January 20, 2008

Industry turmoil slams Washington Mutual

SEATTLE - Turmoil in the mortgage and credit markets in the second half of 2007 decimated Washington Mutual Inc.'s fourth-quarter performance and dragged the country's largest savings and loan into the red for the year.

WaMu had been preparing Wall Street for the hit, caused by the plummeting value of its mortgage portfolio and the growing number of people who can't repay their debts, since December.

The year was so bad that Kerry Killinger, WaMu's chief executive officer, said in a conference call Thursday he would not accept a bonus.

And then he told analysts that 2008 won't be much better.

Investors must have expected worse. After hours, shares climbed back from a 7 percent drop to $12.46 in the regular session, before the results were announced.

For the quarter, WaMu said it swung to a loss of $1.87 billion, or $2.19 per share, after a profit of $1.06 billion, or $1.10 per share last year.

Those earnings included a write-down of $1.6 billion to account for the sinking value of its home loan portfolio, and $1.53 billion to cover future loan losses — more than four times what WaMu set aside for unpaid loans in the year-ago quarter.

Revenue fell 5 percent to $3.41 billion in the quarter, behind Wall Street's expectation of $3.51 billion.

"Clearly, the current downturn in housing is acute and deeper than expected. We continue to see declining home prices, elevated inventories of unsold homes and increased foreclosure activity," Killinger said, particularly in California and Florida, where WaMu's mortgage customers are concentrated.

The report was grim, but Howard Shapiro, an analyst for Fox-Pitt Cochran Caronia, said he thought it would be worse.

"There was a big sigh of relief," he said. "If they can get through this next year, then I think they'll stay viable."

WaMu's mortgage division was hit hardest in the quarter. Its home loans volume sank 97 percent to $19.09 billion compared with the fourth quarter of 2006, and the division's net loss totaled $1.96 billion, compared with a loss of $124 million in the year-ago quarter.

But it was WaMu's credit card division results and outlook that most surprised Shapiro. WaMu said card services net income sank 35 percent to $92 million in the quarter. Killinger said rising unemployment pushed up delinquency rates and credit losses.

For 2008, Killinger forecast continued high unemployment would cause slower growth rates for managed credit card receivables, as well as higher loss rates. The CEO said WaMu would cut back on marketing credit cards, except in bank branches and on its Web sites.

"We're obviously concerned about that," said Shapiro.

The brighter spots in WaMu's quarter were its commercial loans business and its retail banking operations — the branches and Web sites that support checking and savings accounts for individuals and businesses. While net income for both divisions fell compared with a year ago, Shapiro called the credit quality of its commercial loan portfolio "pristine," and noted the rising fees in the retail banking division.

For 2007, WaMu posted a loss of $67 million, or 12 cents per share, on $11.11 billion in revenue, compared to a profit of $3.56 billion, or $3.64 per share, on $13.68 billion in revenue in 2006.

Analysts were looking for a profit of 59 cents per share on $13.78 billion in sales.

In December, WaMu said it expected loan loss provisions to total as much as $2 billion a quarter in 2008, a forecast executives affirmed Thursday.

The Seattle-based bank also said in December it would shutter its subprime lending business and control expenses with layoffs and a dividend cut. WaMu reported Thursday that subprime mortgages accounted for $18.6 billion, or 7 percent, of its $244.4 billion loan portfolio.

Shares of WaMu edged up 3 cents to $12.49 in after-hours electronic trading, after sinking 93 cents, or 7 percent, to close at $12.46.

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