Wells Fargo & Co and other major U.S. banks said the troubled economy drove big increases in loan losses, reducing second-quarter earnings.

Wednesday's results provided fresh evidence the nation's banks still face a rough road as loan losses once concentrated in home mortgages migrate to commercial loans, commercial real estate loans and credit cards.

While Wells Fargo joined Bank of America Corp , Citigroup Inc and JPMorgan Chase & Co in posting multibillion-dollar profits, all boosted reserves for bad loans. Analysts question how well the sector can weather credit conditions that are expected to worsen at least into 2010.

Some banks show early signs of slowing deterioration, but there is growing weakness in commercial real estate, which will worsen, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. This is no longer just a residential housing and home equity problem.

Rising loan losses also reduced earnings at U.S. Bancorp , SunTrust Banks Inc and KeyCorp , which like Wells Fargo took billions of dollars of federal bailout money from the Troubled Asset Relief Program. U.S. Bancorp is the only one of these allowed so far to repay its infusion.


Wells Fargo, the nation's fourth-largest bank and largest mortgage lender, said quarterly profit after preferred dividends increased 47 percent to $2.58 billion, or 57 cents per share, from $1.75 billion, or 53 cents.

Analysts expected profit of 34 cents per share, according to Reuters Estimates. Revenue nearly doubled to $22.51 billion, topping forecasts. The San Francisco-based bank doubled in size when it bought Wachovia Corp at year end. Wells Fargo made $129 billion of mortgages, the second-most since 2003.

But nonperforming assets, where borrowers are not making payments, soared 45 percent from the end of March to $18.34 billion, and swelled 69 percent in commercial and commercial real estate loans.

Net charge-offs over that period rose 35 percent to $4.39 billion. The bank nevertheless added just $700 million to reserves, giving it $23.53 billion. Fitch Ratings cut Wells Fargo's credit rating.

Credit costs continue to increase at an alarming rate, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

Howard Atkins, Wells Fargo's chief financial officer, said the bank is properly reserved for bad loans and that there are signs here and there that the economy has bottomed.


U.S. Bancorp, based in Minneapolis, said profit fell 76 percent to $221 million, or 12 cents per share, from $926 million, or 53 cents. Net revenue rose 9 percent to $4.16 billion. Analysts expected profit of 10 cents per share on revenue of $4.02 billion.

The bank's set-aside for loan losses and net charge-offs both more than doubled. Chief Financial Officer Andrew Cecere said in an interview that net charge-offs and nonperforming assets will keep rising, but at a lower rate of growth.

Atlanta-based SunTrust lost $164.4 million, or 41 cents per share, compared with a year-earlier profit of $530 million, or $1.52.

SunTrust more than doubled the amount it reserved for loan losses and said borrowers were not making payments on about $5.5 billion of loans, or 4.48 percent of all SunTrust loans.

KeyCorp, based in Cleveland, posted a loss of $390 million, or 68 cents per share, as the bank set aside 31 percent more for bad loans.

It lost $1.13 billion a year earlier, although that figure was inflated by an unrelated $1.01 billion accounting charge.

Bank of New York Mellon Corp , which focuses on securities services for institutional clients as well as asset management, said profit fell 43 percent to $176 million, or 15 cents per share, from $309 million, or 27 cents.

It attributed the drop in part to the cost of repaying its own TARP money, and to writedowns of some investments.

In Wednesday trading, Wells Fargo shares fell 90 cents, or 3.6 percent, to $24.45; U.S. Bancorp rose 69 cents, or 3.8 percent, to $18.96; SunTrust rose $1.01, or 6.7 percent, to $16.19; KeyCorp rose 34 cents, or 7.1 percent, to $5.16, and Bank of New York Mellon fell $1.79, or 6.1 percent, to $27.32.

(Reporting by Jonathan Stempel; additional reporting by Svea Herbst-Bayliss in Boston, Juan Lagorio in New York and Karey Wutkowski in Washington; editing by John Wallace, Andre Grenon and Matthew Lewis)