Legg Mason Cautiously Optimistic on Golden West
Kulikowski, Laurie, American Banker
David J. Bishop at Legg Mason Wood Walker Inc. initiated coverage this week on Golden West Financial Corp. with a slightly mixed review.
On Tuesday the analyst awarded the $114 billion-asset thrift company a "hold/low-risk" rating and said in an accompanying research note that the flattening yield curve would probably affect its net interest margin, origination volume, and earnings.
Additionally, several issues could cause "headline risk" for Golden West, Mr. Bishop wrote: a housing bubble, further interest rate tightening by the Federal Reserve, more competition to sell option adjustable-rate mortgages, and the growing use of negative amortization products.
Negative amortization -- which occurs when loan payments are smaller than the interest due -- has been growing at Golden West. (See story on page 12. )
But Mr. Bishop called the Oakland company "best of breed" and said it has the ability to "manage through these issues longer term."
He established per-share earnings estimates of $4.64 for 2005 and $5.25 for next year. According to Thomson First Call, the average analyst estimates are $4.67 and $5.34 a share, respectively.
Albert H. Savastano, an analyst with Janney Montgomery Scott LLC, said the key at Golden West is loan growth, not margin expansion. "With the yield curve flattening, it's going to become more challenging for Golden West and other lenders that focus" on ARMs, he said.
On May 18 Golden West reported that loan originations in April fell 7% from March, to $4.2 billion, though volume was up 10.5% from a year earlier. Total loans at the end of April were $109 billion; deposits were $56. …