UPDATE: Rising Bad Loans Shadow Strong US Banking Revenue
July 22 2009 - 4:00PM
Dow Jones News
Even at profitable U.S. banks, troubled loans tied to
cash-strapped consumers and struggling businesses are still rising
quickly.
Wednesday's earnings reports from four large banks, including
Wells Fargo & Co. (WFC), U.S. Bancorp (USB), SunTrust Banks
Inc. (STI) and KeyCorp (KEY), largely tamed investors' growing
hopes that the nation's levels of past-due loans could soon begin
to fall.
Each of the companies reported a sharp increase in loan losses
from the year-earlier period, even as executives at Wells Fargo and
U.S. Bank took pains to show they are growing amid an otherwise
grisly era for banks.
The results show that banks still have a long way to go to work
through the fallout from the financial crisis. But to some banking
executives, a picture of how the banking industry will change has
already started to emerge. One element: banks will be more like
traditional banks - focusing on lending - rather than providing the
raw material that capital markets turned into destructive credit
derivatives.
"The industry as a whole has become more disciplined in credit
underwriting," said Andrew Cecere, U.S. Bancorp's chief financial
officer. "I don't expect that to change" when times are better.
Meanwhile, banks "generally are going to be more relevant in the
lending market. The shadow lending market," or loans financed
through securitization, "has diminished."
U.S. Bancorp, which earned $471 million in the second quarter,
also disclosed Wednesday that it has launched a $10 million
nationwide advertising campaign to court new customers, likely from
other banks. The Minneapolis compay can boast it recently repaid
the $6.6 billion in public support it accepted from the U.S.
Treasury last year.
Nevertheless, analysts on the bank's conference call challenged
U.S. Bancorp's assertion that its financial problems are
decelerating. Calyon analyst Michael Mayo reminded management that
the bank made similar comments in the fall of 2001, only to report
worsening loan problems six weeks later. But U.S. Bancorp CEO
Richard Davis remained adamant that "This company has changed. I
think it is a good time for you to have trust in our ability to
predict." Shares of U.S. Bancorp were up 4.3% in Wednesday
afternoon trading.
Wells Fargo, which posted a $3.2 billion profit for the quarter,
nonetheless had a harder time convincing investors that it faces a
rosy future. Its shares were down 3.6% Wednesday afternoon.
The San Francisco firm grew coast-to-coast last year when it
purchased teetering rival Wachovia Corp.
While that acquisition has driven Wells Fargo to record
revenues, there are increasing signs that Wachovia's risky loan
books could become Wells Fargo's Achilles' heel.
The bank's nonperforming loans, or those becoming uncollectable,
rose 45% over the previous quarter. Souring loans from Wachovia's
portfolios more than doubled during the quarter to $5.6
billion.
"Our credit losses increased during the quarter, as expected,"
said Howard Atkins, Wells Fargo's chief financial officer. "But the
rate of increase slowed in many of our consumer portfolios."
Wells Fargo also has yet to announce a specific time frame for
repaying the $25 billion in assistance it accepted from the U.S.
Treasury.
Smaller regional banks, such as SunTrust and Keycorp, could yet
face larger troubles in coming quarters.
Both grew agressively in now-sinking markets for commercial real
estate. Loans tied to that sector - for projects ranging from strip
malls to housing developments - are showing signs of stress just
now, even though delinquencies among consumer loans, from mortgages
to credit cards, started rising many quarters ago.
Keycorp, which lost $236 million, said that nearly $1.2 billion
of its commercial real estate loans are now considered
nonperforming - a three-fold increase over a year ago. It set aside
$850 million during the quarter for current and future loan
losses.
The Cleveland bank, which accepted $2.5 billion in public
support from the Treasury, emphasized that it raised $1.8 billion
in common equity during the quarter and continues to rein in
expenses.
SunTrust, like Keycorp, faces similar problems from commercial
loans.
The Atlanta-based company lost $183.5 million, compared with
year-earlier income of $504 million. Nonperforming commercial real
estate loans, including those for construction projects, have more
than doubled in the past year to $1.9 billion. Problems among loans
to businesses have increased six-fold over the same period to $716
million.
SunTrust's Chairman and Chief Executive James M. Wells III said
the regional bank expects credit losses and non-performing loans to
increase in the third quarter.
In addressing the growth in past-due loans, Wells cited "an
increase in residential mortgage and real estate construction
loans, as well as larger commercial borrowers in economically
sensitive industries."
-By Marshall Eckblad and Matthias Rieker, Dow Jones Newswires;
212-416-2156; marshall.eckblad@dowjones.com
(Kerry Grace Benn and Brett Philbin contributed to this
report.)