Wells Fargo, Morgan Stanley earnings give investors pause

CHARLOTTE, North Carolina -- Wells Fargo joined other big U.S. banks in reporting a big second-quarter profit even as losses from failed loans kept rising and dampened results, but Morgan Stanley lost more than $1.2 billion during the second quarter as it took a charge to repay government bailout money.

Wells Fargo said Wednesday its earnings, which rose 47% from a year earlier, were boosted by the acquisition of struggling Wachovia in December.

The earnings surpassed the 34 cents-a-share forecast of analysts surveyed by Thomson Reuters.

Before payment of dividends, earnings rose 81% to $31.7 billion, the bank said. Revenue nearly doubled to $22.51 billion, with 39% of the total coming from Wachovia.

Despite the higher earnings, Wells Fargo's shares fell.

Like Bank of America and JPMorgan Chase, Wells Fargo reported rising losses from failed loans. Wells Fargo said it recorded a $5.1 billion provision for loan losses during the second quarter.

Non-performing assets, where borrowers are not making payments, soared to $18.34 billion from $12.61 billion in the first quarter, including a 69% increase from commercial and commercial real estate loans.

Net charge-offs rose 35% from the first quarter to $4.39 billion. The bank added just $700 million to credit reserves, giving it $23.5 billion.

The Wells Fargo 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.

In May, the government told Wells Fargo it needed to raise $13.7 billion in additional capital after the Treasury released results of "stress tests" of the nation's largest banks. The tests were designed to determine how banks would fare if economic conditions worsened, and whether they might need additional capital.