Wells Fargo 3Q profit rises, but so do loan losses

NEW YORK (AP) - Wells Fargo & Co. on Wednesday reported a $2.6 billion third-quarter profit as the company's retail banking operations, including the businesses it acquired with the purchase of Wachovia Corp., offset rising loan losses.

San Francisco-based Wells Fargo joined other big banks in reporting continuing heavy losses from failed loans as a growing number of consumers were unable to pay their bills. The bank said credit losses climbed to $5.1 billion, or 2.5 percent of its loan portfolio. That is up from $2 billion a year ago and $4.4 billion in the second quarter.

The amount of loans that are past due but have not yet been written off totaled $23.5 billion, nearly four times higher than in the same period last year and 28 percent higher than in the second quarter.

Wells Fargo's loan losses were balanced out by its traditional banking business, which includes the big mortgage operation it took on when it bought Wachovia at the height of the credit crisis a year ago. Net interest income, or what the bank makes on loans and other assets, rose 43 percent to $5.57 billion after setting aside $6.1 billion to cover credit losses.

Total revenue more than doubled from the same period last year to $22.47 billion, but was roughly flat with the second quarter.

The spike in revenue drove the nation's fourth-largest bank to report a third-quarter profit of $2.64 billion, or 56 cents per share, after paying preferred dividends. That compares with earnings of $1.64 billion, or 49 cents per share, a year ago. Analysts, on average, were expecting earnings of 37 cents per share.

Wells Fargo has long been considered one of the stronger, more conservatively managed big banks. But investors have been worried about the deteriorating credit quality in the huge loan portfolio it acquired from Wachovia, after the Charlotte, N.C.-based bank nearly collapsed under the weight of shaky mortgage loans and other bad bets on the housing industry.

Nearly a third of the loan losses during the quarter come from Wachovia loans. Among consumer loans, charge-offs in Wachovia's portfolio totaled nearly $1.11 billion, compared with $2.48 billion from Wells Fargo's original portfolio.

Chief Financial Officer Howard Atkins, in an interview with The Associated Press, said Wells Fargo's results should quell any lingering concerns investors have about the Wachovia deal. Wachovia is adding to the bank's earnings and capital growth earlier and more significantly than anticipated, he said, and integration costs should be less than originally expected.

"The risks are kind of behind us and now we're enjoying the revenue synergies and the expense synergies," Atkins said.

Wells Fargo also offered a more upbeat credit outlook than some of the other banks, saying it expects credit losses to peak in 2010, with consumer losses possibly even peaking by the first half of the year. Credit cards, a problem area at many large banks, make up only about 3 percent of Wells Fargo's total loan portfolio.

Analysts, while generally positive about the results, were hoping for fewer loan losses and troubled assets. The high level of loans that are past due was especially worrisome.

"Their nonperforming assets have experienced a significant uptick, which is a signal to investors that they are going to have to allocate more money to cover credit losses in the future," said Derek Ferber, a research analyst at SNL Financial.

Investors were also cautious about Wells Fargo's results Wednesday. The bank's shares slipped 40 cents to $30.06 in afternoon trading.

The market has been uneasy about banks' rising loan losses since reports last week from Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. that provided further evidence that businesses and consumers are still struggling to pay off their debts. Bank of America and JPMorgan Chase said their results were supported by their trading businesses. Wells Fargo has a relatively small trading operation.

Wells Fargo is still reticent about its plans for paying back a $25 billion loan it received from the government last fall as part of the Troubled Asset Relief Program, or TARP.

Atkins offered little details beyond saying the bank would like to repay the money. "At some point, the regulators will let us know what needs to be done," he said.

After getting approval from the government this summer, several big banks, including Morgan Stanley, Goldman Sachs Group Inc. and JPMorgan, repaid their bailout funds. Wells Fargo, Bank of America and Citigroup are among the banks that still have taxpayer money on their books.

In May, the government mandated that Wells raise $13.7 billion in additional capital as a buffer against future losses. In the past six months, the bank has raised $20 billion in excess capital.