Press Release

DBRS Changes Trend for IndyMac Bancorp Inc. to Stable; Confirms at BBB (low)

Banking Organizations
August 02, 2007

DBRS has today confirmed the ratings for IndyMac Bancorp Inc. (IndyMac or the Company) and IndyMac Bank, F.S.B. as reflected in the table below. At the same time, the trends for all ratings have been revised to Stable from Positive. The trend change reflects the reduced earnings profile of IndyMac and the severe market conditions which IndyMac, like other participants, is facing in the residential mortgage market.

Although IndyMac continues to navigate through this highly volatile market, the current market conditions along with the Company’s reduced earnings profile have stalled upward rating potential. Additionally, the weakening of asset quality in IndyMac’s home lending portfolio in Q2 2007 and the increase in non-performing assets, coupled with decreased originations and tight margins in the Company’s core Alt-A product have reduced IndyMac’s ability to generate strong consistent earnings growth in the near term, which was a significant factor underlying the prior Positive rating trend.

Finally, industry pressures have changed many of the dynamics of IndyMac’s business in the short term. These pressures include increased risk premiums and the continued, significant decrease in liquidity across the mortgage industry. Although IndyMac continues to operate at a profit in a market otherwise characterized by significantly reduced profitability, for the Positive ratings trend to be re-instated, the Company must re-build its earnings profile and earnings generation ability.

The ratings confirmation reflects the Company’s overall strong franchise and prominent market position in the residential lending industry. IndyMac has a significant market presence as one of the largest originators of Alt-A mortgages in the United States and as the largest originator of reverse mortgage products in the United States. The reverse mortgage business segment, which continues to grow at a rapid pace, adds growth potential with minimal credit risk, as these loans are sold to third parties. Intense competition in the reverse mortgage sector, however, will likely keep margins tight and restrain growth.

Profitability trended down in the past three quarters, owed primarily to rapid spread widening, less liquid secondary markets, higher credit costs and increased early payment default-related repurchases. Still, IndyMac’s profitability measures remain tolerable, considering stressed market conditions and weak peer performance. Nonetheless, DBRS considers IndyMac’s short-term earnings power as reduced and expects profitability to be pressured over the next 12 months.

IndyMac’s balance sheet remains sound, but is showing evidence of weakening. Asset quality measures in the held-for-sale (HFS) portfolio deteriorated in the second quarter largely driven by weakness in the high loan-to-value (LTV) piggyback loans and loans to sub-prime borrowers, which represent 12% and 3% of the $11.5 billion HFS portfolio. The loans delinquent for at least 30 days (30+ day delinquencies) increased to 5.35% of the total loan servicing portfolio, up from 4.1% at June 30, 2006. Importantly, the non-performing assets (NPAs) portfolio increased dramatically to 1.63% of total assets at June 30, 2007, up from 0.49% a year earlier. The increased non-performing assets in the loan held for investment and loans held for sale portfolio add the risk of further valuation adjustments. Although the Company has significantly enhanced its underwriting criteria to eliminate poorer-performing loan products, loan seasoning is required for the Company to realize the benefits of these changes.

In the near term, DBRS expects that NPLs will remain at elevated levels. Capitalization remains appropriate for the Company’s rating level, with a strong equity base and minimal amounts of goodwill or preferred stock. Leverage compares favorably to the Company’s peer group, and is acceptable on a risk-adjusted basis. The Company has adequate liquidity, supported by impressive growth in deposits in the past three years. Additionally, DBRS considers the improved diversity in the Company’s funding profile a positive ratings factor.

DBRS will continue to monitor IndyMac’s progress in its efforts to improve asset quality while also returning to past levels of profitability. Continued weakening in credit quality, further deterioration of the balance sheet or decreased liquidity could have negative rating implications. Moreover, additional illiquidity in the mortgage industry, specifically for IndyMac’s predominant product, Alt A loans, would likely have a significant impact on the Company’s operating performance and, as such, could put negative pressure on ratings. Although, IndyMac has recently performed better than most of its peers, near-term market pressure remains a key concern. Conversely, evidence of sustained improvement in credit quality and earnings could put positive pressure on the rating.

Note:
All figures are in U.S. dollars unless otherwise noted.

Ratings

IndyMac Bancorp Inc.
IndyMac Bank, F.S.B.
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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