WaMu bets on blemished borrowers with credit cards

Washington Mutual Inc., burned by subprime mortgage losses, has been issuing credit cards to borrowers with blemished credit records as it tries to rebound.

Washington Mutual moved into credit cards in 2005 with the $6.45 billion takeover of Providian Financial Corp. It increased accounts 56 percent to 14.7 million as of February while running up the highest proportion of overdue loans among the top 15 providers, according to data compiled by trade publication Nilson Report.

The push comes as the industry's uncollectible debt climbs faster than during the past two recessions and after the company had $9.1 billion of losses and writedowns from bad mortgages. Investor David Dreman called last week for the ouster of CEO Kerry Killinger, blaming him for an 85 percent drop in Washington Mutual shares in 12 months.

"Lower earnings in the credit-card business are going to compound their earnings issues," said Moshe Orenbuch, an analyst at Credit Suisse Group in New York, who has a "neutral" rating on Washington Mutual.

The Seattle-based lender said in its annual report that it seeks customers who "are often underserved by large prime/superprime-oriented credit-card issuers and who satisfy its underwriting criteria." That's somewhere between subprime and prime markets, according to Nilson publisher David Robertson.

"When the economy starts to sour, that group is going to go belly-up faster," Robertson said from his office in Carpinteria, Calif.

Washington Mutual spokesman Alan Elias said the bank has taken a "very prudent, fiscally conservative" approach to the business and is not a subprime credit-card company. Bad subprime loans helped trigger the global credit crunch, which has caused $397.7 billion in losses and writedowns at the world's biggest financial companies, data show.

WaMu shares fell to the lowest since February 1992, dropping 16 cents, or 2.7 percent, to $5.80.

Of the 15 biggest card issuers, Washington Mutual had the most loans overdue for more than 30 days at 6.5 percent, compared with 5.3 percent in 2006, Nilson said. Killinger said in April that the company is reducing its risk by scaling back broad promotions and focusing on existing retail customers.

Washington Mutual added more than 666,000 card customers in the first quarter, with 38 percent coming from the bank's retail locations. The company is projecting credit losses of 9.5 percent to 10.5 percent this year based on an unemployment rate of 6 percent, Chief Operating Officer Stephen Rotella said in April. The jobless rate was 5.5 percent in May.

The card unit is profitable, with net income dropping to $199 million in the first quarter from $249 million a year earlier. The subsidiary's net interest income, or revenue from borrowers after deducting interest paid to depositors, rose 19 percent in the first quarter to $765 million, helped by an $85 million gain from Visa Inc.'s initial public offering.

That may reverse as uncollectible loans, or charge-offs, increase. Friedman, Billings, Ramsey Group Inc. analyst Scott Valentin predicted in a June 17 report that industry charge-offs may reach the highest since 1985.

"Credit cards are just a business we wouldn't go into at this point," said Dreman, whose Dreman Value Management LLC in Jersey City, N.J., owns 28.8 million Washington Mutual shares among its $15 billion in assets under management. "They're up to their necks in everything bad."

Washington Mutual has forecast mortgage-related losses through 2011 of as much as $19 billion. UBS AG analyst Eric Wasserstrom in New York said the number will reach $21.7 billion as foreclosures increase. The housing crisis has already forced the company to raise $7 billion from TPG, cut its dividend twice and strip Killinger of his chairman position.