As financial companies’ second-quarter earnings results begin rolling out, analysts are closely watching Washington Mutual, which last month slashed its 2004 profit forecast and warned of layoffs.
The woes of the largest U.S. savings and loan also have prompted speculation that it has become a takeover target.
“Eighteen months from now, this is not going to be an independent company,” Charlotte Chamberlain, an analyst at Jefferies & Co. in Los Angeles, told American Banker.
But WaMu is not the only mortgage lender struggling. The industry is in shock as the market changes and prior record volume levels dip drastically. The CEOs of BankRate and Wells Fargo Home Mortgage have departed, Cendant is looking to unload its mortgage company and mortgage loan volumes are dropping off across the board.
In a June statement, WaMu warned that increases in long-term interest rates would significantly impact its mortgage banking business. The lowered forecast was the second in seven months.
It also said its mortgage business might lose money as home-loan volume and profit from selling mortgages fall below expectations.
Additionally, the company announced, more layoffs are likely. WaMu already cut about 7,400 jobs in the six months ending March 31, according to the Seattle Times. A company spokesman said more layoffs are anticipated during the remainder of 2004, but declined to specify how many jobs overall would be eliminated.
The Seattle-based bank said it now expects to make $3 to $3.60 a share in 2004. That compares with its previously forecast profit of $4.35 a share.
The expected drop has been fueled primarily by higher interest rates. Mortgage rates have climbed, demand is drying up and refinance loans have dropped significantly from their peaks last year. Other banks have been impacted by those changes as well, but some analysts believe WaMu will be especially hard hit by them because of other factors such as its rapid expansion program in recent years, according to CNN Money.
Mortgage rates are now hovering near 6 percent on 30-year fixed-rate mortgages, compared with about 5.3 percent in early March. Mortgage rates didn’t rise after the Fed raised its target federal funds rate last month since they had already incorporated such a shift. But the Fed has warned that more hikes are likely, which means mortgage rates will continue to increase, bringing about even smaller loan volumes for all lenders, not just WaMu.
Countrywide Financial Corp. reported last month that its average daily application volume of $2 billion declined 39 percent in May 2004 compared with the prior-year period. Applications also fell 5 percent compared with April 2004. ABN/AMRO also has reported a sharp decline in fundings. In May, the company’s residential mortgage production totaled $5.9 billion, a 48 percent drop from the $11.25 billion in May 2003.
Some observers have predicted that as funding volumes fall, consolidations of lenders will increase. As examples, they point to past refi boom and bust cycles when the loan sector consolidated, 1993-94 and 1998-99. The reason is simple, analysts say: More companies will decide it’s time to sell after the refinance business drops off.
That thinking falls right in line with rumors that both Citigroup and London-based HSBC are interested in acquiring WaMu. Some analysts also believe the bank’s continued troubles and earnings warnings will make it even more attractive to possible suitors.
WaMu’s stock traded at $39.14 a share this morning. That’s a 5.5 percent decline from its closing price of $41.31 on June 28, just before WaMu announced its revised forecast.
The company will report its second-quarter results July 21, after market close.
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