News

Washington Mutual Inc., the largest U.S. savings and loan, posted a $3.33-billion (U.S.) second-quarter loss Tuesday as souring mortgages forced it to set aside more money for loan losses.

The thrift's deteriorating health prompted Moody's Investors Service to say it may downgrade Washington Mutual to “junk” status, and shares of the company fell more than 2 per cent.

Excluding a one-time adjustment, Washington Mutual said it lost $3.34 per share – triple the $1.09 per share loss analysts on average expected, according to Reuters Estimates. Retail banking, mortgage and credit card units all posted losses.

Washington Mutual had posted a profit of $830-million, or 92 cents per share, a year earlier.

The net loss equalled $6.58 per share including a one-time adjustment related to the Seattle-based thrift's $7.2-billion capital raising in April from private equity firm TPG Inc. and other investors.

Washington Mutual set aside $5.91-billion for loan losses, and said net charge-offs totalled $2.17-billion.

It also said it expects cumulative residential mortgage loan losses to be “toward the upper end” of the $12-billion to $19-billion range it had forecast in April. Some analysts had predicted the losses might end up higher.

“We are planning for continued softness in housing for the next several quarters,” chief executive officer Kerry Killinger said in an interview. “The capital that we have in place is sufficient to manage through this period. We have no plans at this point to raise additional capital.”

Washington Mutual also said Mr. Killinger, chief operating officer Steve Rotella and chief financial officer Tom Casey will not receive annual incentive payments under a company bonus plan, in light of the thrift's performance in 2008.

Washington Mutual has cut 6,205 jobs this year, leaving it with 43,198 employees, and analysts widely expect further cuts as Mr. Killinger tries to reduce expenses by $1-billion.

PRESSURE

Mr. Killinger is under heavy pressure to stanch losses and restore profit following an 86 per cent plunge in Washington Mutual's stock price in the last year.

Moody's said the falling stock price and declines in some deposit categories have resulted in “reduced financial flexibility” for Washington Mutual, making it tougher for the thrift to raise additional equity.

The rating agency projected “sizable” quarterly losses through 2009 for Washington Mutual.

Meanwhile, Washington Mutual's board, long considered loyal to Mr. Killinger, last month stripped him of his chairman's post after shareholders voted at the thrift's annual meeting in favour of appointing an independent director in his place.

Mr. Killinger has been chief executive officer since 1990, and became chairman the following year.

In the interview, Mr. Killinger said the thrift has a “very strong and very engaged board,” including the “welcome additions” of TPG founding partner David Bonderman and Continental Airlines Inc. chief executive officer Larry Kellner, as a board observer.

“The board is absolutely committed to returning the company to profitability in as short a time as possible,” Mr. Killinger said.

He declined to provide a time frame, or to discuss speculation the thrift could be a takeover target. “The board has approved this comprehensive plan and instructed management to execute it,” he said.

Washington Mutual said its mortgage unit suffered a $1.35-billion loss in the second quarter, while retail banking posted a $2.04-billion loss.

Credit cards generated a $175-million loss, while profit in commercial banking fell 29 per cent to $87 million.

Washington Mutual said it ended the quarter with $309.7-billion of assets, and operates about 2,239 branches.

Shares of Washington Mutual fell 12 cents, or 2.1 per cent, to $5.70, following up-and-down after-hours trading. They had closed at $5.82 on the New York Stock Exchange before release of the earnings report.