Wells Fargo, other U.S. banks hurt by credit losses

By Jonathan Stempel

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N) and other U.S. regional banks on Tuesday reported disappointing third-quarter results, hurt by loan losses that may rise further as the U.S. housing slump deepens.

Profit missed estimates at Wells Fargo, Regions Financial Corp (RF.N) and KeyCorp (KEY.N). U.S. Bancorp's (USB.N) results topped forecasts, although profit fell. Each bank reported higher loan losses, following Citigroup Inc (C.N) on Monday.

"As trends over the last four or five years start to play in reverse, it becomes a difficult environment for banks to manage in," said Thomas Russo, who helps invest $3 billion at Gardner, Russo & Gardner in Lancaster, Pennsylvania.

Banks are struggling as tight capital markets force them to write down some holdings as investors take less risk. Meanwhile, falling housing prices are making it harder for homeowners to refinance, adding to delinquencies, and leaving some commercial real estate borrowers strapped for cash.

U.S. Treasury Secretary Henry Paulson on Tuesday called the housing decline "the most significant current risk" to the economy. A day earlier, Federal Reserve Chairman Ben Bernanke said the housing slump will likely be a "significant drag" on economic growth through early 2008.

"Clearly, weakness in the housing market and higher delinquencies in mortgages remains a headwind for the banking industry," said Mark Batty, an analyst at PNC Wealth Management in Philadelphia, which invests $77 billion.

By the close of Tuesday trading, Wells Fargo had dropped 3.9 percent to $34.55, U.S. Bancorp was down 0.5 percent to $32.35, Regions was 2.1 percent lower to $28.53, and KeyCorp had slid 5.9 percent to $30.44.

WELLS FARGO, U.S. BANCORP

Net income at San Francisco-based Wells Fargo, the nation's fifth-largest bank and second-largest mortgage lender, rose 4 percent to $2.28 billion, or 68 cents per share, from $2.19 billion, or 64 cents, a year earlier.

While profit set a record, analysts on average expected 70 cents per share, according to Reuters Estimates.

Net credit losses rose 35 percent to $892 million. The bank wrote down $490 million for mortgages, and said home equity losses rose more than fivefold to $153 million. Wells Fargo expects the latter to rise in the fourth quarter and stay "elevated" in 2008.

"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."

Friedman Billings Ramsey & Co analyst Gary Townsend downgraded Wells Fargo to "market perform" from "outperform," saying higher loan losses should reduce future earnings.

Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is the bank's largest investor.

At Minneapolis-based U.S. Bancorp, profit fell 2 percent to $1.18 billion from $1.2 billion. Earnings per share rose to 67 cents from 66 cents, topping forecasts by a penny.