Wells Fargo and other U.S. regional banks Tuesday reported disappointing third-quarter results, hurt by mounting losses from mortgages and other loans as the housing market slumps.
Earnings fell short of analysts' forecasts at Wells Fargo, Regions Financial and KeyCorp. U.S. Bancorp's results topped forecasts, though profit fell.
All four banks said loan losses rose.
"As trends over the last four or five years start to play in reverse, it becomes a difficult environment for banks to manage in," said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, Penn.
Banks are struggling as tight capital markets force them to write down some holdings as investors take less risk.
Meanwhile, falling housing prices are making it harder for homeowners to refinance, adding to delinquencies, and leaving some commercial real estate borrowers strapped for cash.
Federal Reserve Chairman Ben Bernanke said Monday that the housing slump will likely be a "significant drag" on economic growth through early 2008.
"Clearly, weakness in the housing market and higher delinquencies in mortgages remains a headwind for the banking industry," said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $77 billion.
In afternoon trading, Wells Fargo shares fell 3.8 percent, U.S. Bancorp fell 0.6 percent, Regions fell 1.65 percent, and KeyCorp fell 5.3 percent.
Net income at San Francisco-based Wells Fargo rose 4 percent to $2.28 billion, or 68 cents per share, from $2.19 billion, or 64 cents, a year earlier.
While profit set a record, analysts, on average, expected 70 cents per share, as compiled by Reuters Estimates. The bank reported $490 million of write-downs related to mortgages, and said its lending margin declined.
Analysts have long considered San Francisco-based Wells Fargo, the nation's fifth-largest bank, among the industry's best at managing risk. Warren Buffett's Berkshire Hathaway is Wells Fargo's largest investor.
"It was a tough environment," Chief Financial Officer Howard Atkins said in an interview. "Credit markets seized up, and the housing market took another downturn."
Net credit losses rose 24 percent from the second quarter to $892 million from $720 million. Almost half the increase was in home equity loans, and much of the rest was in auto loans.
At Minneapolis-based U.S. Bancorp, profit fell 2 percent to $1.18 billion from $1.2 billion. Earnings per share rose to 67 cents from 66 cents, topping forecasts by a penny.
The sixth-largest U.S. bank set aside $199 million for credit losses, up 47 percent. Nonperforming assets rose to $641 million from $565 million on June 30, hurt by two mortgage customers that declared bankruptcy.
Credit is becoming "more of an issue, and we're not going to be immune," Chief Financial Officer Andrew Cecere said in an interview. "The trends we're seeing are probably not likely to turn positive in the next year."
U.S. Bancorp and Wells Fargo operate mainly in the western two-thirds of the United States.
At Birmingham, Ala.-based Regions, which operates mainly in the Southeast, net income rose 12 percent to $394.2 million from $351.7 million.
Profit per share fell to 56 cents from 77 cents because the 10th-largest bank issued stock to buy AmSouth Bancorp. Excluding items, profit was 64 cents per share, a nickel below forecasts. Loan losses nearly quadrupled to $90 million.
"There is no doubt that economic conditions are limiting industry revenue growth, and pressuring more borrowers' ability to repay their loans," Chief Executive Dowd Ritter said on a conference call.
Cleveland-based KeyCorp said profit fell 33 percent to $210 million, or 54 cents per share, from $312 million, or 76 cents.
Operating profit was 57 cents per share, 14 cents below the average forecast.
Results were hurt by a 73 percent jump in nonperforming assets to $570 million, reflecting commercial real estate construction losses, principally in Florida and California.
Unsteady capital markets also caused $77 million of losses from investments, loan sales, write-downs and trading.
"Fixed-income markets experienced one of the most volatile periods in a long, long time," Chief Executive Henry Meyer said on a conference call. The bank's branches are largely in the Midwest, New York and Washington state.