Fitch Downgrades Washington Federal's L-T IDR to 'BBB'; Outlook Revised to Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has downgraded Washington Federal's (WFSL) long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB+'. The Rating Outlook has been revised to Stable from Negative. A full list of ratings is provided at the end of this release.

Fitch's downgrade primarily reflects WFSL's continued elevated level of non-performing assets (NPAs). As of Sept. 30, 2011, Washington Federal's NPAs (including restructured loans or TDRs) as a percentage of gross loans plus real estate owned was 8.75% compared to 7.52% at Sept. 30, 2010. Excluding covered real estate, the NPA ratio as of Sept. 30, 2011 is 8.15%, which is still elevated, in Fitch's opinion, relative to similarly rated institutions.

Fitch adjusts NPA figures to include TDRs, regardless of their performing status as they represent riskier loans. The rise in TDRs is partly due to the new accounting guidance that came into effect during the quarter. Nonetheless, 85% of WFSL's TDRs are classified as performing to the new loan terms.

The company's reported NPA measure which does not include TDRs, and is calculated as a percentage of total assets was 2.76% at Sept. 30, 2011. Fitch notes that WFSL's overall level of NPAs is still above Fitch's expectations and elevated relative to the Fitch calculated NPA ratio of similarly rated entities.

The rating action is also supported by volatility in trends in non-accrual loans and early stage delinquencies on the large residential mortgage portfolio, after these trends had previously abated in 2010. Given continued weak home prices and persistently high unemployment rates throughout WFSL's footprint, Fitch notes these trends could worsen over the near-to-medium term.

WFSL's ratings and Rating Outlook revision to Stable are primarily supported by the company's significantly better than peer group capital ratios. As of Sept. 30, 2011 WFSL's tangible equity ratio (TCE) was 12.52%, up from 11.97% at Sept. 30, 2010, which affords the company the ability to address asset quality issues.

Moreover, despite its asset quality challenges, WFSL has remained profitable over an extended period, reflecting the company's ability to manage its net interest margin, keep ultimate loss rates low, and solid operational efficiency. Fitch expects that WFSL will continue to maintain its strong capital levels and remain comfortably profitable. Fitch has evaluated various stress scenarios given the currently uncertain economic environment, and believes that WFSL's capitalization would remain strong even under more adverse circumstances.

While WFSL intends to eventually grow business banking and other products in order to improve its loan diversity, Fitch notes that this could be difficult given the current economic and competitive environment. Moreover, operating as a traditional thrift, WFSL's business model possesses elevated interest rate risk and sensitivity, particularly compared to other similarly rated entities. While this has historically been adequately managed, given the current unusual interest rate environment, Fitch notes that this could be more challenging going forward.

Fitch believes that WFSL's current ratings are solidly situated at their current rating level. Fitch further notes that there is limited upside to current ratings. Although not anticipated, Fitch would view any decline in the TCE ratio due to share repurchases, increasing dividend payments, or potential acquisitions as potentially creating negative pressure to ratings.

WFSL is a $13.44 billion thrift institution headquartered in Seattle, Washington, specializing primarily in residential lending across the Pacific Northwest.

Fitch has downgraded the following ratings:

Washington Federal Inc.

--L-T IDR to 'BBB' from 'BBB+';

--Viability Rating to 'bbb' from 'bbb+'.

Washington Federal Savings & Loan

--L-T IDR to 'BBB' from 'BBB+';

--Viability Rating to 'bbb' from 'bbb+';

--Long-term deposits to 'BBB+' from 'A-';

--Short-term deposits to 'F2' from 'F1'.

Fitch has affirmed the following ratings:

Washington Federal Inc.

--Short-term IDR at 'F2'

--Individual at 'C';

--Support at '5';

--Support Floor at 'NF'.

Washington Federal Savings & Loan

--Short-term IDR at 'F2'

--Individual at 'C';

--Support at '5';

--Support Floor at 'NF'.

The Rating Outlook has been revised to Stable.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research

--Global Financial Institutions Rating Criteria, Aug. 16, 2011

--Bank Holding Company Criteria, Aug. 16, 2011;

--Troubled Debt Restructurings (May 16, 2011);

--Troubled Debt Restructuring - Challenges for Ratio Analysis (April 22, 2010).

Applicable Criteria and Related Research:

Troubled Debt Restructuring (Challenges for Ratio Analysis)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=512825

Troubled Debt Restructurings (Accounting Standards Update Set to Increase TDR Recognition)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628437

Bank Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648612

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

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