WaMu Hit With Downgrades as it Tries to Reassure Investors

In trouble? Preannounce earnings — it’s an age-old Wall Street strategy designed to shock investors out of a (usually downward) funk. Troubled thrift Washington Mutual (WM) dialed up the play out of its financial playbook late Thursday, updating investors on third quarter performance in an attempt to slow investor concern over a quickly souring mortgage portfolio. It didn’t exactly go as planned, however, with both Fitch Ratings and Moody’s Investors Service immediately downgrading the Seattle-based bank over capital adequacy concerns. WaMu said in a press statement that its third quarter loss provision expense would be $1.4 billion less than Q2 levels, but still signficant at $4.5 billion. Net charge-offs are expected increase, WaMu said, but at a rate no more than 20 percent compared to year-ago totals; Q2’s charge-offs grew at a 60 percent rate, in comparison. The bank also said non-interest income is expected to rise to $1 billion, the result of hiking fees to depositors, as well as from gains on MSRs as prepayments have slowed. WaMu also said it will take a hit on $282 in preferred equity holdings at Fannie Mae (FNM) and Freddie Mac (FRE). Investors have been fretting over the effect of risky mortgages on the nation’s largest thrift. Out of WaMu’s $231.1 billion loan portfolio, it’s $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit that are drawing the most attention. Total nonperforming assets at the Seattle-based bank jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier. Fitch moved immediately to downgrade WaMu Thursday night, saying that “the flexibility to add to capital is now significantly constrained in light of market conditions.” The agency lowered its long-term debt ratings on the bank’s holding company to BBB-, one notch above junk. Moody’s went further, downgrading the holding company to below investment grade. The agency moved WaMu’s senior unsecured rating to Ba2 from Baa3 and knocked down Washington Mutual Bank’s long-term deposit and issuer ratings to Baa3 from Baa2. The outlook is negative, Moody’s said, signaling future downgrades are yet likely. “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. WaMu shares fell in early trading Friday, but had rebounded slightly by the time this story was published. Shares were at $2.82, off 0.35 percent. Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.