Washington Mutual tries to soothe anxiety
The nation's largest savings and loan says it remains sufficiently capitalized but two ratings agencies downgrade WaMu's debt; stock falls again Friday.
NEW YORK (CNNMoney.com) -- Washington Mutual sought to reassure the market late Thursday by saying it has sufficient liquidity and capital to see it through these tough times.
The bank "continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability," it said in a statement revealing part of its third-quarter performance.
But two credit rating agencies downgraded the Seattle-based savings and loan's debt following WaMu's release, citing continued concerns about the company's ability to raise more capital.
Shares of WaMu, which plunged 46% between last Friday and Wednesday before bouncing back 22% Thursday, resumed their slide Friday morning, falling 8% shortly after the market opened. The stock is down nearly 80% so far this year.
And in a separate filing with the SEC, the bank also disclosed that its new chief executive officer could be eligible to receive nearly $20 million in salary and bonuses next year.
Investors fled WaMu earlier this week, fearing the bank might need a new capital infusion beyond the $7 billion it received from TPG, a private equity firm, in April.
WaMu (WM, Fortune 500), the nation's largest savings and loan, said it plans to set aside $4.5 billion in the quarter for loan losses, down from $5.9 billion in the prior period but more than two times expected charge-offs, or uncollectible loan losses. Reserves for loan losses should build to $10.3 billion, up from $8.5 billion.
Some $3.4 billion is being set aside for losses from the bank's residential mortgage portfolio, down from $5.5 billion in the second quarter. But credit card losses are expected to increase, requiring an additional $600 million to be set aside.
The growth of net charge-offs is expected to slow to less than 20% in the quarter. In the prior period, charge-offs soared nearly 60%.
The bank said it expects its capital ratio, a measure of its ability to withstand loan losses, to remain "significantly above the levels for well-capitalized institutions." It has approximately $50 billion of liquidity from "reliable" funding sources.
Its net interest income should come in at the same level as the second quarter, which was $2.3 billion, while its non-interest income is expected to be $1 billion, up from $561 million in the prior period, thanks in part to growth in retail banking fees.
Retail deposit balances at the end of August stood at $143 billion, essentially unchanged from the end of 2007. The bank has been offering high interest rates in hopes of attracting more money.
Investors' concerns about WaMu are overblown, said Bert Ely, an independent banking consultant. He was glad to see the bank issue Thursday's statement.
"They face serious issues, but they don't have their back against the wall," said Ely. "They have more capacity there to absorb losses than most people appreciate."
Not everyone, however, is that optimistic. After Thursday's announcement, Fitch Ratings downgraded the company to BBB-, with a negative outlook, citing concerns about its ability to maintain its capital levels.
"WaMu's most significant operating constraint in the intermediate term is maintenance of capital levels at sufficiently high levels to be considered well-capitalized by its regulators," the ratings agency said. "Fitch believes WaMu's ability to keep capital ratios at acceptable levels will largely hinge on how well it executes on previously announced expense saves and modest balance sheet reduction initiatives."
Credit rating agency Moody's also downgraded WaMu, cutting its senior unsecured rating to Ba2, or so-called "junk" status,from Baa3
Moody's also lowered the company's financial strength to D+ from C- an its base line credit assessment (BCA) to Ba1 from Baa2. Moody's, like Fitch, also gave WaMu a negative outlook.
"The company's limited financial flexibility makes it more difficult for it to replenish capital and preserve diversified and stable funding sources. Both issues are critical to restoring the strength of the institution," said Moody's vice president and senior credit officer Craig Emrick in a statement about the downgrade.
WaMu issued its own statement in response to the Moody's downgrade, saying that the "decision to reduce the ratings of Washington Mutual, Inc. to below investment grade is inconsistent with the company's current financial condition."
The company added that "the action by Moody's appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual's business, the strength of its national franchise and the steps it is taking to return to profitability."
Credit ratings downgrades are big concerns for banks since they raise the cost to borrow money and issue debt.
However, WaMu pointed out that its ratings were investment grade at other agencies and also said it did not expect the "impact on borrowings, collateral or margin requirements to be material." The company added that it had no plan to suspend the dividend on its preferred stock because of the Moody's downgrade.
The bank also reported it expects to take a loss in its investments in its portfolio of preferred shares in Fannie Mae and Freddie Mac, which were taken over by the federal government on Sunday. Its holdings were valued at $282 million on June 30.
It will release its quarterly results on Oct. 22. The bank lost $3.3 billion in the second quarter.
WaMu has had a rough week. On Sunday night, it tossed out its chief executive, Kerry Killinger, who helped build the firm into a mortgage lending powerhouse. But that legacy came back to hurt him as the housing market collapsed over the past year. His replacement is Alan Fishman, who served as president of Sovereign Bank, the nation's second-largest savings and loan.
The next day, WaMu announced it had entered into a memorandum of understanding with the Office of Thrift Supervision, which was concerned about its risk management and compliance functions. The bank will now have to provide regulators with a multi-year business plan and forecast for its earnings, asset quality, capital and business unit performance.
Separately, WaMu also disclosed in a SEC filing Thursday night that Fishman could be eligible to receive nearly $20 million in compensation in 2009 for taking the job: a $1 million base salary, $7.5 million signing bonus, target bonus of $3.65 million and a long-term incentive award of at least $8 million.