With sharks circling the waters for weakened companies from the mortgage fallout, one big fish in the sea, Washington Mutual Savings Bank, may become a prime target due to its Friday warning announcement of a larger-than-expected decline in its third-quarter earnings. The No. 1 savings and loan institution said profits would fall 75% to about 20 cents a share from the year-ago third quarter. WaMu shoulders the blame on the collapse of the market for mortgage-backed securities and the credit crunch, which resulted in the following damage to its preliminary third earnings results:
- a $975 million provision to its loan loss reserves exceeding the original anticipated amount by $550 million
- a $150 million write-down on the value of held-for-sale mortgage loans
- a $150 million loss in its trading portfolio
- $110 million of impairment losses on its mortgage-backed securities portfolio
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Meanwhile, rival Countrywide Financial Corp. has caught the same flu, leading Bank of America Corp. to take a chance with a $2 billion investment via convertible, nonvoting preferred stock that yields 7.25%. The August investment could translate into a 16.2% stake in Countrywide for BofA.
What makes WaMu a more attractive target than Countrywide is its large revenue stream outside the mortgage business. "While we're disappointed with our anticipated third-quarter results, we look forward to an improved fourth quarter as we continue to see good operating performance in our Retail Banking, Card Services and Commercial Group businesses," WaMu chairman and CEO Kerry Killinger said.
The bank began to move away from the retail mortgage business with the addition of Commercial Capital Corp. in April 2006 and credit card issuer Providian Financial Corp. in June 2005. The $983 million deal for Commercial Capital strengthened WaMu's commercial and retail lending, and the $6.5 billion deal for Providian pushed WaMu into the top 10 credit card issuers in the U.S.
So don't be surprised in the coming weeks if WaMu falls prey because of the mortgage thorn in its side and the attraction of its healthy businesses outside of the mortgage sector. — Gerald Magpily
See WaMu press release
