On Wednesday, Wells Fargo & Co., the nation’s fourth largest bank, and SunTrust Banks Inc., the nation’s seventh largest bank, both reported good results, before heavy mortgage losses overshadowed their gains.
Given the state of the U.S. economy and continued job losses, the banks don’t expect consumers to catch up on their bills any time soon.
Second quarter net income at the San Francisco-based Wells Fargo was a record $3.17 billion, up 81 percent from last year.
But investors and analysts were concerned with the bank’s credit losses on mortgages as it integrates Wachovia Corp., which Wells Fargo bought in January. The bank disclosed that loans currently not collecting interest rose 45 percent during the quarter to $18 billion.
Wells Fargo’s performance is a key indicator on how well consumers are paying their bills. Besides the mortgages it took on from Wachovia, Wells Fargo is a big lender in California, one of the hardest hit states in the housing collapse, and a leading issuer of “adjustable rate mortgages,” considered some of the riskiest issued during the housing boom.
“Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment in the quarter,” said Mike Loughlin, Wells Fargo Chief Credit Officer, in a statement. “We expect credit losses and nonperforming assets to increase, although we’re beginning to see some moderation in the rate of growth of losses in a number of consumer portfolios.”
Wells Fargo deemed $4.4 billion, or 2.1 percent of average consumer loans, to be uncollectible. That’s an increase of 35 percent from $3.3 billion set aside during the first quarter. Charge offs from commercial and commercial real estate loans also went up during the second quarter, especially loans given to commercial developers “tied to the residential real estate industry,” the company said.
The company expects the losses to continue into the third quarter. “While we are seeing some encouraging signs of home sales in California, housing prices need to stabilize broadly before credit results in the mortgage portfolio will improve,” Loughlin said.
SunTrust, another regional bellwether, was also hurt by real estate losses. The bank is a key player in the Southeast region of United States, especially in Florida where housing price declines were among the most severe in the nation.
The Atlanta-based bank reported net loss of $183.5 million for the second quarter, a far cry from the $540 million in profit it saw last year.
SunTrust reported $6.17 billion worth of loans in default, an 18 percent increase from the first quarter. More than half of such loans are from homeowners in Florida.
Analysts have reason to worry about increasing consumer delinquencies. While the big investment banks are reaping record profits from trading, consumer and commercial lenders—considered the engine of the U.S. economy—will continue to suffer as long as more than 10 percent of the nation’s workers are unemployed.
Friends Read Free