Fitch Downgrades Washington Federal's Default Rating

Fitch Ratings has lowered the default rating from BBB+ to BBB for Washington Federal Savings, the savings and loan subsidiary of Washington Federal Inc.

According to Fitch, the downgrade occurred because of WFSL's elevated level of nonperforming assets, including restructured loans.

At the end of September, Washington Federal's nonperforming assets as a percentage of gross loans and real estate owned properties was 8.75%, compared to 7.52% at the same time period last year.

A BBB rating indicates that expectations of default risk are currently low. Fitch said this rating means that the capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

WFSL is a $13.4-billion thrift institution based in Seattle, specializing primarily in residential lending in the Pacific Northwest.

Meanwhile, some good news for WSFL is that the New York-based ratings agency revised the lender's overall outlook from negative to stable. This decision was based on the company's capital ratios.

As of Sept. 30, the company's tangible equity ratio was 12.5%, up from 12% in September 2010. With an improved outlook rating, the lender can address asset quality issues.

Despite asset quality challenges that the lender is facing, WFSL said it has remained profitable over an extended period by managing its net interest margin and keeping ultimate loss rates low.

Fitch said it expects WFSL is going to continue to maintain its strong capital levels and remain comfortably profitable. Fitch has elevated various stress scenarios given the current uncertain economic environment and believes that WSFL's capitalization would remain strong even under more adverse circumstances.

However, Fitch added that the current economic and competitive environment could make it difficult for the lender to grow its business banking and other products to improve its loan diversity.

“Moreover, operating as a traditional thrift, WFSL's business model possesses elevated interest rate risk and sensitivity, particularly compared to other similarly rated entities,” Fitch said about WSFL's outlook rating. “While this has been adequately managed, given the current unusual interest rate environment, this could be more challenging going forward.”