Washington Mutual Inc. late Thursday said its third-quarter provision for loan losses will fall by $1.4 billion from the second quarter, while the growth rate of net charge-offs — loans it doesn't think are collectable — will slow to less than 20%.
The troubled savings-and-loan — the nation's largest — said it would set aside $4.5 billion to offset current and future losses from souring mortgages, down from the $5.91 billion it set aside in the second quarter, while also noting its liquidity is stable at about $50 billion and net interest income will be in line with the second quarter.
The company offered an early look at its third-quarter expectations just days after it named Alan Fishman to succeed ousted Chief Executive Kerry Killinger on Monday. It also entered a memorandum of understanding with the Office of Thrift Supervision earlier this week, meaning the bank is now effectively on probation.
Shares have fallen 34% this week, hitting a two-decade low, as the executive shake-up did little to restore investor confidence. But after bleeding for most of the trading session Thursday, the stock closed trading up 22%, fed by rumors about the company's future strategy and short sellers running for cover. After hours, shares rose 5.7% to $2.99.
WaMu has a monumental task in dealing with the sheer number of delinquent mortgages it holds and it remains unclear how much loan losses will rise before things get better. Earlier this year, the company cut more than 10% of its work force as part of an effort to lower costs by $500 million to $600 million annually.
Late Thursday, the company said its Tier 1 leverage and total risk-based capital ratios at June 30 were 7.76%, and 13.93%, respectively — significantly above the regulatory requirements for well-capitalized institutions. WaMu said it expects both ratios to remain significantly above the levels for well-capitalized institutions at the end of the third quarter.
The company expects its total loan loss reserve to increase to about $10.3 billion at the end of the third quarter from $8.5 billion at June 30 as charge-offs continue climbing, though at a slower pace than the 60% recorded in the second quarter. Residential mortgage provisions are expected to be about $3.4 billion, down about $2.1 billion from the second quarter.
In the third quarter, WaMu expects to book an other-than-temporary impairment loss related to its investments in Fannie Mae and Freddie Mac preferred stock. At June 30, the amortized cost of the securities was $282 million, and they are currently valued at about 10% of par value.
Following WaMu's announcement, Fitch Ratings downgraded its credit ratings on the thrift, reflecting its expectation for continuing asset-quality challenges.
In cutting its long- and short-term issuer default ratings on the thrift by one notch to BBB-, one level above junk status, Fitch said the third-quarter preview is "very much in line" with its expectations that WaMu won't return to profitability until some time next year.
The ratings firm pointed to market conditions, including the receptivity of the capital markets and the cost of funding, as the primary driver behind the downgrade, while also noting the company's flexibility to add to capital is now "significantly constrained."
Washington Mutual expects to report third-quarter results Oct. 22.