UPDATE: Bank Shares Mostly Higher After 4Q Earnings Reports

Bank shares opened mostly higher after quarterly reports from Bank of America Corp. (BAC), Morgan Stanley (MS) and Wells Fargo & Co. (WFC) showed improved bottom-line results but lingering signs of credit troubles.

The three banks posted improvements over last year, when the financial crisis and escalating credit problems led to huge losses.

Bank of America came closer to the black, though shares were little changed as the company posted a loss of $194 million in the fourth quarter after its mammoth consumer loan books showed signs of stabilizing, but its once-frothy revenue from trading fell sharply. The results were still an improvement over a year ago. Its shares rose 0.3% to $16.38 in recent trading.

Nonperforming assets at the bank also rose across the board as levels of past-due mortgages, home-equity loans, business loans and commercial real estate mortgages all rose. Foreign loans to businesses provided a bright spot for the company.

Standard & Poor's analyst Matthew Albrecht wrote in a note to clients that loan charge-offs and provisions declined sequentially, suggesting an improved outlook, but the total loss reserve keeps building. He said he expects a slight reserve build this year and anticipates charge-offs rising again in the first half.

Wells Fargo's results topped analysts' expectations. The company swung to a profit of $2.82 billion, or 8 cents a share, compared with a year-earlier loss of $2.73 billion, or 84 cents a share. It said its earnings were reduced by 47 cents for TARP-related preferred-stock dividends. Shares fell 0.7% to $28.07.

Net charge-offs at Wells Fargo rose to 2.71% of average loans from 2.5% a quarter earlier and 2.11% a year earlier. The bank also slimmed down on reserves, even though past-due loans are still rising quickly. Wells put another $500 million into its coffers for future losses, but those reserves are only equal to 103% of troubled loans. In the prior quarter, its reserves were equal to 118% of highly delinquent loans.

"There's no doubt in my mind that the credit picture is significantly worse than we've been led to believe this past year" for the banking industry as a whole, Motley Fool senior analyst James Early said.

Overall, the banks have been doing a little too well for too long because of the support they have been getting, such as the Troubled Asset Relief Program and low interest rates, he said. Most TARP money is paid back, but the banks can still borrow money at a low rate and lend money out at higher rates because of the steep yield curve, he said, allowing them to make more money. If the banks are still struggling even with that, it's a worry for investors, Early added.

Morgan Stanley posted a fourth-quarter profit after big prior-year losses as it sets the stage for further improvement this year. One reason for the rebound is that former Chief Executive John Mack pulled back in risk in the immediate aftermath of the financial crisis, and then gave traders more freedom toward the end of the year. Morgan Stanley's shares broke the mold, slipping 1.2% to $30.80 in recent trading.

The securities firm reported that its Value At Risk, known on Wall Street as VaR, rose to $132 million in the fourth quarter compared with $105 million in the prior year and $118 million in the third quarter. It stands for the maximum that could potentially be lost trading on a single day.

On a heavy day for bank earnings, smaller financial firms also saw their shares rise as bottom lines improved.

Jefferies Group Inc. (JEF) reversed a prior-year loss in the fourth quarter while investment-banking revenue soared at the end of 2009 amid a resurgence in deal making. Jefferies' shares jumped 2.6% to $26.50.

U.S. Bancorp's (USB) fourth-quarter profit jumped 82%, driven by growth in net interest income and fee revenue. Chairman and CEO Richard Davis also credited the company's expanding balance sheet and recent investments in its branch network for the profit gains. Shares rose 2.5% to $25.10.

Among asset managers, Bank of New York Mellon Corp.'s (BK) fourth-quarter earnings soared as the firm freed itself of the securities losses that hobbled it in past quarters. Shares increased 3% to $30.41.

State Street Corp. (STT) shares climbed 5.9% to $45.73 as its fourth-quarter profit more than doubled as the institutional money-management firm's revenue from servicing and management fees strengthened.

Analysts at Janney Montgomery Scott said a legal settlement, lowered guidance and poor trends in ancillary revenues would likely keep investors sidelined despite "decent trends in core servicing fees."

Among regional banks, Marshall & Ilsley Corp.'s (MI) fourth-quarter loss narrowed significantly amid a big year-earlier charge, but the bank's results still missed analysts' forecasts. "Despite the loss, there are some encouraging signs that credit quality has stabilized and core earnings trends have improved," said President and Chief Executive Mark Furlong.

M&I's shares rose 3.6% to $7.23. SunTrust Banks Inc. (STI), another regional, saw shares rise 1.3% to $23.66. Zions Bancorp (ZION), considered more volatile than peers, climbed 3.8% to $17.76.

-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; kerry.benn@dowjones.com

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