Washington Mutual Posts Quarterly Loss on Provisions (Update3)

By Elizabeth Hester


Jan. 17 (Bloomberg) -- Washington Mutual Inc., the largest U.S. savings and loan, reported its first quarterly loss since 1997 after writing down the value of its home mortgage unit and setting aside $1.5 billion to cover bad loans.

The lender reported a loss in the fourth quarter of $1.87 billion, or $2.19 a share, compared with profit of $1.06 billion, or $1.10, a year earlier, the Seattle-based company said today in a statement. The lender, commonly known as WaMu, was expected to post a loss of $1.43 a share according to the average estimate of 17 analysts surveyed by Bloomberg.

Washington Mutual signaled that the unprofitable mortgage unit will continue to struggle this year, with Chief Executive Officer Kerry Killinger predicting a ``dramatic'' rise in loans that will need to be modified to avert defaults. Credit-card losses are likely to rise as well, from 6.9 percent to as much as 9.5 percent.

``Certainly credit costs are elevated and we anticipate them to be elevated throughout 2008,'' Killinger said in an interview. He added during a conference call that he won't take a cash bonus for 2007.

Washington Mutual fell 93 cents, or 7 percent, to $12.46 in New York Stock Exchange composite trading today, leaving the stock down 72 percent in the past year. Earnings were released after the regular session ended. It was the sixth-worst performing stock in the S&P 500 index last year.

Nonperforming Assets

Washington Mutual expects to set aside $1.8 billion to $2 billion to cover bad loans in the first quarter, Killinger said during a conference call. The company said if it is unable to sell some credit-card loans, it will have to increase the provision.

Profit at the retail bank fell 50 percent to $278 million in the fourth quarter, mostly due to the higher provision. Earnings for the credit-card division fell 35 percent to $92 million.

The ratio of Washington Mutual's non-performing assets, those no longer paying interest, to total assets climbed to 2.17 percent from 0.8 percent at the end of last year's fourth quarter. The provision for loan losses widened to $1.53 billion from $344 million a year earlier.

``The quality of their mortgages was lower,'' David Dreman, who oversees $20 billion as chairman of Jersey City, New Jersey- based Dreman Value Management LLC, said in an interview with Bloomberg Radio. ``As a major bank, their loan standards were probably some of the lowest.''

Charge-Offs

Net loan charge-offs rose to $747 million from $136 million a year earlier.

Net interest margin -- the difference between what the bank pays for deposits and charges on loans -- narrowed to 2.85 percent from 2.86 percent in the third quarter and improved from 2.58 percent in the fourth quarter of 2006.

The lender reported a full-year loss of $67 million, or 12 cents a share, compared with a profit of $3.56 billion, or $3.64, for 2006. In December, Washington Mutual slashed its dividend 73 percent, cut staff by 6 percent and sold $3 billion in convertible debt to shore up capital.

There's speculation Washington Mutual could be bought, Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida, said in a Dec. 11 research note. JPMorgan Chase & Co. is a likely acquirer, he said.

``The liquidity available to Washington Mutual hopefully prevents the immediacy of the need for a transaction,'' said Frederick Cannon, an analyst at KBW Inc. in San Francisco. He rates the stock ``market perform.''

The value of Washington Mutual's retail branches, especially those on the West Coast, isn't reflected in the company's balance sheet and should be included in a potential sale price, Cannon said.