Banks’ loan losses easing but demand down

By Elinor Comlay and Joe Rauch

NEW YORK/CHARLOTTE (BestGrowthStock) – Banks including Wells Fargo & Co (WFC.N: ) said the credit losses that have plagued the financial sector amid the recession are easing but they are making fewer new loans.

Wells Fargo, the fourth-largest bank in the United States by assets, posted a slightly lower first-quarter profit (Read more your timing to make a profit.) as mortgage originations dropped after a boom in mortgage refinancing in the year-earlier quarter.

Huntington Bancshares (HBAN.O: ) reported its first quarterly profit since 2008, helped by a tax gain, and SunTrust Banks Inc (STI.N: ) and KeyCorp (KEY.N: ) reported narrower first-quarter losses compared to the year earlier period.

Regional U.S. banks have struggled as high U.S. unemployment and falling home prices hurt their core business of lending to consumers and local businesses.

But as bank executives reported that loan losses broadly eased, they said they are not making many new loans as customers are reluctant to borrow, even as the economy appears to be improving.

“While we’re turning a corner on credit quality, the corner that we seem to have turned in the economy overall is not yet visible in the banks’ results,” said Nancy Bush, analyst at NAB Research. “There’s certainly been almost across the board a shrinkage in balance sheet as customers aren’t borrowing,” she added.

Wells Fargo said its total assets shrunk to $1.23 trillion from $1.24 trillion a year earlier, while SunTrust’s fell to $171.8 billion from $179.1 billion.

WELLS FARGO

Wells Fargo, which has a reputation as a conservative lender, avoided the worst losses of the financial crisis in its own portfolios but it has dealt with heavy losses in the portfolios it acquired when it bought Southeastern lender Wachovia Corp at the end of 2008.

The bank’s first-quarter profit (Read more your timing to make a profit.) to shareholders fell slightly to $2.37 billion, or 45 cents a share, from $2.38 billion, or 56 cents a share, a year earlier. Wells Fargo shares fell 1.9 percent to $33.04 in afternoon trading.

The bank’s earnings are more dependent on its mortgage business than those of its larger peers, JPMorgan Chase & Co (JPM.N: ) and Bank of America Corp (BAC.N: ), whose first-quarter results were helped by revenue from their investment banking units, said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel.

The bank said mortgage originations fell 25 percent, largely due to a dip in refinancing activity. In the first quarter a year earlier, banks including Wells Fargo benefited from a rise in mortgage refinancings. Mortgage activity has slumped since April 2009, according to weekly data from the Mortgage Bankers’ Association released on Wednesday.

“I think people are starting to see the environment for mortgages is going to be good but not as great as it was before,” McCormick said, adding that compared to peers, “Wells Fargo may have more challenges in front of them.”

The bank has been working to shrink a now $82 billion Wachovia portfolio of so-called “pick-a-pay” mortgages, which allow homeowners to pick the type of monthly payment they make. Wells Fargo is transferring some of these customers to fixed rate loans and the portfolio is shrinking at a rate of about $2 billion a quarter, executives told analysts on a call.

“We believe we have turned the corner on many of the credit challenges of the past two years,” Chief Executive Officer John Stumpf told analysts. The bank said credit losses eased by $83 million to $5.3 billion.

It repaid $25 billion in taxpayer funds to the U.S. government at the end of last year.

TARP

SunTrust, KeyCorp and Huntington, which received $4.9 billion, $2.5 billion, and $1.4 billion, respectively, from the government’s Troubled Asset Relief Program (TARP), have yet to return the money.

KeyCorp’s first-quarter loss narrowed to $96 million, or 11 cents per share, from $536 million, or $1.09 per share, a year earlier.

Atlanta-based SunTrust’s loss shrunk 74 percent to $229 million, or 46 cents per share, from a year-earlier loss of $875 million, or $2.49 per share, which included a large goodwill write-down.

Columbus, Ohio-based Huntington posted a net profit of $39.7 million, or 1 cent a share, helped by a tax benefit, compared with a loss of $2.4 billion, or $6.79 a share, a year earlier.

Shares in KeyCorp were up 5 percent at $9.02 and Huntington shares were up almost 14 percent at $6.62.

SunTrust shares were down 16 cents at $30.04.

Investing Basics

(Reporting by Elinor Comlay and Joe Rauch; additional reporting by Maria Aspan and Franklin Paul; Editing by Dave Zimmerman, Phil Berlowitz)

Banks’ loan losses easing but demand down