Washington Mutual (NYSE: WM) is the leading commercial bank ($14.5B in revenue in 2006) providing retail banking, credit card services, commercial services, and home loan origination and services. The company has 2,225 stores in the US and is the third largest mortgage originator with a 7% share of the total market.
By creating a friendly and convenient environment for its clients and providing products such as free checking accounts, WaMu, as it is affectionately known by its customers, has managed to attract loyal customers; on average, a checking account holder with a two-year tenure at WaMu holds about 6.7 other WaMu products.
Despite attempts to diversify its loan portfolio, nearly 60% of Wamu's current loans are mortage originations. This ratio is 1.8 to 4.5 times that of its competitors. In the current environment which has been marked by increased interest rates, stagnant to falling home prices and deteriorating credit this is a significant point of concern. In recent months there has also been increased regulation of non-traditional mortgages, prompting WaMu to decrease the proportion of non-traditional mortgages in order to focus on high margin markets, such as home equity, Alt A, and options-ARM mortgage loans. On aggregate, WaMu’s management, has elected to decrease the exposure created by the Home Loans segment and focus on increasing its footprint in Retail Banking.
In the aftermath of a devastating fire which destroyed 120 acres of real estate in Seattle, the Washington National Building Loan and Investment Association filed incorporation papers on September 25th, 1889. The company’s first transaction, a monthly-installment home loan made on February 10, 1890, opened the flood gates to more than 2,000 similar loans focused on rebuilding 250 blocks of Seattle residence. In 1911, Eugene Favre, co-founder of Murphey Favre, Inc., became a member of the board of trustees, fostering a relationship between his investment firm and Washington National Building Loan and Investment Association. Subsequently, the company changed its name to Washington Mutual. After weathering the financial distress of World War I, the Great Depression, and World War II, in 1983 Washington Mutual acquired Murphy Favre, a securities brokerage firm. Upon its initial public offering, Washington Mutual raised over $72 million for the bank’s common stock shares, 26% more than expected.
WaMu’s 2,200 banking branches nationwide provide a full array of retail banking products. In addition to offering deposit hold services, WaMu also offers annuities, private investment advisory and brokerage services, home equity loans, lines of credit, and a consortium of other retail banking products. By and large, the Retail Banking segment serves as the most lucrative, accounting for 71% of its earnings in the third quarter of 2006.
Because of difficulty in expanding deposits in lower branch concentration areas such as Chicago and Atlanta, WaMu had lagged behind the industry in with a 1.5% total retail deposit growth rate in 2006 and a decline in saving deposits and low-cost checking deposits of 4.8 %.
Despite low deposit growth, WaMu’s acquisition of Commercial Capital in 2006 and Providian in 2005 has increased retail banking cross selling opportunities. As a result, the average number of products a two-year deposit holding patron held jumped from 6.09 to 6.7 from September 2005 to end of 2006. Plans to expand further in high branch concentration areas such as California and Texas will additionally increase these cross-selling opportunities.
Accounting for 22% of WaMu’s third quarter earnings in 2006, the Card Services segment of WaMu takes on the responsibility of originating and servicing credit card loans. As the eighth largest card issuer in the United States managing over $21 billion in assets, the Card Services segment has exhibited 13% compound annual growth rate (CAGR) in credit card loans since acquisition of Providian. Compared to the 8% CAGR of Card Services prior to acquisition, WaMu has clearly increased its cross-selling opportunities.
The Commercial Group provides financing to developers and contractors for the creation and acquisition of multifamily units, office complexes, and other commercial properties. WaMu services all loans that originate through the Commercial Group; with the acquisition of Commercial Capital Bancorp, the multi-family loan portfolio has grown to over $26 billion, establishing WaMu as the nation’s leading multi-family lender.
WaMu’s Home Loans Group, third largest in the nation with a 7% mortgage origination and service market share, has been a long time originator and of various mortgage products including fixed-rate, adjustable rate, hybrid, and pay-option adjustable rate mortgage loans. Early in 2006, the Home Loans Group was strategically focused on building its non-traditional mortgage origination and investment; in particular, the Home Loans portfolio consisted of 46% option-adjustable rate mortgages (option-ARMs) and 11% sub-prime mortgages.
Current management, however, has taken note of softening housing markets and by the end of 2006 had significantly reduced nontraditional mortgage origination and portfolio weight, as evinced by sale of nearly all sub-prime mortgage originations and a $2.4 billion decrease in sub-prime mortgage portfolio weight. Also, increased bank regulation of non-traditional mortgage products have and will continue to decrease the return opportunities. WaMu’s initially large position in these non-traditional mortgages have contributed to an overall loss for the Home Loans Group, resulting in a -3% net contribution to WaMu’s total earnings in the third quarter of 2006.
As it was founded in 1889 to facilitate the rebuilding of a city in shambles, WaMu has long been a leader in the mortgage origination and service market. On aggregate, the mortgage market depends most on the current housing and credit markets. WaMu adjusted its Home Loans Segment portfolio composition of mortgages based on major fluctuations in either market.
In addition, WaMu has ceased origination of government guaranteed loans and shifted focus on higher margin mortgage products such as home equity, Alt A, and options-ARM mortgage loans.
Historically, deposit taking banks generated profits by collecting cash deposits, holding a percentage of those deposits (as dictated by the Federal Reserve) in bank reserves, and issuing leveraged loans. The interest payments paid by the bank on deposits and paid to the bank on loans are dictated by the yield curve. In general, the yield curve is an increasing, concave expression of interest rate as a function of time. Because, under normal conditions, the short term interest rates tend to be lower than the long-term interest rates, banks give short-term interest rates for deposits and charge long-term interest rates for loans; the difference between these two interest rates is called the net interest margin and spells profit for banks.
Primarily a savings and loan bank, WaMu's main focus in the banking industry is on retail banking, commercial lending, and originating and servicing mortgages. By maintaining customer friendly environments in local branches and offering services such as providing loans to small businesses and free checking, WaMu has established itself as one of the major savings and loan services in the Texas, California, and New York areas. The major competitors within the industry by market capitalization other than WaMu are Countrywide Financial, Wells Fargo, JPMorgan, Citigroup, and Bank of America.
|Mortgage Origin. Vol.||Mortgage Portfolio||Card Loans||Avg. Total Deposits||Retail Branches|
|Wells Fargo (WFC)||206.6||1,116.6||18.9||254.2||2,430+|
|J P Morgan Chase (JPM)||92.1||639.6||136.4||200.8||2,600+|
|Bank of America||80.8||391.3||142.4||632.0||5839|