WaMu profit plunge doesn't faze investors

The other shoe dropped today for Washington Mutual, as the giant Seattle-based thrift said the collapsed housing and mortgage markets will lead to a 75 percent drop in third-quarter profit.

Most of the impact will come from the approximately $975 million WaMu will set aside to cover bad loans, and another $410 million in writedowns because its portfolio of mortgage-backed securities and other assets has lost value.

In the third quarter of 2006, WaMu reported a net profit of $748 million, meaning this year's third-quarter profit likely will drop to around $187 million.

Still, traders took the news well — relieved to have a better sense of just how hard WaMu will be hit by the weak housing market and the recent crunch in the mortgage market. Shortly before noon, WaMu shares were up $1.05, or nearly 3 percent, to $36.33 on the New York Stock Exchange.

"The fear of the unknown is worse than the reality of the known," said Jim Bradshaw, an analyst who follows WaMu for D.A. Davidson in suburban Portland.

At an investors conference last month, WaMu chief executive Kerry Killinger said the company would put aside $2 billion to $2.2 billion this year to cover loan losses. That's more than twice the $816 million it put aside last year, and some analysts — including Bradshaw — think even the $2.2 billion might be low.

Although investors had been warned the third quarter would be rough for WaMu, one of the nation's largest mortgage lenders, today's announcement "gives us a little more clarity about exactly where things stand," said Bradshaw.

After Citigroup made a similar "pre-announcement" on Monday, its shares gained 2.2 percent.

As the nation's housing bubble has deflated, WaMu's stockpile of delinquent loans, foreclosed properties and other non-performing assets has risen — both in absolute terms, to over $4 billion, and as a share of its total assets, to 1.3 percent.

Of the $975 million WaMu set aside in the third quarter, $550 million represents loans that already have been charged off. Much of those charge-offs, the company said, reflect subprime mortgages and home-equity loans.

The company already had set aside $606 million for bad loans in the first half of the year, and Bradshaw thinks it may have to set aside as much as $1 billion more in the fourth quarter.

At the same time, investor appetite for buying mortgage loans and securities backed by them has all but evaporated. Without that secondary market, WaMu has had to cut the value of the loans and securities it's now forced to keep on its books.

WaMu will release third-quarter earnings on Oct. 17, at which time it will update investors on the state of its business. The company said it would have no further comment until then.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com