By Ari Levy
July 21 (Bloomberg) -- Investors who plowed money into Wachovia Corp. and Washington Mutual Inc. last week after competitors posted better-than-expected quarters may find out tomorrow if that was a good idea when the two lenders report their own results.
Wachovia and Washington Mutual may have combined second- quarter losses of $3.8 billion, according to analysts surveyed by Bloomberg. Wachovia, the nation's fourth-biggest bank by assets, and Washington Mutual, the largest saving and loan, rank among the top providers of ``option-ARM'' and subprime mortgages that now have some of the highest default rates.
``These are certainly troubled companies that aren't going to improve anytime soon,'' said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $65 billion. ``I still would need to see the banking sector as a whole show some sort of fundamental improvement'' along with better housing data, he said.
The Standard & Poor's 500 Financials Index jumped 11 percent last week, its biggest gain since March, as Citigroup Inc., Wells Fargo & Co. and JPMorgan Chase & Co. posted results that topped analysts' estimates.
Washington Mutual, based in Seattle, climbed 20 percent last week and is down 86 percent over the past year. Wachovia, based in Charlotte, North Carolina, gained 12 percent, for its first weekly advance in more than two months.
Financial institutions worldwide have racked up $447 billion in credit losses and writedowns amid the worst housing crisis since the Great Depression. They've been forced to raise $331 billion in capital.
Wachovia's Bad Loans
Wachovia, which reports before the New York Stock Exchange opens tomorrow, has said it may post a loss of $2.6 billion or more.
During the previous quarter, bad loans in California led to the bank's first loss since 2001 and eventually cost Kennedy Thompson his job as chief executive officer. Former Treasury Undersecretary Robert Steel took over as CEO this month and must deal with the fallout from Wachovia's $24 billion purchase of Golden West Financial Corp. in 2006.
Washington Mutual, known as WaMu, is likely to report its third straight loss, which may total $1.23 billion, the average of three analysts surveyed by Bloomberg. The announcement may also be CEO Kerry Killinger's first opportunity to address shareholders since he was stripped of the chairman's position last month.
California Market
The bank has been burned by foreclosures in California, home to half of its loans. At the end of the first quarter, WaMu had $15 billion of subprime loans on its balance sheet as well as $40 billion of hybrid adjustable-rate mortgages, $56 billion of option-ARMs and $63 billion of home-equity loans and lines of credit, according to Credit Suisse analyst Moshe Orenbuch.
``Credit performance of all these asset types continues to deteriorate,'' Orenbuch, who rates the shares ``neutral,'' wrote in a July 15 report. He increased his loss estimate for the quarter to 90 cents a share from 70 cents. ``While others have also experienced deterioration in these asset classes, WaMu has significant concentrations.''
Wachovia spokeswoman Christy Phillips Brown declined to comment for this story. WaMu spokesman Derek Aney didn't return calls.
Following Wells Fargo and JPMorgan, Citigroup beat analysts' estimates on July 18, reporting a smaller-than-expected loss on fewer mortgage-bond writedowns. Citigroup, the biggest U.S. bank by assets, gained 20 percent for the week, paring its decline for the past year to 63 percent.
``I'm pretty encouraged by the results generally for the financial industry,'' Jason Price, research director at Haverford Investments, said in an interview with Bloomberg Television. ``We're getting a continuing trend here.''
To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net
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