Washington Mutual (NYSE: WM) is a leading U.S. commercial bank ($14.2 billion in net revenue in 2007) providing retail banking, credit card services, commercial services, and home mortgage originations and services. The company has 2,257 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 known by its customers, has managed to attract loyal customers; on average, a checking account holder with a two-year tenure at WaMu uses about 7.2 WaMu products in total.
Despite attempts to diversify its loan portfolio, nearly 67% of Wamu's current loans are mortgages. This ratio is 1.8 to 4.5 times that of its competitors. This has been a point of concern through 2007 and into 2008 as credit conditions worsened and U.S. home prices began to decline. WaMu has taken steps to avoid or greatly limit its exposure to fallout from the collapse of the subprime lending industry, choosing to stay away from the riskiest mortgages that are causing other lenders and banks to lose billions. Despite this, a general downturn in the U.S. economy will inevitably harm WaMu's bottom line, as its $67 million net loss for 2007 shows.
WaMu’s over 2,200 banking branches nationwide provide a full array of retail banking products for consumers and small businesses. In addition to offering deposit hold services, WaMu also offers annuities, private investment advisory and brokerage services, home equity loans, lines of credit, and related retail banking products. By and large, the Retail Banking segment is WaMu's most significant, accounting for 59% of its net revenue in 2007.
Because of difficulty in increasing the volume of its deposits in lower branch concentration areas such as Chicago and Atlanta, WaMu has held a relatively smaller share of the total domestic market compared to some of its larger peers, though its Retail Banking division did grow deposits by 3% in 2007 to an average of over $144 billion. Despite relatively smaller market share, WaMu’s acquisition of Commercial Capital in 2006 and Providian in 2005 has increased cross-selling opportunities for its Retail Banking segment. As a result, the average number of WaMu products used by a checking account customer of two years was 7.2 as of 2007. Plans to expand further in high branch concentration areas such as California and Texas will additionally increase these cross-selling opportunities.
Accounting for 21% of WaMu’s 2007 net revenue, 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 $27 billion in assets, Card Services's credit card loans have grown at a 13% compound annual growth rate (CAGR) since the acquisition of Providian in 2005, compared to a CAGR of 8% prior to the acquisition.
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 $31 billion, establishing WaMu as the nation’s leading multi-family lender.
WaMu’s Home Loans Group, the third-largest mortgage originator in the U.S. with a 7% share of the domestic market, offers various mortgage products including fixed-rate, adjustable-rate, hybrid, and pay-option adjustable-rate mortgage loans. In early 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% subprime mortgages.
By the end of 2006, current management had taken note of slowing growth in housing markets and significantly reduced nontraditional mortgage origination and portfolio weight, as shown by its sale of nearly all subprime mortgage originations and a $2.4 billion decrease in the value of subprime mortgages in WaMu's total portfolio. By mid-2007, when the subprime lending industry collapsed and mortgages began entering default, WaMu had taken these and other steps to limit its exposure, though the Home Loans division did report a net loss of $2.46 billion in 2007.
As it was founded in 1889 to facilitate the rebuilding of Seattle, WaMu has long been a leader in the mortgage origination and service market. In general, the mortgage industry is heavily influenced by conditions in both the housing and credit markets, which means that poor conditions in either of the two will negatively impact WaMu's revenue and profits. As such, WaMu is faced with the task of monitoring these markets closely, anticipating upcoming downturns or booms, and adjusting the composition of its mortgage portfolio accordingly. Unexpected changes in the housing or credit markets, which often cannot be foreseen, can significantly impact WaMu's bottom line.
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 interest rate spread, which is a main source of profit for banks like WaMu.
Primarily a savings and loan bank, WaMu's main focus 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 providers in the Texas, California, and New York areas. WaMu's major competitors are Countrywide Financial (CFC), Wells Fargo (WFC), J P Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC); of these, Countrywide and Wells Fargo most directly compete with WaMu's mortgage business, whereas JP Morgan, Citi, and Bank of America are much larger, diversified financial services firms. Bank of America will, however, become a much greater direct competitor after it completes its acquisition of Countrywide.
|Mortgage Origin. Vol.||Mortgage Portfolio||Card Loans||Avg. Total Deposits||Retail Branches|
|Countrywide Financial (CFC)||220.0||1,196.7||0||58.6||993|
|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 (BAC)||80.8||391.3||142.4||632.0||5839|