Jan. 22 (Bloomberg) -- Wachovia Corp., the fourth-largest U.S. bank, said profit fell 98 percent to the lowest since 2001 on writedowns for bad loans and mortgage-backed securities.

Net income in the fourth quarter declined to $51 million, or 3 cents a share, from $2.3 billion, or $1.20 a share, a year earlier, the Charlotte, North Carolina-based company said today in a statement. Excluding merger costs, Wachovia earned 8 cents a share, missing the 33 cents average estimate of 21 analysts surveyed by Bloomberg.

Wachovia has dropped almost 45 percent in New York trading since Chief Executive Officer Kennedy Thompson acquired Golden West Financial Corp. for $24.6 billion in October 2006 just before the housing market peaked. Since then, U.S. home sales have slumped 21 percent, prompting Thompson to call industry conditions the ``toughest'' in his 32 years of banking.

``They've got a tiger by the tail in Golden West and I don't think they know what to do,'' said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who has a ``hold'' rating on Wachovia.

Wachovia rose $1.11, or 3.6 percent, to $31.91 in New York Stock Exchange composite trading at 4:35 p.m., snapping a two- day decline of 11 percent. The company affirmed its ability to pay the current dividend, which yields about 8 percent annually, and the Federal Reserve lowered its benchmark interest rate in an emergency move to aid the economy.

Bad Loans

The company's non-performing assets, including loans and foreclosed properties, surged more than threefold to $5.1 billion. The provision for losses from bad loans rose to $1.5 billion from $206 million a year earlier. Net charge-offs advanced to an annualized 0.41 percent of average net loans, compared with 0.14 percent a year earlier.

Wachovia's capital levels were adequate to pay a dividend this year, Thompson said today during a conference call.

``People were looking at their low level of capital with these writedowns and they were getting concerned,'' Kevin Fitzsimmons, analyst at Sandler O'Neill & Partners in New York, said today in an interview. ``For now, it's reassuring.'' He rates the company ``hold.''

Wachovia recorded $1.7 billion of writedowns companywide. The company's corporate and investment bank had a loss of $596 million, driven by $1.6 billion of writedowns. Falling prices for securities backed by subprime mortgages cut the value of Wachovia's holdings by $1 billion, compared with $350 million in the third quarter.

Commercial Credits

Moody's Investors Service reduced the outlook on ratings for Wachovia to ``negative'' from ``stable'' on the possibility of future writedowns, while affirming its ``B+'' financial strength and ``Aa1'' deposit ratings, the firm said today in a statement.

The bank doesn't expect to take an impairment charge on the value of Golden West, Chief Financial Officer Thomas Wurtz said during a conference call with investors today.

Holdings backed by commercial real estate mortgages were written down by $600 million, compared with a $488 million reduction during the third quarter.

Fourth-quarter revenue fell 17 percent to $7.2 billion. Return on equity, a gauge of how effectively the company reinvests profit, declined to 0.28 percent from 13.1 percent a year earlier.

The net interest margin, the difference between what Wachovia pays for deposits and what it charges on loans, narrowed to 2.88 percent from 2.92 percent on Sept. 30 and 3.09 percent a year earlier.

For the full year, net income fell 19 percent to $6.31 billion, the company said.

$133 Billion and Climbing

Citigroup Inc., the largest U.S. bank by assets, had a fourth-quarter loss of $9.8 billion, the biggest in its 196-year history, as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

JPMorgan Chase & Co., ranked third, said profit fell 34 percent after it put aside $2.3 billion in reserves. Both are based in New York. Bank of America said today its quarterly profit fell 95 percent.

Citigroup lost more than half its value in New York Stock Exchange trading during the past 12 months through last week, JPMorgan dropped by 20 percent and Bank of America slipped 33 percent. The world's biggest banks and brokerages have disclosed more than $133 billion of writedowns and credit losses since June because of collapsing prices in U.S. mortgage markets.

Golden West

Because of increased writedowns and Golden West's loan losses, investors have a ``newfound awareness that Wachovia's earnings are much more volatile than previously thought,'' Merrill Lynch & Co. analyst Ed Najarian said in a Jan. 11 report. He has a ``sell'' rating on Wachovia.

Profit at the unit that includes Wachovia's brokerage gained 42 percent to $350 million as managed assets expanded 52 percent to $203.5 billion at year-end. Wachovia bought A.G. Edwards Inc., the St. Louis-based securities firm, for about $6.6 billion in October.

Earnings at Wachovia's retail and small business unit, the so-called general bank, declined 18 percent to $1.24 billion as it set aside more money for bad loans, including auto financing.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: January 22, 2008 17:38 EST