Shares of Washington Mutual Inc. stumbled Wednesday after the bank reported a staggering $3 billion loss in the second quarter as it increased its loss reserves to more than $8 billion to cover souring mortgage loans.
Shares dropped $1.17, or 20.1 percent, to close at $4.65. Shares are down 66 percent for the year.
WaMu said late Tuesday that it set aside a total of $5.91 billion during the quarter to cover bad loans, reflecting continued credit deterioration and increased delinquencies. Its total loan-loss reserves grew to $8.46 billion.
Standard & Poor's Ratings Services subsequently lowered its counterparty credit rating on the Seattle-based bank to "BBB-" from "BBB," and removed all ratings from negative watch. A rating of "BBB-" is one notch above junk status. The outlook is stable.
The ratings reflect an expected loss in 2008 and a modest return to profitability in 2009, S&P said. An upgrade is not likely during the next year, S&P said, and ratings could drop lower if residential mortgage credit losses were to exceed expectations.
The rating action follows Moody's Investors Service's announcement late Tuesday that it put WaMu's senior unsecured rating of "Baa3" on review for possible downgrade. A rating of "Baa3" is one notch above junk status.
"After several quarters in denial, we believe WaMu now finally appears to accept that housing prices are dropping precipitously," wrote Stifel, Nicolaus & Co. analyst Chris Brendler in a note to clients Wednesday. "Management also admits that cumulative losses will now likely be at the higher end of its previous $12 billion to $19 billion range." But Brendler believes this estimate is still too low.
He is particularly concerned by the company's home equity and "option" adjustable rate mortgage portfolios.
WaMu said the fastest rising delinquencies were among its option ARM loans. The bank stopped originating these kinds of loans, which offer very low introductory payments and let borrowers defer some interest payments until later years, in June.
Brendler projects more than $16 billion in provisions over the next six quarters, which would drive operating losses through the fourth quarter of next year.
Brendler, who maintained a "Hold" rating on the shares, estimates a loss of $9.45 per share for the year, far below his previous forecast for a loss of $2.35 per share. Analysts polled by Thomson Financial, on average, predict a loss of $3.34 per share.
Friedman, Billings, Ramsey & Co. analyst Paul Miller Jr. reiterated an "Underperform" rating on the shares, and cut his target price in half to $4.
"If losses exceed guidance, Washington Mutual could find itself in need of additional capital, which will be difficult," Miller said.
Following a $7.2 billion capital raise in April, the bank insists it has sufficient capital to ride out the remainder of the credit crunch.
WaMu ended the quarter with more than $40 billion of readily available liquidity, and its capital ratio increased to 7.79 percent, up from 6.40 percent in the first quarter.
Miller also cut his full-year estimates to a loss of $6.60 per share from a loss of $3.30 per share.