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.

Wells Fargo wfc said its earnings after payment of preferred dividends came to $2.58 billion, or 57 cents a share, up from $1.75 billion, or 53 cents a share, a year earlier.

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.

By early June, Wells Fargo had raised $8.6 billion in a common stock offering.

The bank has also received $25 billion in bailout funds. It's not known when it will repay the government.

Morgan Stanleyms said its net loss after payment of preferred dividends was $1.26 billion, or $1.10 a share, during the quarter ended June 30. The bank earned $1.06 billion, or $1.02 a share, during the same quarter last year.

Analysts polled by Thomson Reuters, on average, forecast a loss of 49 cents per share for the quarter.

Unlike competitors Goldman Sachs and JPMorgan Chase, Morgan Stanley's trading profits and investment banking revenue, while strong, were unable to offset mounting charges during the second quarter.

Both Goldman Sachs and JPMorgan Chase last week reported profit of more than $2.7 billion.

Morgan Stanley's results were significantly hampered by an accounting rule related to the value of its debt. The rule requires companies, on paper, to record a loss to cover the additional cash it would need to meet its obligations when its debt is worth more.

Essentially, if Morgan Stanley had to buy its debt back at the end of the second quarter, it would have had to pay more for it than it would have a quarter earlier. So while the improving value of its debt means investors are more confident in its long-term prospects, it must take a loss because of that improving confidence.

That accounting rule reduced Morgan Stanley's earnings by $1.32 a share in the second quarter.

Morgan Stanley also recorded an $850 million, or 74 cents a share, charge for repaying the money it received from the government under the Troubled Asset Relief Program. Last fall, amid the mushrooming credit crisis that led to the collapse of fellow investment bank Lehman Bros., the government provided hundreds of banks with loans to try and restart stagnant credit markets.

Last month, Morgan Stanley was one of 10 major banks that was approved to repay that loan. Morgan Stanley had received $10 billion as part of the government's $700 billion program.

Morgan Stanley did see improved investment banking operations, which spurred big profits at its competitors. Morgan Stanley said underwriting revenues increased 19% to $855 million during the quarter. As credit markets have improved, more companies have tapped equity and debt markets to raise much-needed capital. Like Goldman, Morgan Stanley was able to take advantage of that pent-up demand for underwriting new offerings.

Both Goldman and JPMorgan Chase were among the other major banks that repaid TARP obligations last month.