Shares of H&R Block Inc. fell sharply Friday, as the largest U.S. tax preparer warned of losses at its struggling mortgage unit, and UBS downgraded the stock to “neutral.”
The company said it would take a charge of $61.3 million, or 19 cents a share, to reflect an increase in the number of its subprime mortgage customers falling behind on their loan payments.
H&R Block’s woes will likely extend to other subprime lenders, analysts said, as borrowers with less-than-stellar credit histories struggle to keep up their payments as rates rise.
The charge will double H&R Block’s estimated net loss for the fiscal first quarter ended July 31. Analysts had forecast a loss of 19 cents a share, according to Reuters Estimates.
Kansas City, Missouri-based H&R Block, in a regulatory filing late on Thursday, said it expects to set aside $46.1 million for loans sold in the quarter, and an additional $56 million for loans sold in prior quarters.
In trading Friday, shares of H&R Block fell to their lowest level since March, when New York Attorney General Eliot Spitzer sued H&R Block, accusing it of deceptive marketing of a retirement savings product.
The share price has fallen 31 percent since July 2005, compared with a 5.8 percent rise in the S&P 500 Index. The shares have been under pressure for more than a year amid concern about the mortgage business, which has struggled amid rising rates.
The first-quarter charge prompted analyst Kelly Flynn of brokerage UBS to cut her rating on the stock to “neutral” from ”buy.”
Flynn also lowered her stock price target to $23 from $28 and said the company was likely to take a charge of 10 cents a share in the second quarter related to loans made in the past six months. She said H&R Block was unlikely to pursue strategic alternatives, such as unit sales, as advocated by some investors frustrated with the laggard stock price.
“Even if H&R Block has already tightened standards to address prepayment risks, defaults on loans originated in the last four to six months will worsen,” Flynn wrote. “We also worry that worse-than-expected experience on new loans provides further downside risks.”
Analysts said other subprime lenders may share H&R Block’s woes.
“Investors are already discounting a more conservative outcome for most subprime lenders, though we think the announcement from H&R Block could further undermine confidence in the subprime sector,” said Merrill Lynch analyst Kenneth Bruce said in a research note Friday.
Bruce said the slowing housing market, forecasts of rising credit losses and accelerating repurchase losses will further weigh on subprime lenders’ shares.
H&R Block is to report first-quarter results on August 31.