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NEW YORK (Reuters) - Washington Mutual Inc (WM.N), one of the largest U.S. mortgage lenders, said on Friday it expects a 75 percent drop in third-quarter earnings due to losses and write-downs on mortgage loans and securities.
Pretax loan loss provisions for the quarter will be about $975 million, the largest U.S. savings and loan said in a statement.
About $425 million of this provision will be used for net charge-offs -- bad loans with no chance of being recovered. The rest will be added to WaMu's reserves to cover future loan losses, indicating the bank expects weakness in the housing market to continue.
The Seattle-based thrift expects total losses and write-downs of about $410 million.
Sovereign Bancorp Inc SOV.N, the second-largest U.S. savings and loan, also said on Friday it would raise its pretax provision for credit losses for the third quarter by between $104 million and $114 million from the previous quarter.
Citing volatility in mortgage-backed securities and credit markets, Sovereign said it would incur about $20 million in charges related to losses on financings to mortgage lenders that have since filed for bankruptcy protection or defaulted on credit agreements.
On Monday, Citigroup Inc (C.N), the largest U.S. bank by market value, said it expected a 60 percent fall in third-quarter earnings on $5.9 billion in losses and write-downs from subprime and leveraged loans, fixed income trading, and weakness in its consumer business.
Merrill Lynch MER.N, the largest U.S. brokerage, said on Friday it would post a third-quarter loss after writing down about $5.5 billion in collateralized debt obligations and subprime mortgage holdings, and non-investment grade lending commitments.
"We're disappointed with our anticipated third-quarter results," WaMu Chief Executive Kerry Killinger said in a statement. But he added the company expects an improved fourth quarter on good performance in its retail banking, card services and commercial group businesses.
Killinger said the bank, which announced 1,000 layoffs last month, has the liquidity and capital necessary to develop its businesses and support its current dividend.
Washington Mutual posted net income of $748 million in the year-earlier third quarter. A 75 percent drop would mean net income of $187 million in the 2007 third quarter, or less than half the $466 million forecast by analysts surveyed by Reuters Estimates.
Analysts said they were not surprised by WaMu's news and do not expect the bank to recover immediately.
Punk Ziegel & Co analyst Richard Bove said he had assumed the thrift would take loan loss provisions of $700 million in both the third and fourth quarters.
"While I am not sure that the recovery may be as fast as I imagine Washington Mutual believes it will be, all of the charges are non-cash in nature," Bove said in a research note. He said this made it likely WaMu will maintain its dividend.
But Credit Suisse analyst Moshe Orenbuch said in a research note that WaMu "may have to reexamine its dividend policy, given the challenging operating environment."
Analysts expect the bank to add to its reserves in future quarters, which will continue to drag earnings down.
"In general, banks are under-reserved, and you're going to see continued reserve additions. And that's going to be a significant drag on earnings for all the banks," said Keith Davis of Farr, Miller & Washington, an investment management firm.
He said investors would greet WaMu's third-quarter profit slide "positively" because they believe the bank has sorted its losses, set its reserves at an appropriate level, and is likelier to post earnings growth going forward.
WaMu shares closed up 79 cents to $36.07 on the New York Stock Exchange. The shares have fallen 21 percent this year.