Wells Fargo Profit Hurt by Credit Pressures

By Jonathan Stempel

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) said on Tuesday third-quarter profit rose 4 percent, the slowest pace in more than six years, hurt by rising losses from home loans that it expects to increase further.

Earnings set a record, but fell short of forecasts, at a bank considered among the industry's best at managing risk.

Credit losses are mounting industrywide as the U.S. housing sector slumps and credit markets tighten. Wells Fargo is the nation's No. 5 bank and one of its largest mortgage lenders.

"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 afternoon trading, Wells Fargo shares fell $1.43, or 4 percent, to $34.52 on the New York Stock Exchange.

The bank's net income 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 San Francisco-based bank reported $490 million of write-downs related to mortgages.

Wells Fargo also said home equity losses rose more than fivefold to $153 million. It expects such losses to rise in the fourth quarter and stay "elevated" in 2008.

Net credit losses totaled $892 million, up 35 percent from a year earlier and 24 percent from the second quarter.

Analysts on average expected profit of 70 cents per share on revenue of $10.02 billion.

"The real story was weaker-than-expected credit trends and an associated increase in provision expense, which are likely to reduce future earnings," wrote Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. He downgraded Wells Fargo to "market perform" from "outperform."

DIFFICULT ENVIRONMENT

Wells Fargo said almost half its increase in credit losses was in home equity, hurt by declining home prices, and the rest was in auto loans and unsecured consumer credit.

Payments on $1.26 billion of loans were at least 90 days late as of Sept. 30, up 16 percent from the end of June.