Bank Earnings: No 2Q Bonanza

Disappointing second-quarter earnings are evidence that rising credit losses continue to plague big U.S. banks

By Associated Press and BusinessWeek staff

The depth of big U.S. banks' struggles with rising credit losses became clear on July 22 as several major industry names reported second-quarter results. The disappointing figures from several banks helped weigh on U.S. equities, with major indexes opening lower on July 22.

Among the big banks posting results on July 22:

Wells Fargo (WFC) joined other big banks in reporting a big second-quarter profit even as losses from failed loans kept rising. The bank said its earnings, which rose 47% from a year earlier, were boosted by the acquisition of struggling Wachovia in December.

Wells said its earnings after payment of preferred dividends came to $2.58 billion, or 57¢ per share, up from $1.75 billion, or 53¢ per share, a year earlier.

The earnings surpassed the 34¢-per-share forecast of analysts surveyed by Thomson Reuters (TRI). Wells Fargo's revenue of $22.5 billion also beat expectaions.

Like Bank of America (BAC) and JPMorgan Chase (JPM), San Francisco-based Wells Fargo reported rising losses from failed loans. It said it recorded a $5.1 billion provision for loan losses during the second quarter.

More Capital Needed?

Wells said it had strong profit from its mortgage banking business. Analysts, however, have raised concerns that Wells Fargo will need to raise more capital to cover potential losses from its real estate loans, including the loans it inherited from Wachovia.

Despite the higher earnings, Wells Fargo shares fell 5.6% in morning trading on July 22, as investors fretted about the rising loan losses.

Morgan Stanley (MS) said it lost more than $1.2 billion during the second quarter as it took a charge to repay government bailout money. The investment bank was also hurt for a second straight quarter by the improving value of its own debt.

Morgan Stanley says its net loss after payment of preferred dividends was $1.26 billion, or $1.10 per share, compared with earnings of $1.06 billion, or $1.02 per share, a year earlier.

The New York-based bank also recorded an $850 million, or 74¢ per share, charge for repaying the money it received from the government under the Troubled Asset Relief Program.

Analysts had forecast a loss of 49¢ per share for the quarter.

Lagging Asset Management

"We think MS is positioned to take market share in its investment banking and wealth management businesses, but asset management results continue to lag," wrote Standard & Poor's equity analyst Matthew Albrecht in a July 22 note. Albrecht lowered his 2009 estimate to a loss of 93¢ per share from earnings per share of 29¢, but he maintained his target share price of 32.

Morgan Stanley shares were 1.3% lower on July 22.

Bank of New York Mellon (BK) said its second-quarter profit fell 43% as it repaid a government loan and paid a special fee to the Federal Deposit Insurance Corp.

The New York-based trust bank said its net income available to common shareholders fell to $176 million, or 15¢ per share, during the quarter ended June 30, from $309 million, or 28¢ per share, a year ago.

BNY Mellon recorded a one-time charge of $196.5 million as it repaid the $3 billion it received last fall as part of the government's Troubled Asset Relief Program. BNY Mellon also paid $39.

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