Analyst Cuts Ratings on 2 Leading Thrifts

Falling interest rates have proved too much of a good thing for Washington Mutual and Golden West Financial, analyst Gary Gordon at PaineWebber says.

While shares of the two huge savings and loans have rallied powerfully since the Federal Reserve stopped raising short-term rates in May, the recent downturn in mortgage rates may cut into the thrifts’ profits, Gordon said.

He cut both stocks to “neutral” from “attractive” on Tuesday--the first downgrade by a Wall Street analyst in almost six months for Washington Mutual and in three months for Golden West. Washington Mutual shares (ticker: WM) slid $1.94 to $44. Golden West (GDW) lost 56 cents to $56.06.

Mortgage rates have fallen with long-term Treasury bond yields in recent months as investors have bet that the Fed is finished tightening credit.

With long-term rates at their lowest levels in more than a year, mortgage borrowers prefer fixed-rate loans to adjustable mortgages, Gordon said in a note to clients. Golden West, parent of World Savings, deals almost exclusively in adjustable loans, which also are a major product for Washington Mutual, he said.

The adjustable-rate mortgage “is rapidly losing favor with borrowers,” Gordon wrote.

That will mean that growth in Golden West’s loan portfolio will slow from 30% this year to the low single digits in the second half of 2001, he said. Washington Mutual “should have a similar story, although more muted,” he said.

But Gordon is going against the herd on the stocks. He is one of only two analysts with the equivalent of “hold” ratings on Washington Mutual. The other 14 analysts rate it “buy.” Nine analysts say Golden West is a “buy,” while five say it’s a “hold.”

Washington Mutual, which according to analysts surveyed by First Call/Thomson Financial is expected to report profit growth of 18% in 2001, sells for 13 times this year’s estimated earnings per share. Golden West is priced at 16 times estimated 2000 earnings, with profit expected to grow 23% next year.

By contrast, the average U.S. blue-chip stock is priced at about 25 times estimated 2000 earnings.

“Even though [the stock] has gone up, it’s still awfully, awfully cheap,” David Dreman of Dreman Value Management said of Washington Mutual. His firm owned more than a million shares as of June 30.

Gordon, however, argues that though the stocks sell for lower price-to-earnings multiples, that doesn’t make them cheap. Golden West is selling at its highest P/E of the last decade, while Washington Mutual is near the upper end of its ratio for the same period, he said.

But Dreman, noting investors’ hunger for “value” stocks lately, said: “If he wants to sell them, I’m sure there will be buyers.”

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Interest Rate Victims?

Shares of savings and loans Washington Mutual and Golden West Financial are vulnerable because the companies’ adjustable-rate mortgages are falling out of favor, one analyst argues.

Monthly closes and latest on the New York Stock Exchange

Golden West Financial on Tuesday: $56.06, down 56 cents

Washington Mutual on Tuesday: $44, down $1.94

Source: Bloomberg News