Washington Mutual Inc. executives on Wednesday presented Wall Street with a gloomy business outlook for 2008, saying that higher loan-loss provisions and sharply lower mortgage originations would continue to weigh on the bottom line.
One piece of information not provided to analysts and investors who gathered in New York for Wamu's annual investor day was word on when conditions might improve.
"We're trying to call it the way it is. We just don't know how long this lower level of performance" in housing will last, said Kerry K. Killinger, Wamu's chairman and chief executive. "We've taken every measure possible to mitigate the effects of the current environment" but "the reality is, no one knows for sure what's going to happen."
The $312 billion-asset company reiterated that it expects to set aside as much as $1.3 billion in fourth quarter for loan-loss provisions, and its chief financial officer, Thomas W. Casey, said it plans for a similar or "slightly higher" amount in the first quarter of 2008. It did not give a full-year chargeoff estimate for 2008. In the third quarter higher loan losses helped push its profit down 72%.
"You should expect to see quarterly provisions remain elevated" until the housing market improves, Mr. Casey said. He also cautioned that conditions were "extremely difficult to project."
Mr. Killinger said that he expects Wamu's mortgage loan originations to fall 40% in 2008, in line with the industry, and that he expects home prices to continue falling well into 2008.
Asked about a possible dividend cut, he said the Wamu board would periodically review the need for it but had no immediate plans to change the dividend.
Howard Shapiro of Fox-Pitt Kelton Cochran Caronia Waller said in an interview after the presentation: "I think they will delay it as long as possible. But the fact that … [Mr. Killinger] didn't come out and affirm the dividend is a pretty clear indication to me that it will make a cut."
Wamu's shares traded down between 5% and 6% as it began giving its business outlook and sank further on news that New York Attorney General Andrew Cuomo is continuing his indirect pursuit of the company over allegations it pressured appraisers to inflate mortgage valuations.
On Wednesday, Mr. Cuomo issued a press release saying his office is sending subpoenas to Freddie Mac and Fannie Mae and that he is telling them to hire an independent examiner to review mortgages and appraisals they bought from Wamu.
Last week Mr. Cuomo sued First American Corp. and its eAppraiseIT unit for allegedly colluding with Wamu to inflate mortgage appraisals. Wamu is not a named a defendant in that suit, but analysts have said it could have to buy back billions of dollars of loans if the appraisals prove to be flawed. (See related story
Wamu shares tumbled more than 17% to a seven-year low after Mr. Cuomo's statement.
On the subject of Mr. Cuomo's investigation, Mr. Killinger said only that Wamu is assessing the allegations, and he asked investors to take a long-term view of its business.
He said that falling home values are the main reason its mortgage business is slumping but said he expects prices will eventually rebound. Wamu has taken steps to reduce its exposure to subprime mortgage losses, he added.
In the meantime, Mr. Killinger said, it will continue to cut jobs if necessary to keep expenses in check. Since 2005 it has shed 18% of its staff and now has about 50,000 employees. Mr. Casey said the company will evaluate the need for more cuts and predicted 2008 net interest expenses will be at or below the $8.5 billion forecast for this year.
Mr. Killinger said that commercial lending and credit card business lines should post solid profits, and that Wamu's retail banking arm is poised for dramatic growth in 2008 — it will open as many as 150 retail bank branches next year and push to add one million new checking accounts, he said.
Analysts said they were troubled by the uncertainty of Wamu's outlook.
Fox-Pitt's Mr. Shapiro slashed his earnings estimate for next year to $2.12 a share, from $3.
"They truly are facing a very uncertain, difficult time to navigate through," Mr. Shapiro said. "The next year will be an extremely challenging period, no question about it. Their lack of guidance is consistent with the uncertainty of the market."
A year ago Wamu estimated that it would set aside as much as $950 million for credit costs this year. But estimates rose steadily, and Wamu reported a $967 million loan-loss provision for the third quarter alone. It has said the figure for all of 2007 could be as high as $2.9 billion.
Lehman Brothers analyst Bruce Harting predicted in a research note issued this week that Wamu could take $3.8 billion loss provision for 2008.
There is also uncertainty about the looming legal battle, said David C. Schneider, the president of Wamu's home loan division.
He would only say that the company did not press appraisers to inflate figures and that the company's lawyers are carefully reviewing the suit. "We take accusations such as these very seriously," he said.
Robert Lacoursiere, an analyst at Banc of America Securities LLC, wrote in a report issued this week that Mr. Cuomo's allegation could be a sign that Wamu's loan-to-value ratios were routinely understated. Wamu may have to repurchase some of the $52 billion of its securitized loans, which would further losses, he wrote.
