NEW YORK (CNN/Money) -
A huge profit warning from Washington Mutual, based on interest-rate damage to its mortgage lending unit, helped sink shares of other home lenders Tuesday morning. But though mortgage lenders' earnings are likely to suffer from higher rates, many analysts thought their pain would not be nearly as great as WaMu's in the long run.
In fact, they said WaMu's implosion could set the stage for its being swallowed up by Citigroup or another large bank.
Monday night, WaMu (WM: Research, Estimates) slashed its forecast for earnings in 2004 to a range of $3 to $3.60 per share from a recent forecast of $4.35 a share. Wall Street analysts, on average, expected the firm to earn $4.24 a share this year, according to earnings tracker First Call.
The Seattle-based thrift, which is also the No. 2 U.S. mortgage lender, said interest rates were sapping its mortgage revenue, that it was struggling to cut costs fast enough to keep up and that its hedging instruments had failed to do much hedging.
WaMu's shares dropped about 8 percent Tuesday morning as a result, and dented other lenders too. Wells Fargo (WFC: Research, Estimates), No. 1 in the industry, dipped less than 1 percent. Countrywide Financial (CFC: Research, Estimates), No. 3 in the sector, fell nearly 3 percent. Smaller Rival Golden West Financial (GDW: Research, Estimates) also fell less than 1 percent.
But Calabasas-Calif.-based Countrywide was also quick to distance itself from its ailing competitor, issuing a statement Tuesday morning bragging that its latest earnings forecast took higher interest rates into account, that its overhead was low and its hedging strategies were effective.
"The mortgage market will ultimately return to a normal level, in which refinance volume is substantially lower than we have seen during the last several quarters," Countrywide CEO Angelo Mozilo said in the release. "Countrywide management remains confident that the company is well-prepared for such an environment, as our operations and past guidance have contemplated the potential impact of rising rates."
Many analysts agreed, saying WaMu would likely be alone in its pain.
"We believe that WaMu's difficulties are not industry-wide but company-specific," Bernstein analyst Jonathan Gray wrote in a note Tuesday morning. "Indeed, we believe Countrywide's servicing operations will prove to be a source of considerable strength in the second quarter."
Last year, mortgage rates fell to their lowest level in more than 40 years, triggering a boom in demand for new mortgages and mortgage refinancing, a bonanza to mortgage lenders.
But an improving economy and signs of inflation have led interest rates back up this year, snuffing out refi activity and threatening to slow demand for new loans. Though mortgage lenders will still make money from their outstanding loans, weaker refi and origination activities mean the salad days are likely over.
"Ninety percent of a retail bank's primary business is lending money on residential real estate, and that cycle is over," said Richard Bove, analyst with Hoefer & Arnett.
Bove said the biggest lenders -- a group which these days includes WaMu, Wells Fargo and Countrywide -- are usually the hardest hit when a mortgage boom ends, since they've got more exposure and overhead than everybody else. In part for this reason, Bove said he took Countrywide's boast that it was virtually impervious to higher rates "with a healthy dose of skepticism."
Still, he agreed with other analysts that WaMu had a host of problems that could make its pain particularly sharp, including the hangover from its rapid expansion program in recent years and the fact that bigger banks are finally cutting their fees to better compete with WaMu and stop it from taking market share away.
"This is not to say that Countrywide and Golden West are going to have better earnings than last year, but they're not going to implode the way WaMu has," said Charlotte Chamberlain, analyst with Jefferies & Co. "The mortgage market is challenging, but this is the most anticipated refi bust in the history of the planet."
Attractive target for Citi?
If nothing else, WaMu's problems could weaken it enough that it will make an even juicier acquisition target for Citigroup (C: Research, Estimates) or some other potential suitor, some analysts believe.
Citigroup has long been rumored to be interested in buying WaMu, but has until recently said it had little interest in buying U.S. thrifts, choosing instead to focus on growing business in Asia.
That attitude may have changed very recently, however. Last week, Citigroup suspended two big cogs in its Chinese machinery, including Margaret Ren, the daughter-in-law of former Chinese Premier Zhao Ziyang, accusing them of giving false information to the bank and regulators. On Monday, Citigroup said it planned to sell its stake of Taiwanese conglomerate Fubon Financial.
Meanwhile, the world's No. 1 bank, which has a fairly light retail banking presence, is also rumored to be interested in buying New York Community Bancorp (NYB: Research, Estimates). Washington Mutual, after an orgy of expansion in recent years, could be an even more appetizing target for Citigroup.
"If they're going to buy a thrift, the one to buy is WaMu," said Bove of Hoefer & Arnett. "If they bought WaMu, they would be a major player up there with Bank of America (BOA: Research, Estimates), Wells Fargo and Wachovia (WB: Research, Estimates) -- the big retail bankers in the country."
Citigroup would not comment on rumors of its interest in Washington Mutual or New York Community Bancorp, nor would it comment on any desire to expand its retail banking business.
-- None of the analysts quoted in this story own shares of the companies discussed, and their firms have no banking relationship with those companies.