'Moment of truth' arriving for Washington Mutual

DOWNGRADING OF BANK:WASHINGTON MUTUAL may face increased costs to keep the confidence of depositors, say analysts, after the largest US savings and loan institution was downgraded to junk by both Standard & Poor's and Moody's.

"This week and next will be the moment of truth for WaMu," said Fred Cannon, an analyst at Keefe Bruyette & Woods. "Their primary sources of liquidity are retail deposits and advances from the Federal Home Loan Banks, but now they are junk-rated WaMu may have to pay more to encourage depositors."

Paying higher rates to sustain the bank's $143 billion (€101 billion) deposit base will impede WaMu's ability to make profits over the long term. Until this week, the bank offered 5 per cent on one-year certificates of deposit, the highest in the market.

Deposit campaigns can attract new customers, said Mr Cannon, but do not make money for the bank when its own cost of funds for one year is about 5 per cent.

WaMu said last week customer deposits had fallen $5 billion from the end of the second quarter. However, it said "reliable sources of liquidity" were up $10 billion to $50 billion, and the bank had not seen any "dramatic" moves in deposit flows "for some time".

If WaMu can see off the risk of a run on customer deposits the rating downgrades from S&P and Moody's will have no near-term liquidity impact. WaMu is the fourth largest commercial bank in the US, with $310 billion in deposits. None of WaMu's unsecured debt is subject to rating-based triggers that would require the bank to repay early and WaMu does not expect the ratings to have a material effect on its borrowing, collateral or margin requirements.

S&P acknowledged WaMu's deposit base appeared to be stable and the company had enough liquidity to meet all fixed obligations throughout 2010. "The bank is operating with adequate capital positions from a regulatory perspective and has demonstrated funding resilience as the deposit franchise has remained stable."

However, the downgrades reflect concerns at WaMu's ability to weather further losses on its portfolio of mortgage and home-equity loans and its reduced financial flexibility to raise capital. - (Financial Times service)