WaMu Has $3.3 Billion Quarterly Loss on Delinquencies

July 22 2008 - Washington Mutual Inc., the biggest U.S. savings and loan, reported a $3.3 billion second-quarter loss on uncollectible loans as a record number of borrowers were unable to keep up with mortgage payments.

The loss of $6.58 a share compared with net income of $830 million, or 92 cents a share, a year earlier, Seattle-based Washington Mutual said today in a statement. The company said mortgage-related losses through 2011 will be at the high end of its previous forecast of $12 billion to $19 billion.

Chief Executive Officer Kerry Killinger, 59, stripped of the chairman position last month, is facing increased pressure from investors after the stock dropped 86 percent over the past year and his peers from Citigroup Inc. and Wachovia Corp. were fired. The company, which has raised capital, cut employees and reduced the size of its home-lending business, increased provisions for loan losses 69 percent to $5.9 billion.

“WaMu is definitely in the hot seat here,” said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach, California, which owned 117,000 Washington Mutual shares at the end of March and manages $650 million. “They have a lot of exposure to a lot of messy things but from what we can tell it looks like they’ll be able to make it.”

WaMu fell 12 cents to $5.61 in extended trading. The stock gained 34 cents to $5.82 at 4 p.m. earlier on the New York Stock Exchange and has dropped 57 percent this year.

Expecting Loan Losses

The cost of uncollectible loans jumped 58 percent to $2.2 billion from the first quarter. Bad loans may rise to $9.6 billion over the next 12 months, said Stephanie Hall, an analyst at Gradient Analytics, a research firm in Scottsdale, Arizona.

Washington Mutual, known as WaMu, was the last of the six biggest U.S. lenders to announce quarterly results. Wachovia, the fourth-biggest, reported an $8.9 billion loss earlier today, slashed its dividend 87 percent and announced $2 billion of cost cuts. Citigroup recorded a $2.5 billion loss last week, while JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. reported drops in profit.

Moody’s Investors Service said today it may reduce its rating on WaMu senior debt to below investment grade. The lender may have “sizable quarterly losses through 2009,” Moody’s said in a statement.

The home-loans group lost $1.35 billion as the company set aside $1.64 billion in provisions. U.S. foreclosure filings rose 53 percent in June from a year earlier, with one in every 501 households in some stage of the process, according to RealtyTrac Inc.

Foreclosures

WaMu had $3 billion of losses in the prior two quarters. In California, home to half of the company’s loans, one in every 192 householders was in foreclosure last month, 2.6 times the national average, RealtyTrac said.

The world’s biggest banks and brokerages have racked up $462 billion of writedowns and credit losses because of falling prices of homes and mortgage-backed securities. The companies have raised $345 billion, including $12.1 billion by WaMu in the past year, according to Bloomberg data.

Washington Mutual plans to have $1 billion in annual savings as it scales back on home loans. That will contribute to “improved pretax, pre-provision earnings,” WaMu said.

The lender had a $175 million net loss in its credit-card group after setting aside $911 million in provisions. Net trading losses were $305 million.

TPG’s Investment

Private equity firm TPG Inc., led by David Bonderman, anchored a $7 billion cash injection for WaMu in April by purchasing stock for $8.75 a share, a 33 percent discount at the time. With the stock’s drop, TPG’s investment is down by a third. Killinger said today that WaMu has no need to raise additional cash.

“We think that we have sufficient capital now to see us through the cycle and including assumptions of a stressed real estate market,” Killinger said in the conference call.

Washington Mutual, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender, according to trade publication Inside Mortgage Finance. WaMu had $13.9 billion in subprime loans on its balance sheet at the end of June, down from $15 billion the previous period.

“So much of their business has been in the lower-quality loans,” said Gradient’s Hall. The mortgages are “higher risk relative to other large-capitalization banks.”

WaMu Has $3.3 Billion Quarterly Loss on Delinquencies
by Ari Levy | Bloomberg