June 9, 2008 / 4:21 PM / 12 years ago

UPDATE 2-WaMu's total losses seen at about $27 bln into 2011-UBS

(Adds analyst comments, background and updates share price details)

By Tenzin Pema

BANGALORE, June 9 (Reuters) - U.S. mortgage lender Washington Mutual Inc (WM.N) will likely incur total losses of about $27 billion across all its asset classes into 2011, according to a UBS analyst, who also widened his loss view and cut his price target for the bank.

Shares of WaMu, which on Friday fell to a 16-year low of $7.12, fell about 12 percent Monday to a new low of $6.65. By afternoon, they pared some of the losses to trade down more than 10 percent at $6.74 on the New York Stock Exchange.

Since January, the Seattle-based company’s share price has plunged 51 percent, as investors have been unnerved by heavy write-downs and fears that slowing economic growth would further hobble the lender.

“The attributes of WM’s remaining loan portfolio and broader economic weakening mean our bias is that losses could be worse than our projection,” analyst Eric Wasserstrom wrote in a note to clients.

“Conversely, a lower reserve balance in 2010 would drive upside to EPS, though uncertain economic conditions cloud this outlook,” he added.

The analyst widened his second-quarter loss estimate to $1.12 a share, from his prior loss per share view of 91 cents. For 2008, Wasserstrom now expects a loss of $4.45 a share, from his prior loss per share view of $4.

Among 18 analysts covering Washington Mutual, analyst Wasserstrom ranks thirteenth in the accuracy of his earnings forecast, according to data compiled by Thomson Reuters.


Cumulative losses for WaMu’s mortgage portfolio will likely total $21.7 billion for the period post the first quarter through 2011, Wasserstrom said.

“This is above the top-end of WaMu’s projected range of $12 billion to $19 billion,” he said, but added that this estimate may still be too low.

“First, the UBS loss estimates are based on original balance, but we applied them to WaMu’s remaining balance. However, many borrowers’ condition has weakened since the loan was originated,” Wasserstrom said. “Hence, it is reasonable to assume that losses will be higher than the assumptions underlying our estimate.”

The analyst also said his estimates were based on historical performance, and do not account for the possibility of an extended recession, which would drive losses higher.

The largest U.S. savings and loan reported a $1.1 billion first-quarter loss, triggered by its exposure to subprime mortgages, and was forced to sell a $7 billion stake to investors led by TPG Capital.


Based on the projected credit loss for WaMu combined with likely continued balance sheet shrinkage over the next two years, “we believe WM has adequate capital, and will not require an additional capital raise in the absence of a more significant downturn in the economy,” Wasserstrom said.

The analyst cut his price target to $8.50 from $11, but continues to rate the stock “neutral.” (Editing by Jarshad Kakkrakandy)

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