NEW YORK (CNNMoney.com) - Washington Mutual is looking to shake off its reputation as a mortgage-centric thrift bank, and reinvent itself as a diversified financial player.

But some on Wall Street think it may be too little, too late, leaving the door open for a possible Washington Mutual (Research) sale.

During the company's recent analyst day in New York, Washington Mutual chairman and chief executive Kerry Killinger told investors the nation's No. 1 savings and loan is "leaving its thrift legacy behind" by limiting its volatile mortgage servicing rights business to about 25 percent of its balance sheet and de-emphasizing its home lending business.

He said the company's acquisition of Providian Financial marks its foray into the credit card business, with Washington Mutual focusing more on its retail operations by opening new branches and cross-selling its insurance, credit card and home loan products to consumers and small businesses.

Washington Mutual expects to see retail banking fees rise 10 to 12 percent next year, as it opens another 150 to 200 new branches.

"We're seeing an evolution take place," Killinger said, adding that the shift in focus will make Washington Mutual "more akin to large commercial banks" rather than a mortgage thrift.

But there lies the problem, analysts say.

In a research note, CreditSights analyst David Hendler said diversified banks such as Citigroup (Research) and Bank of America (Research) have 2006 price-earnings multiples that are roughly in line with Washington Mutual's current multiple of 10.1 times earnings, while a specialized thrift such as Golden West Financial (Research) trades at a premium with a multiple of 11.8 times earnings. That raises the question of whether diversification is worth the trouble as far as stock price is concerned.

And some analysts think the concept of a rebirth is a little overblown as the company's mortgage business will continue to be its core business.

"By law, if they want to maintain their charter as a thrift, 65 percent of their assets have to be in real estate lending," said Dick Bove, analyst at Punk Ziegel & Co. "They can use the remaining 35 percent to go into other businesses, like the credit card business, but the likelihood of them changing the essential character of their business is nil."

Bove added that Washington Mutual is looking to step into other areas given the slowdown in the housing market due to rising interest rates, as well as the flattening yield curve, which squeezes margins as borrowing costs rise. As a result, he believes the high margin credit card business and other forms of non-prime lending will look increasingly appealing.

"He's (Killinger's) following a line of reasoning that's valid," Bove said. "But he's signaling more than anything else is that the company is experiencing weakening in its core business."

And internal weakness in its mortgage operation could make Washington Mutual a potential takeover target, analysts speculate.

Moshe Orenbuch, research analyst at Credit Suisse First Boston, said Washington Mutual currently doesn't appear to be entertaining thoughts of putting itself up for sale -- but that could change if the company is faced with any major stresses going forward.

One possible stress could be Washington Mutual's exposure to the option ARMs market. Option ARMs are an adjustable-rate mortgage that typically lets borrowers choose one of four different payments each month. Those who pay the minimum payment pay no principal, and less interest than what accrues on the loan -- resulting in negative amortization over time.

Currently the company is one of the largest sellers of this exotic mortgage product, which saw a surge in demand in the last year. But there is concern that once the typical three-year honeymoon period is over for borrowers, and mortgage payments double to reflect a rise in interest rates, Washington Mutual could be left with a high number of mortgage defaults and higher loan losses.

"Anyone that had a rapid growth in assets (from option ARMs), and exercised less conservatism in underwriting, is going to see some pressure," Orenbuch said.

Punk Ziegel's Bove added that option ARMs could be a massive problem for Washington Mutual, especially since the honeymoon period is likely to end before the company's shift in business can truly provide it with a financial cushion.

He speculateed that Citigroup may step up as a potential buyer. He said Citigroup and Washington Mutual would be good strategic fit because Citigroup is a large mortgage lender but wants to expand its domestic deposit base, particularly in hot markets such as Texas and Florida where Washington Mutual has a significant presence.

Thomas Monaco, director of research at Moors & Cabot Capital Markets, added that the company's acquisition of Providian Financial may also make it more attractive to a buyer such as UK-based HSBC, which has been looking to expand its footprint within the U.S. market.

But for now, Washington Mutual is talking more about making acquisitions than being acquired.

During the analyst day, CEO Killinger emphasized that the company is open to acquisitions, although it's focused more on organic growth.

Orenbuch said investors would be disappointed if the company decided to make any other major acquisitions, adding that the $6.45 billion Providian buy was primarily a positive for the credit card company.

Investors, for their part, have been lackluster about the stock. Washington Mutual shares are down about 2 percent this year, under performing its peers on the S&P 500 Financial's sub-index, which has risen about 5 percent.

"We believe the stock price doesn't reflect the growing value of our unique franchise," Killinger said, adding that the company had approved a 100 million share buyback.

CSFB's Orenbuch is neutral on the stock but Moors & Cabot's Monaco said the company is currently a good buying opportunity for investors.

None of the analysts quoted in the story own shares of Washington Mutual but CSFB has an investment banking relationship with the company

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