Wells Fargo profit hurt by credit pressures

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) said on Tuesday third-quarter profit rose 4 percent, the smallest gain in more than six years, as weaker credit conditions caused losses from mortgage, home equity and auto loans.

Earnings set a record but fell short of forecasts, at a bank long considered by analysts among the industry's best at managing risk. Credit losses are mounting industrywide as the U.S. housing industry slumps and credit markets tighten.

Net income for the fifth-largest U.S. bank rose to $2.28 billion, or 68 cents per share, from $2.19 billion, or 64 cents, a year earlier.

Revenue rose 10 percent to $9.85 billion. Results included a $160 million gain from a sale of $27 billion of low-yielding mortgage securities. The bank also reported $490 million of writedowns related to mortgages.

Analysts on average expected profit of 70 cents per share on revenue of $10.02 billion. San Francisco-based Wells Fargo, which is also one of the largest U.S. mortgage lenders, usually posts double-digit gains in quarterly profit per share.

"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."

In morning trading, Wells Fargo shares fell $1.14, or 3.2 percent, to $34.81 on the New York Stock Exchange.

"As trends over the last four or five years start to play in reverse, it becomes a difficult environment for banks to manage in. This is especially true for a multi-product, consumer-oriented bank such as Wells Fargo," said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, Pennsylvania, including in Wells Fargo shares.

The bank's net interest margin tumbled to 4.55 percent from 4.89 percent in the second quarter. Wells Fargo said it bought $17 billion of securities late in the quarter, which it said should benefit the margin in the fourth quarter.

Net credit losses increased 24 percent from the second quarter to $892 million.

The bank said almost half the increase was in home equity, hurt by declining home prices, and the rest in auto loans and unsecured consumer credit. It expects home equity losses to rise in the fourth quarter and remain "elevated" into 2008.

FEE INCOME ROSE

Net interest income rose 5 percent to $5.28 billion, while fee income rose 18 percent to $4.57 billion.

Profit rose 8 percent to $1.61 billion from retail banking, and 6 percent to $543 million from wholesale business banking. At Wells Fargo Financial, which lends to less creditworthy people, profit fell 29 percent to $135 million.

Customers also bought more products. The bank said it sold an average of 5.5 products to each retail customer, up from 5.4 in the prior quarter, and three when Norwest Corp. and Wells Fargo merged in 1998.

Quarterly home loan applications were unchanged at $95 billion, and residential lending fell 12 percent to $68 billion. Compared with the second quarter, applications fell 17 percent and lending fell 15 percent.

Wells Fargo has long said it could better withstand turmoil afflicting subprime and other lenders because it didn't make exotic home loans. Atkins said the bank is adding market share as weaker or less prudent rivals contract.

"If anything, our experience in the mortgage business is better than most other mortgage providers, because we have over time stayed in the middle of the fairway," he said. "What we're now doing is further tightening up on lending standards. The business that we do is to be a responsible lender to customers, and to be paid well enough for our shareholders."

Billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is the bank's largest investor, owning 7.7 percent of its stock as of June 30, Thomson ShareWatch said.

Wells Fargo has more than 3,200 branches in 23 U.S. states, mainly in the western two-thirds of the country, and $548.7 billion of assets.

Through Monday, Wells Fargo shares had risen 1 percent this year, compared with a 10 percent drop in the Philadelphia KBW Bank Index .BKX.