By Michael J. Moore
July 22 (Bloomberg) -- Wells Fargo & Co., SunTrust Banks Inc. and KeyCorp led banks in boosting reserves for losses after bad loans rose in the second quarter. Morgan Stanley posted a bigger-than-expected loss on costs to repay U.S. aid.
U.S. Bancorp also raised its credit reserves as the deepest recession in five decades limited consumers’ and businesses’ ability to repay debt. The lenders except Morgan Stanley set aside more than $7.4 billion for loan losses in the quarter.
Wells Fargo, SunTrust and KeyCorp each reported at least an 18 percent rise in loans that weren’t collecting interest, signaling further losses as borrowers fall behind on payments. Regional banks haven’t benefited from the capital market gains that lifted larger banks including JPMorgan Chase & Co. and Bank of America Corp. to profits.
“The banks are not pointing to the sun getting ready to come out,” said Jeff Davis, director of research at Howe Barnes Hoefer & Arnett. “All these banks need the economy to turn and asset prices to firm with better bids to clear out the backlog.”
The five banks raised more than $20 billion in the quarter to meet regulator demands after the Federal Reserve’s stress found 10 of the 19 biggest financial institutions needed additional capital to survive a deeper, prolonged recession. U.S. Bancorp, spared the need for raising capital, sold $2.5 billion in stock to help buy back the U.S. preferred shares.
Investors were encouraged and the KBW Bank Index rose as much as 2.2 percent, paring earlier losses. SunTrust, based in Atlanta, jumped as much as 10 percent, to $16.69. Wells Fargo, the San Francisco-based lender whose biggest shareholder is Warren Buffett’s Berkshire Hathaway Inc., fell as much as 7.6 percent to $23.23. U.S. Bancorp of Minneapolis rose as much as 5.6 percent to $19.30
Morgan Stanley
Cleveland-based KeyCorp rose as much as 9.3 percent, to $5.27, while New York-based Morgan Stanley fell as much as 6.1 percent to $25.88.
Morgan Stanley, the biggest U.S. brokerage, reported a larger loss than analysts estimated. The results included losses at all three divisions and a $2.3 billion accounting charge for rising costs should Morgan Stanley buy back outstanding debt. The firm earned less than rivals in fixed-income trading.
“We underperformed” in fixed income, Morgan Stanley Chief Financial Officer Colm Kelleher said in an interview. “We just didn’t pursue the opportunities we could have done in rates and foreign exchange.”
Wells Fargo, the biggest U.S. home lender this year, said assets no longer collecting interest climbed 45 percent to $18.3 billion as of June 30 from the first quarter. Net income soared 81 percent to a record $3.17 billion.
Credit Reserves
Wells Fargo added to credit reserves amid a 26-year high in unemployment and rising commercial real estate delinquencies. While the acquisition of Wachovia Corp. in January bolstered deposits and home lending, the bank must stanch losses from defaults in California and option adjustable-rate mortgages, ranked among the riskiest loans issued during the housing boom.
“Credit losses rose in the second quarter, as expected, due to the weak economy and higher unemployment,” Mike Loughlin, the bank’s chief credit officer, said in a statement. “We expect credit losses and nonperforming assets to increase.”
KeyCorp’s net loss narrowed to $236 million, or 69 cents a share, from $1.13 billion a year earlier, when the bank had a $1 billion cost tied to a tax case, the company said in a statement. KeyCorp exceeded the adjusted per-share loss of 40 cents, the median of 17 analyst estimates in a Bloomberg survey.
KeyCorp, U.S. Bancorp
KeyCorp raised loss reserves $311 million to $2.5 billion and said non-performing loans jumped 26 percent from last quarter to $2.19 billion, or 3.1 percent of all loans. Chief Financial Officer Jeff Weeden said higher non-performing assets suggests charge-offs will “remain elevated” for the year.
U.S. Bancorp set aside $1.4 billion to cushion bad debts in the quarter, more than double the $596 million a year earlier, amid “continuing stress in residential real estate markets, driven by declining home prices in most geographic regions.”
Assets no longer collecting interest rose to $4 billion from $1.1 billion a year earlier, and debts U.S. Bancorp doesn’t expect to be repaid jumped to $929 million from $396 million.
SunTrust, the seventh-largest bank by assets and deposits, reported its third straight quarterly loss and charged off more real-estate loans because of weak economies in the Southeast.
The net loss was $183.5 million, or 41 cents a share, compared with a profit of $540.4 million a year earlier, the lender said in a statement. The per-share loss, which includes preferred-stock dividends, exceeded the average 63-cent loss estimate of 20 analysts surveyed by Bloomberg.
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