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Sept 17 (Reuters) - Washington Mutual's (WM.N) board would seriously consider a merger offer even at a discount to what the Seattle-based thrift believes it is worth, as it faces mounting pressure to pursue options amid credit-rating downgrades, an analyst at Merrill Lynch said.
"Recent markets disruption and lack confidence that Washington Mutual can withstand the credit cycle are increasing the likelihood that it will need to seek shelter from the storm through a merger," analyst Kenneth Bruce said in a note dated Sept 16.
Rating agency Standard & Poor's downgrade of the thrift to "junk" status, "is likely to add more impetus to Washington Mutual to act quickly," Bruce, who lowered his price target on the stock to $1 from $3, said.
The S&P downgrade came on Monday, and followed downgrades last week by Moody's Investors Service and Fitch Ratings.
S&P had expressed concern about the thrift's share price, and said "it increasingly appears that market conditions could overtake credit fundamentals and leave the company with greatly diminished financial flexibility."
Washington Mutual's stock has lost almost 94 percent of its value from its 52-week high of $39.25 on Sept. 19, 2007, to its close on Tuesday of $2.36, as investors worry about continued losses related to risky real-estate loans.
The company's woes has led to speculation that it is primed for a takeover.
On Wednesday the New York Post reported, citing sources, U.S. federal regulators recently called a number of banks asking if they would consider buying Washington Mutual should it eventually falter.
In recent days federal banking regulators contacted Wells Fargo & Co (WFC.N), JPMorgan Chase & Co (JPM.N), HSBC (HSBA.L) and several other financial institutions to gauge their interest in a possible acquisition of the largest U.S. savings and loan institution, the paper said.
Merrill's Bruce said the retail-bank footprint of the company remains attractive to potential buyers, but the poor quality of its balance sheet may hinder prospects getting full-value from a sale.
Shares of Washington Mutual were trading down 20 cents at $2.16 Wednesday morning on the New York Stock Exchange. (Reporting by Ratul Ray Chaudhuri in Bangalore; Editing by Pratish Narayanan)