2008-09-12 00:27:01 -
- Fitch Ratings has downgraded the long- and short-term Issuer Default Ratings (IDRs) of Washington Mutual, Inc. (WaMu) as follows:
--Long-term IDR to 'BBB-' from 'BBB';
--Short-term IDR to 'F3' from 'F2'
Fitch has also taken the following rating actions on Washington Mutual Bank (WMB):
--Long-term IDR affirmed at 'BBB''
--Short-term IDR downgraded to 'F3' from 'F2'.
The Rating Outlook is Negative.
Today's actions reflect Fitch's expectation for continuing asset quality challenges amidst market conditions that are considered the most difficult in several decades for U.S. retail banks, particularly those with a concentration in residential mortgage assets.
WaMu has posted significant quarterly losses for the past three quarters, primarily
as a result of a sharp rise in credit loss provisioning during the past year. Earlier in 2008, WaMu began provisioning with a view toward estimated cumulative losses over the life of its loan portfolio in an attempt to build reserves in advance of charge-offs. To date, provisions have been substantially higher than net charge-offs, although that trend is anticipated to reverse in the future as the reserve building plateaus and is then used to absorb credit losses. WaMu announced today that it expects the provision for third-quarter 2008 (3Q08) to start showing evidence of that anticipated trend with a substantially lower provision (estimated at approximately $4.5 billion) in 3Q'08 versus the 2Q'08 provision of $5.9 billion.
WaMu also indicated that net charge-offs are continuing to climb, as expected, albeit at a slower pace than in prior quarters. The provision, while less than the 2Q'08 provision, is still sufficiently elevated that it will translate into a significant loss for the quarter; this is very much in line with Fitch's prior expectations which do not anticipate WaMu returning to profitability until some time in 2009.
Market conditions, including receptivity of the capital markets and the cost of funding for all financial institutions, have remained volatile and have deteriorated in some cases. This is the primary driver behind today's downgrades of the holding company ratings and the short-term debt and IDR of WMB. WaMu's series of capital raising actions during the past year have resulted in the build-up of a notable, but necessary, capital flexibility. This provides a meaningful buffer to absorb losses as WaMu works through its considerable level of problem assets.
However, Fitch believes that the flexibility to add to capital is now significantly constrained in light of market conditions. In particular, while the holding company has several years worth of liquidity, should it become necessary for the holding company to inject additional capital into WMB from its storehouse of liquidity, the holding company's ability to rebuild its own liquidity, given current market conditions, is assumed to be quite low.
That being said, prior to summer 2007, WaMu expanded and diversified its funding sources at both the bank and the holding company, reducing its reliance on historical sources such as certificates of deposit (CDs) and FHLB advances. Since that time, however, WaMu has shifted back toward a greater reliance on these domestic funding sources. Its retail deposit base has remained fairly steady through the turbulence of the summer of 2008, with a reduction in uninsured deposits largely offset by growth in FDIC insured transaction accounts and CDs. WaMu has no reliance on short-term wholesale funding sources and has only minimal debt maturities over the intermediate term. WaMu's outstanding debt is not subject to rating triggers or other terms that would cause acceleration (neither holding company or bank debt).
Thus, WaMu's most significant operating constraint in the intermediate term is maintenance of capital levels at sufficiently high levels to be considered well-capitalized by its regulators. Based on the current capital cushion, but assuming WaMu continues to post quarterly net losses in 2009, albeit at levels in line with the expectation that 2Q08 represents the peak level of necessary provisions, Fitch believes WaMu's ability to keep capital ratios at acceptable levels will largely hinge on how well it executes on previously announced expense saves and modest balance sheet reduction initiatives.
WaMu named a new CEO, Alan Fishman, earlier this week. As with any organization under new management, other potentially significant changes are possible over the intermediate term. However, at this juncture, the only obvious path is to continue to aggressively work to contain the high, and still rising, level of problem loans. In the current environment, this is expected to take a considerable amount of time. Should asset quality deterioration accelerate or WaMu be faced with other problems preventing it from maintaining solid capital levels, it would put additional pressure on WaMu and could result in further rating downgrades.
Fitch has taken the following rating actions on WaMu and subsidiaries:
Washington Mutual Inc.
--Long-term IDR downgraded to 'BBB-' from 'BBB';
--Senior debt downgraded to 'BBB-' from 'BBB';
--Short-term IDR downgraded to 'F3' from 'F2';
--Short-term debt downgraded to 'F3' from 'F2';
--Subordinated debt downgraded to 'BB+' from 'BBB-';
--Preferred stock downgraded to 'BB-' from 'BB+';
--Individual downgraded to 'C/D' from 'B/C';
--Support affirmed at '5';
--Support Floor affirmed at 'NF'.
Washington Mutual Bank
--Long-term IDR affirmed at 'BBB';
--Long-term deposits affirmed at 'BBB+';
--Senior debt affirmed at 'BBB';
--Short-term IDR downgraded to 'F3' from 'F2';
--Short-term deposits affirmed at 'F2'.
--Individual downgraded to 'C' from B/C;
--Support affirmed at '3';
--Support Floor affirmed at 'BB-';
--Subordinated debt affirmed at 'BBB-'.
Bank United FSB
--Subordinated debt affirmed at 'BBB-'.
Bank United Corp.
--Subordinated debt downgraded to 'BB+' from 'BBB-'.
Providian Financial Corp
--Senior debt downgraded to 'BBB-' from 'BBB+'.
Providian National Bank
--Long Term Deposits affirmed at 'BBB+'.
Washington Mutual Preferred Funding (Cayman) I Ltd.
Washington Mutual Preferred Funding Trust I (Delaware)
Washington Mutual Preferred Funding Trust II
Washington Mutual Preferred Funding Trust III
Washington Mutual Preferred Funding Trust IV
--REIT Preferred downgraded to 'BB-' from 'BB+'.
Washington Mutual Capital I
Providian Capital I
--Trust Preferred downgraded to 'BB-' from 'BB+'.
This rating action has no effect on WM Covered Bonds Program outstanding debt, which is rated 'AA' by Fitch.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, New York
Sharon Haas, CFA, +1-212-908-0362
John Mackerey, +1-212-908-0366
Sandro Scenga, +1-212-908-0278 (Media Relations)
