U.S. Bancorp sees higher loan losses; shares fall

NEW YORK (Reuters) - U.S. Bancorp (USB.N), the sixth-largest U.S. bank, on Tuesday projected higher credit losses in the third quarter, and said it will add more reserves at the expense of current earnings until it is convinced loan losses will decline.

The news was surprising in that U.S. Bancorp has largely skirted many of the problems afflicting many rivals amid difficult U.S. housing and credit markets. Shares of the bank fell as much as 7.4 percent.

U.S. Bancorp said it expects third-quarter net charge-offs to rise 25 percent to 28 percent from the second quarter, following a 35 percent increase in the second quarter compared with the first.

It also said third-quarter nonperforming assets should rise 27 percent to 32 percent from the second quarter, after a 34 percent increase in the prior period.

Speaking at a Lehman Brothers Inc financial services conference, U.S. Bancorp Chief Executive Richard Davis said much of the projected increase is tied to loans for commercial real estate, to property developers, and in California.

He said there has been a "contagion" effect from tough housing conditions, and that the bank will keep adding to loss reserves "until we see loan losses absolutely going down."

Separately, Davis said U.S. Bancorp may face a $150 million to $250 million third-quarter charge for exposure to asset-backed commercial paper and structured investment vehicles that lost value as credit markets tightened.

He also said the bank may need to write down its $97 million investment in preferred stock of Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

In afternoon trading, U.S. Bancorp shares were down $1.48, or 4.4 percent, at $32.46 the New York Stock Exchange, after earlier falling as low as $31.42.

Through Monday, the shares had risen 7 percent this year, compared with a 17 percent drop in the 24-member KBW Bank Index .BKX, which includes U.S. Bancorp.

(Reporting by Jonathan Stempel; editing by John Wallace, Gary Hill)