Washington Federal Shares Hover Near Record High

Shares in Washington Federal Savings and Loan Association, surged to a record $38.25 on Sept. 13 and have hovered near $37 since.

Analysts said the surge marked a rare instance of an old-fashioned interest rate play on thrift stocks. Because of widespread changes in the banking industry, the $2.6 billion-asset thrift has few peers that can point to such robust results.

In the wake of the skyrocketing rates of the 1970s, most major thrifts adopted a strategy of reducing their interest sensitivity by offering adjustable-rate loans. But Seattle-based Washington Federal chose to maintain a portfolio of fixed-rate mortgages and offset risk by keeping costs down.

To be sure, eight of the top 25 thrifts, including some adjustable-rate lenders such as Washington Mutual Savings and Loan, were at or near their 52-week highs as of Friday. But that reflected a recovery from the battering bank and thrift stocks began to take about a year ago, as the economy faltered, and not a new surge of investment, said Bruce Harting, analyst for Salomon Brothers.

Normally, he said, thrift stocks "go through the roof" with rates falling 200 basis points in a year.

Falling rates usually help thrifts in ways other than widening the spread between interest income and interest expense. They also tend to raise home sales, which stimulates new mortgage activity.

Lag Protects Portfolio

Moreover, even with a portfolio laden with adjustable rate loans, a thrift's margin increases as rates fall because of a two-month lag between the change in costs and the index-based adjustments in the rate charged on the loans.

But if rates stabilize, the margin between cost of funds and interest revenue could snap back to normal, as the loan prices catch up to the deposit rates, analysts note.

Jonathan Gray, a thrift and housing analyst for Sanford C. Bernstein & Co., New York, said, for example, that Golden West Financial Corp. - a company he likes for a variety of reasons -- may have seen its spread artifically adjusted by about 30 basis points because of the recent decline in rates, meaning that the opportunity to benefit from a rate play on that stock is about to wane.

Meanwhile, Washington Federal, although sensitive to rising rates, is protected by a strong capital base and stable funding bask and a low overhead that make it less expensive to do business. Theoretically, that makes it less of a gamble to load up on the stock in hopes of a continued decline in rates.

Returns Have Been Strong

The thrift has maintained returns on average assets well in excess of 2%, and returns on average equity in excess of 20%, for the past four years, in a variety of interest scenarios.

Currently, said Mr. Gray -- who declined to rate stock in Washington Federal, saying he is in the midst of research on it -- the yield on the bank's assets exceed its cost of funds by about 450 basis points, compared to an industry average of about 100 basis points. Its tangible equity is greater than 10%. And its cost of operation is less than half the industry average, at less than 1%.

Both he and Mr. Harting said it is the fixed-rate lenders who are getting more business in today's marketplace. Both recommend investment in the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., which buy and securitize fixed-rate loans.

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