WaMu and National City plummet

IndyMac's collapse on regulators

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NEW YORK (CNNMoney.com) -- Shares of Washington Mutual and National City both plunged Monday as fears grew about the credit crisis plaguing big banks.

Both banks have been hit particularly hard by the subprime mortgage meltdown and ensuing credit crisis, as they had to raise significant capital to cover bad home loans from their residential mortgage lending businesses.

Washington Mutual shares plummeted 34.8% after a note from a Lehman Brothers analyst suggested that the bank may need to "substantially" raise its reserves over the course of 2008 to cover losses from home loans.

Lehman analyst Bruce Harting said he expects the bank will report $26 billion in cumulative losses - $21 billion of which are expected to come from home loans - when the company announces its results on July 22.

WaMu responded after the market close with a statement, saying it is sufficiently capitalized, with more than $40 billion in excess liquidity after it recently raised $7.2 billion in capital.

"The company significantly exceeds all regulatory 'well-capitalized' minimums for depository institutions," the bank said in a statement.

Harting caused waves last week when his note about how a potential accounting change may require beleaguered mortgage financing giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) to raise a combined $75 billion sent those stocks on a week-long slide, culminating in Sunday's proposed rescue plan by the Treasury Department and Federal Reserve.

Harting said he expects Seattle-based WaMu to take a $4 billion provision in the second quarter and that the company will report a loss of $1.48 per share in the quarter. That's more than the 93-cent- per-share loss being predicted by the rest of Wall Street, according to Thomson Reuters.

The Lehman analyst said WaMu (WM, Fortune 500) should have sufficient capital to make it through this credit cycle without needing to raise more. But as the bank builds reserves to cover losses, "it should remain unprofitable until credit costs normalize."

A Ladenburg Thalmann analyst went further. Richard Bove, in a report Monday, wrote that Washington Mutual is on the edge of the "danger zone."

As for National City (NCC, Fortune 500), shares fell more than 14.7% Monday amid talk that the Cleveland-based bank was on the verge of collapse. National City will report its second-quarter results next week, and analysts are predicting a loss of 26 cents per share.

The bank, however, insisted that the speculation was unfounded.

"National City is experiencing no unusual depositor or creditor activity," said the bank in a statement. "As of the close of Friday's business, the bank maintained more than $12 billion of excess short-term liquidity."

The bank also said it maintains one of the best capital ratios among large banks, after it recently raised $7 billion.

Concerns about bank failures have reached a fever pitch following the seizure of troubled mortgage lender IndyMac Bancorp Inc (IMB). Friday. The failure of IndyMac was the second-largest bank collapse in the nation's history.

"Investors want to know who's next to fail," said Matt McCormick, a Bahl & Gaynor Investment Council bank analyst. "Both banks fit a similar profile to IndyMac in that they have been huge drivers in the mortgage market."

But other analysts said neither bank was on the verge of collapse.

"What we're seeing is mostly just investor panic," said Gerard Cassidy, RBC Capital Markets analyst, who does not believe that either bank is on the verge of failure. "These companies have a considerable amount of capital."

At the time of collapse, IndyMac's debt was 140% of its tangible capital and reserves, but both WaMu and National City have a debt level of less than 50% of its assets, Cassidy said.

"It's bad and it's not over yet, but investors are throwing out the baby with the bath water," he added. "The prospect of one of these banks failing is far-fetched. Both have ample liquidity."

Other financial institutions also suffered steep losses Monday after a painful day on Friday.

First Horizon National (FHN) dropped 24.8%, Zions Bancorp (ZION) sank 23.2%, M&T Bank Corp. (MTB) fell 18% and Wachovia (WB, Fortune 500) fell another 14.7% Monday after tumbling 12% Friday.

Larger banks due to report results later this week fared only slightly better. Wells Fargo (WFC, Fortune 500) lost 6.2%, Citigroup (C, Fortune 500) fell 6% and JPMorgan (JPM, Fortune 500) sank 4.4%

Bank of America (BAC, Fortune 500), which just completed its acquisition of Countrywide Financial - making it the nation's largest mortgage lender - slid 7%.