Real Estate Lender Implosion

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WaMu CEO sees boost from Fed rate cuts
By JESSICA MINTZ

The Associated Press January 29, 2008, 12:04PM ET

Washington Mutual Inc. said Tuesday that higher-than-expected net interest income in 2008, along with its exit from subprime loans and a renewed focus on bank-branch customers, will help carry the thrift through what promises to be a difficult year.

Investors heartened by his optimism sent WaMu shares up 66 cents, or 3.9 percent, to $17.52 in morning trading.

"We expected the correction (in the housing market) would likely be softened by continued economic growth, low unemployment, historically low interest rates," Chief Executive Kerry Killinger told analysts at a Citi Investment Research conference in New York. "However, that has not been the case."

WaMu, the country's largest savings and loan, swung to a loss in the final quarter of 2007 after writing down $1.6 billion to account for the sinking value of its home loan portfolio, and setting aside $1.53 billion to cover future loan losses.

The thrift had said previously that the higher provisioning for loan delinquencies would continue through 2008, at a rate of up to $2 billion per quarter.

Killinger did not directly raise the amount WaMu expects to set aside for loan losses, but he walked analysts through several scenarios on Tuesday that indicated higher-than-expected delinquencies are possible.

Anecdotally, the CEO said troubled borrowers are moving from 30 days late with a payment to foreclosure "a little faster," but said there were no data available.

On a positive note, Killinger outlined several factors he expects to help offset the bite that delinquencies will take from WaMu's results in 2008.

For one, the CEO said further rate cuts by the Federal Reserve would increase WaMu's net interest income, or a chunk of its revenue made up by subtracting how much it costs to borrow money from how much it charges to lend money.

Killinger estimated that every quarter-percent rate cut by the Fed will add $150 million to the thrift's net interest income.

"We are encouraged by aggressive actions by the Fed," and by the Bush administration's proposed economic stimulus package, Killinger told analysts. However, he said, "It's too early to assess how these particular actions are going to impact housing prices."

The Fed, which surprised markets last week with a cut of three-quarters of a percentage point to 3.5 percent, began a two-day meeting Tuesday expected to result in another cut of as much as half a point.

Killinger emphasized WaMu's late 2007 decision to shut down its subprime mortgage lending operation and other high-risk businesses and focus on products the company offers at its bank branches and online -- checking and savings accounts, credit cards and loans whose target customers have better credit, on average, than the subprime borrowers.

In that vein, Killinger announced that WaMu will open 100 to 150 new bank branches in 2008, in cities where the thrift already has a presence.

The CEO said WaMu expects to add more than 1 million net new checking accounts this year, and that all the company's business divisions will focus on selling products through the branches and the retail Web site "like never before."

Killinger also emphasized that WaMu has plenty of cash and access to funding to get through the fiscal year, and that he would continue to work toward turning the company back around.

"We are committed to making whatever changes are necessary to speed our return to profitability," he said.

(This version CORRECTS that WaMu plans to open 100 to 150 new branches, not 150 to 200)

http://www.businessweek.com/ap/financialnews/D8UFLQE01.htm