WaMu sees $4.5 billion loss reserve, tries to soothe

NEW YORK (Reuters) - Washington Mutual Inc WM.N, facing investor anxiety about its survival prospects, said it expects to increase its reserve for soured mortgages and other loans by another $4.5 billion this quarter, but that it has more than enough capital to keep operating normally.

A woman walks into a Washington Mutual bank in New York, April 7, 2008. REUTERS/Joshua Lott

The largest U.S. savings and loan said the increase would be smaller than the $5.9 billion it set aside in the second quarter, when its overall net loss was a record $3.33 billion.

About three-quarters of the increase, or $3.4 billion, would come from residential mortgages. Credit card reserves would rise by $600 million from the second quarter.

Washington Mutual said it expects net charge-offs, or loans it does not expect to be paid back, to be roughly $2.7 billion in the quarter, up from the second quarter’s $2.17 billion.

Despite the losses, Washington Mutual said it maintains $50 billion of liquidity from “reliable funding sources,” and expects to remain “well-capitalized,” with capital “significantly above” regulatory minimums.

Washington Mutual revealed its outlook after nervous investors drove its shares to an 18-year low this week, and as much as 96 percent below where they traded last September.

Shares of Washington Mutual closed up 51 cents on Thursday, or 22 percent, at $2.83 on the New York Stock Exchange, after earlier falling to $1.75. The shares rose after-hours to $3.16 after the thrift provided its third-quarter outlook. It expects to report full results on October 22.

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Fitch Ratings cut its long-term credit rating to “BBB- minus,” one notch above “junk” status, from “BBB,” with a “negative” outlook. Moody’s Investors Service and Standard & Poor’s have also assigned their lowest investment grades.

“The only obvious path is to continue to aggressively work to contain the high, and still rising, level of problem loans,” Fitch analyst Sharon Haas wrote. “This is expected to take a considerable amount of time.”

Through the close, the shares were down 34 percent since the weekend ouster of longtime Chief Executive Kerry Killinger.

He was replaced by Alan Fishman, a former chief operating officer of Sovereign Bancorp Inc SOV.N and chief executive of Brooklyn, New York's Independence Community Bank Corp.

Washington Mutual said it will take a charge for losses on $282 million of Fannie Mae FNM.N and Freddie Mac FRE.N preferred stock it owns, joining many other lenders to project similar charges. It also said it may take a non-cash goodwill write-down to reflect the lower value of various assets.

Non-interest income is expected to be about $1 billion, up from $561 million in the second quarter, reflecting growth in deposit and retail banking fees.

Investors have worried the thrift might run short of capital, despite raising $7 billion this year from investors led by private equity firm TPG Inc TPG.UL. Washington Mutual has said mortgage losses could reach $19 billion through 2011.

“Unfortunately, their options have narrowed significantly, even over the past two days,” Sean Egan, manager of the ratings desk at Egan-Jones Ratings Co, said in an interview. He said the thrift may need to raise well over $10 billion.

TPG spokesman Owen Blicksilver declined to comment.

Earlier this week, Washington Mutual said its main regulator, the Office of Thrift Supervision, had stepped up its oversight into how the thrift manages risk. OTS spokesman William Ruberry said the agency is monitoring the situation.

Separately, in a regulatory filing, Washington Mutual said it awarded Fishman a $1 million annual salary, a $7.5 million signing bonus, stock options and restricted stock, as well as eligibility for performance-based bonuses and incentives.

Additional reporting by Megan Davies in New York, Doris Frankel in Chicago and John Poirier in Washington, D.C.; Editing by Andre Grenon, Gary Hill