Wachovia debt ratings cut, more mortgage losses seen

NEW YORK (Reuters) - Three rating agencies on Tuesday cut Wachovia Corp's debt ratings, citing increased expectations of losses in the bank's mortgage portfolio and its reduced flexibility to raise new capital.

Moody's Investors Service, Standard & Poor's and Fitch Ratings all cut Wachovia one notch to "A1," or "A-plus," the fifth highest investment grade level.

The downgrades followed Wachovia's announcement on Tuesday of an $8.89 billion second-quarter loss as the fourth-largest U.S. bank also slashed its dividend and proposed job cuts after losses tied to mortgages soared.

Moody's said the downgrade was driven mainly by a nearly doubling of its life-time loss expectation on Wachovia's $122 billion adjustable-rate-mortgage (ARM) portfolio to $16 billion.

The rating agency said the option-ARM portfolio, which constitutes 25 percent of Wachovia's loans, has become a particularly volatile asset class and another increase in loss expectations cannot be ruled out as home prices continue to deteriorate.

"The provisioning associated with Moody's loss estimates raises the possibility that Wachovia could report losses into 2009," the rating firm said.

Protracted losses coupled with capital markets volatility have reduced Wachovia's flexibility to boost its capital if such need arises, Moody's said.

Both Moody's and Fitch Ratings have a negative outlook on Wachovia, which indicates that the ratings are more likely to be downgraded over the next one to two years. Standard & Poor's has a stable outlook, indicating an additional rating change is not expected over the next two years.

S&P said the stable outlook reflects Wachovia's credit risk profile, which differs from several of its larger banking peers.

"We believe other potential risk exposures that could surface in the near term in this stressed banking cycle are quite muted and should pose only a modest increase in credit-related expenses that will be manageable within Wachovia's revenue profile," S&P said.

(Reporting by Anastasija Johnson; Editing by Andrea Ricci)