July 15 (Bloomberg) -- Oppenheimer & Co.'s Meredith Whitney, the analyst who correctly predicted Citigroup Inc. would reduce its dividend this year, said the earnings outlook for Wachovia Corp. has ``dramatically diminished'' and bank stocks will keep falling until asset prices ``get real.''

Wachovia fell as much as 13 percent in New York trading after Whitney said prospects for shareholders of the Charlotte, North Carolina-based bank are ``bleak.'' Mortgage assets are still priced too high on U.S. banks' balance sheets, she said.

``Historically, financials have not shrunk well,'' the New York-based analyst said in an interview with Bloomberg Television. She said Wachovia last week released charge-off figures that didn't correspond with portfolio values, meaning the bank might be shrinking its balance sheet. ``Your revenues go down dramatically. Effectively, you'd be eroding capital.''

The world's biggest financial services companies have posted more than $416 billion of losses and writedowns tied to the mortgage-market collapse, according to Bloomberg data. Wachovia's losses totaled $13.7 billion. The Federal Reserve has authorized Fannie Mae and Freddie Mac to borrow directly from the central bank to stem a collapse of confidence in the companies, which own or guarantee about half the $12 trillion in U.S. mortgages.

Cut to `Underperform'

Whitney reduced her rating on Wachovia to ``underperform'' from ``perform.'' The company will report a loss of $1.35 a share this year and lose 35 cents a share in 2009, compared with prior profit estimates of $1.55 and $2.65, respectively, Whitney wrote.

Wachovia has plunged 74 percent this year in New York Stock Exchange composite trading and ousted Kennedy Thompson as chief executive officer on June 2 after it cut its dividend 41 percent and raised $8 billion in capital. The lender hired Treasury Undersecretary Robert Steel as CEO July 9, announced a second- quarter loss of at least $2.6 billion and said it plans to disclose information about cost cutting and ``reducing its mortgage exposure'' later this month.

``We are hard pressed to find examples of financial companies that have successfully shrunk their businesses,'' Whitney said. Wachovia probably reduced its mortgage assets by $50 billion in the second quarter, Whitney wrote in her note.

Wachovia fell $1.20 to $8.64 a share at 9:32 a.m. in New York Stock Exchange composite trading. The Standard & Poor's 500 Banks Index has plunged 51 percent in 2008 through yesterday.

Spokeswoman Christy Phillips Brown said Wachovia had no comment on the Oppenheimer report.

To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net; Linda Shen in New York at Lshen21@bloomberg.net

Last Updated: July 15, 2008 09:37 EDT