WaMu Hit by Moody's Downgrade - TheStreet

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Washington Mutual

(WM) - Get Report

shares were falling in premarket trading Friday morning, after Moody's Investors Service downgraded the bank's holding company to below investment grade.

Moody's downgraded Washington Mutual Inc.'s senior unsecured rating to Ba2 from Baa3 and knocked down Washington Mutual Bank's long-term deposit and issuer ratings to Baa3 from Baa2. The outlook is negative, Moody's said.

The ratings action comes after Washington Mutual on late Thursday preannounced third-quarter results, hoping to reassure investors about the health of its capital position and credit outlook.

Washington Mutual's

stock lost 33% of its value since Sept. 5 and is off more than 90% from its 52-week high.

"The company's limited financial flexibility makes it more difficult for it to replenish capital and preserve diversified and stable funding sources," Moody's Vice President and Senior Credit Officer Craig Emrick said in a statement. "Both issues are critical to restoring the strength of the institution."

WaMu responded by noting its bank remains investment grade, and both the holding company's and bank's ratings remain investment grade at other rating agencies.

"We believe that Moody's decision to reduce the ratings of Washington Mutual, Inc. to below investment grade is inconsistent with the company's current financial condition, as outlined in the press release we issued earlier this afternoon," WaMu said in the statement. "The action by Moody's appears to reflect the current uncertainty in the markets, rather than a thorough evaluation of Washington Mutual's business, the strength of its national franchise and the steps it is taking to return to profitability."

Goldman Sachs had a more positive take, upgrading shares of WaMu to neutral from sell. According to a

Bloomberg

report, the company might be able to avoid another capital raise, Goldman said.

Among the highlights the Seattle-based bank discussed in a press release:

  • The company expects its capital ratios at quarter-end to remain significantly above the levels for well-capitalized institutions and continues to be confident that it has sufficient liquidity and capital to support its operations while it returns to profitability.
  • Net interest income is expected to be in line with the second quarter.
  • The third-quarter provision for loan losses is expected to be approximately $4.5 billion, down from $5.9 billion in the second quarter, while reserves are expected to build.
  • Net charge-offs are expected to increase by less than 20% in the third quarter compared with a growth rate of nearly 60% during the second quarter.
  • Noninterest income is expected to be approximately $1 billion, up significantly from the second quarter, reflecting continued growth in depositor and retail banking fees (up 6% from the second quarter), as well as stronger mortgage-servicing rights results due to slower prepayment speeds.
  • Noninterest expense is expected to be down approximately $200 million, reflecting expectations for lower resizing costs and lower foreclosed asset expense.

WaMu expects the third-quarter provision to be around $4.5 billion, down from $5.9 billion in the second quarter, but nearly two times expected charge-offs, resulting in an expected increase of approximately $1.8 billion in the allowance for loan losses at quarter end. The company expects its total loan-loss reserve to increase from $8.5 billion at June 30 to roughly $10.3 billion at the end of the third quarter.

Retail deposit balances at the end of August of $143 billion were essentially unchanged from the end of 2007. In addition, the company has about $50 billion of liquidity from what it described as reliable funding sources.

The company's tier 1 leverage and total risk-based capital ratios at June 30 were 7.76% and 13.93%, respectively, which were significantly above the regulatory requirements for well-capitalized institutions. The company expects both ratios to remain significantly above the levels for well-capitalized institutions at the end of the third quarter.

In the third quarter, the company expects to record an other-than-temporary impairment loss related to its investments in perpetual preferred securities issued by

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

.

The amortized cost of the available-for-sale securities was $282 million at the end of June, and the securities are currently valued at about 10% of par value. The impact on the third quarter will depend on fair values at the end of the quarter. The company doesn't hold any common or other equity securities issued by Fannie or Freddie.

WaMu shares were slipping 6.7% to $2.64 in recent premarket action.

This article was written by a staff member of TheStreet.com.