Is WaMu the Next Countrywide?
Countrywide Financial (CFC) isn't the only big bank threatened by the deepening real estate crisis.
An analysis of the largest 20 banks and thrifts by TheStreet.com Ratings shows that four institutions are under-reserved for possible credit losses, a red flag as the economy slows and mortgage defaults rise.
Perhaps more troubling, the numbers show that one of those institutions -- Washington Mutual (WM) -- could join Countrywide in facing serious liquidity problems as worries about the housing and mortgage markets multiply. Meanwhile, another big lender, National City (NCC), could see its earnings and dividend come under pressure as a result of its low reserve levels.
Neither Washington Mutual nor National City immediately returned calls seeking comment. But the findings come as investors confront a rising tide of bad news in the U.S. credit markets. Foreclosures nearly doubled last month from a year ago, RealtyTrac reported Tuesday. Shares in bank and brokerage stocks have dropped sharply this summer. Countrywide alone has shed $13 billion in market value this year.With the financial sector under increasing stress, TheStreet.com Ratings checked two key ratios to measure the strength of big banks' balance sheets: loan-loss reserves as a percentage of nonperforming loans, and nonperforming assets as a proportion of core capital and reserves. Banks and thrifts walk a fine line in setting their quarterly loan-loss provisions, which add to their reserves against future losses. If they reserve too little, they can be seen as taking on more risk in the event of a decline in credit quality and padding their earnings for the current quarter (since the loan-loss provision lowers net income). If they reserve too much, investors, analysts and regulators may see the institution as over-reserving -- so it can manage earnings by under-reserving at a future point when earnings would otherwise weaken. A good benchmark for loan-loss reserve coverage is 100% of nonperforming loans, which are loans past due 90 days or more. If a bank is forced to charge off loans totaling more than its loan-loss reserves, the losses eat into capital. That can hurt earnings if loan quality continues to deteriorate. Another thing to consider is headline risk. As we have seen with Countrywide, any bad news in this environment can cause depositors to flee -- every bank's worst nightmare.
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