I saw Philip van Doorn, TheStreet.com’s Bank Analyst, on CNBC’s Street Signs about an hour ago and I went and read his informative article “Is Wamu The Next Countrywide?”
He has some very interesting numbers. The one I found most interesting was Washington Mutual’s (WM) Loan Loss Reserve to Non Performing Loans Ratio of 43.43%.
Every quarter, banks set aside loan loss reserves to cover anticipated losses from bad loans. These loan loss reserves are a hit to earnings but when the loans do go bad they write down these assets on their balance sheets and they don’t necesarily have to hit earnings.
If they over reserve, it gives them a chance to pad earnings in the future by using a lower loan loss reserve charge. If they under reserve, however, they’ll have to take bigger charges as more loans go bad than they had reserved for – which hits earnings.
What the 43.43% number means is that Washington Mutual’s loan loss reserves are less than half of its non-performing loans – which are defined as loans 90 days or more past due.
On top of that, another $2.9 billion of WaMu’s loans are 30-89 days past due. Should some of these become non performing, the ratio would get even lower.
It looks like WaMu is going to have to take bigger loan loss reserve charges in the future which will hurt earnings.
I highly recommend this excellent article which has a table of top banks with their total assets, percentage of non performing assets and loan loss reserves to non performing loans ratios.
He also highlights National City Bank and Countrywide as potentially problematic.