Earnings Preview: Washington Mutual to report 2Q

OVERVIEW: Washington Mutual, among those banks hit hardest by the mortgage mess, reported a $1.1 billion loss in the first quarter as it set aside $3.5 billion to cover sour loans. Despite the Seattle-based bank's successful $7.2 billion capital raise in April, Wall Street is bracing for another loss.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring.

During the quarter, WaMu also announced plans to exit the wholesale lending business and close all remaining standalone home loan centers. WaMu said it will instead focus its mortgage-originating efforts in its retail bank branches and Web site, and by expanding its call center operations.

In June, the bank said it cut about 1,200 jobs, or roughly 2.6 percent of its work force. The bank also slashed its quarterly dividend to 1 cent from 15 cents, which will result in savings of about $490 million a year.

BY THE NUMBERS: Analysts polled by Thomson Financial, on average, anticipate a loss of $1.05 per share.

ANALYST TAKE: In a recent note to clients, Lehman Brothers analyst Bruce Harting said he expects WaMu will need to add "substantially" to its loan loss reserves in the second quarter, and the remainder of the year, as home prices and mortgage credit show no signs of stabilizing. He expects the bank to set aside as much as $4 billion in the quarter to cover bad loans, with charge offs rising to $1.8 billion. Harting projects a loss of $1.48 per share.

Keefe, Bruyette & Woods analyst Frederick Cannon, who has an "Underperform" rating on the shares, expects a second-quarter loss of $2.40 per share, based on the bank's tangible equity-to-assets ratio of 7.8 percent as of June 30.

WHAT'S AHEAD: Harting expects the bank to remain unprofitable until credit costs normalize some time in the second half of 2009.

"The combination of revenue growth, loan loss reserves already established and new capital should be sufficient to cover the losses that Washington Mutual will need to absorb in the next several years," he said.

However, some expect the bank will need to raise additional capital going forward.

Earlier this month, Edward Jones analyst Tom Kersting downgraded the shares to "Sell" from "Hold," based on his concern over the bank's capital position and its ability to raise capital in the future.

"It is likely that WaMu will need to raise additional capital to bolster its financial position due to increasing losses in its loan portfolio," Kersting wrote. "We are concerned about what it will take and how long it may take to improve the performance of the mortgage business, and we believe further near-term disappointments are possible."

Management has indicated potential mortgage-related losses of $12 billion to $19 billion over the next three to four years, but Kersting believes this number could be higher given the company's focus on mortgages and geographic concentrations in higher-risk markets.

STOCK PERFORMANCE: Shares lost 52 percent during the quarter to end the period at $4.93. The stock is down about 56 percent year to date.