Washington Mutual falls after outlook, cut to junk

NEW YORK Fri Sep 12, 2008 1:01pm EDT

NEW YORK (Reuters) - Washington Mutual Inc (WM.N) shares fell on Friday after the largest U.S. savings and loan projected another big write-down for soured loans and was downgraded to "junk" status by a leading credit rating agency.

At least four analysts cut their price targets for the thrift, though Goldman Sachs & Co raised its rating to "neutral" from "sell."

Washington Mutual shares were down 16 cents, or 5.7 percent, to $2.67 in pre-market trading. Through Thursday, the shares had fallen 34 percent this week and 92 percent in the last year.

In an unusual move to quell investor anxiety about its survival prospects, Seattle-based Washington Mutual late Thursday released third-quarter projections six weeks early and said it had ample liquidity. The thrift has said losses from home loans could reach $19 billion through 2011.

But Moody's Investors Service lowered Washington Mutual to below investment-grade status, citing "reduced financial flexibility, deteriorating asset quality, and expected franchise erosion." Fitch Ratings also downgraded the thrift.

Washington Mutual said it expects to set aside $4.5 billion for loan losses in the third quarter, down from the second quarter's $5.9 billion. It also said it expects about $2.7 billion of loan write-offs.

The outlook suggests that Alan Fishman, Washington Mutual's new chief executive, will next month report the thrift's fourth straight quarterly loss.

In its outlook, Washington Mutual also said retail deposits as of Aug. 31 were "essentially unchanged" from $143.6 billion at the start of the year. This, however, suggests a decline from $148.3 billion as of June 30, though the thrift is offering yields as high as 5 percent on one-year certificates of deposit.

Washington Mutual also said it had $50 billion of liquidity from "reliable funding sources."

This language was reminiscent of language that Countrywide Financial Corp, then the largest U.S. mortgage lender, used in August 2007 when it said it could access $46.2 billion of "highly reliable" short-term financing. Less than two weeks later, it drew down an $11.5 billion credit line. Countrywide was bought in July by Bank of America Corp (BAC.N).

Analysts at Goldman, Citigroup Global Markets, Credit Suisse and Friedman, Billings, Ramsey & Co cut their price targets for Washington Mutual, despite the quarter-over-quarter decline in projected loan losses.

FBR's Paul Miller said the outlook suggests a third-quarter loss of $1.20 to $1.30 per share, but he kept his forecast for $1.40. Miller lowered his price target to $2.50 from $4.

"Washington Mutual is quickly realizing expected losses," he wrote. "If losses exceed guidance, Washington Mutual could find itself in need of additional capital, which we believe could be extremely dilutive to current shareholders."

Washington Mutual raised $7 billion of capital this year from investors led by private equity firm TPG Inc [TPG.UL].

Credit Suisse's Moshe Orenbuch, meanwhile, wrote that reported deposit levels "should give investors some comfort," but noted that Washington Mutual did not discuss wholesale deposits, which totaled $33.7 billion on June 30.

Fishman succeeded Kerry Killinger, who was ousted last weekend after 18 years at the bank's helm.

(Additional reporting by Al Yoon; editing by John Wallace)