Thursday, 8 November 2007

WM ups loan loss estimates again

Two months I posted that Washington Mutual (WM) would incur $2.2 billion in credit loses for the 2007 financial year. That estimate has now risen to as much as $2.9 billion after an announcement yesterday. From

WaMu now expects up to $2.9 billion in credit losses

Washington Mutual Inc. said on Wednesday that 2007 credit losses could amount to between $2.7 billion to $2.9 billion, almost double the estimates it made in July when the subprime meltdown began wreaking havoc in U.S. mortgage markets.

Washington Mutual also said that it expects first-quarter credit losses to be in line with those in the fourth quarter, according to executives at an annual investors' conference in New York.

Shares of Washington Mutual fell rapidly to their lowest levels in 20 years after the company issued its latest forecast. By midday in the session, the lender's stock had dropped 19%. Shares closed down 17.3% on more than five times their average daily trading volume.

During presentations, the savings and loan cited Fannie Mae data that suggest U.S. mortgage origination in 2008 will fall to $1.5 trillion for the industry. That would be a substantial decrease from $2.8 trillion from all lenders in 2006. Earlier projections were that new mortgage-loan volumes would slump to around $2.4 trillion....

That's a much smaller cake that mortgage originators will be fighting over next year. WM has said before there are opportunities to grab a larger share of the mortgage origination market. However a bigger share of a much smaller cake is cold comfort.

The picture below tells a thousand words. Previously I estimated 3Q07 earnings for WM at $187m. They came in at $210m. Credit losses are tipped to hit around $1.3 billion in 4Q07 or at least $300m more than the 3rd quarter. That will effectively wipe out any profit for the fourth quarter and probably result in a loss of -$100m or so.

Also, FY08 doesn't look good with 1Q08 credit losses expected to match those in 4Q07 and you can bet they will stay elevated through 2008. WM may have trouble posting a profit at all next year. Again the recurring theme of earnings downgrades is coming through. 4Q07 is going to be worse than the market currently expects, as will FY08.