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Banks profit from investments as loan losses decline

NEW YORK — The nation's big banks have found the key to success while they wait for the economy to recover: aggressive trading of investments including bonds, currencies and commodities.

But they may also be heading toward making money on loans again. The big banks that have released earnings over the past week all reported improvements in their consumer loan portfolios.

Wells Fargo & Co. said Wednesday it has "turned the corner" with its credit problems. The bank reported earnings of $2.37 billion, or 45 cents per share. It set aside $5.3 billion to cover bad loans during the quarter, down 9.9 percent from $5.9 billion in the previous quarter.

Wells Fargo chief credit and risk officer Mike Loughlin said in a statement the bank believes "quarterly total credit losses have peaked."

Morgan Stanley said Wednesday it earned $1.41 billion, or 99 cents per share. The investment bank, which was criticized last year for being too conservative as markets recovered, saw its revenue from trading almost triple to $4.1 billion from a year earlier.

Banking executives had been conservative about their views on the economy and predicting a peak in losses from failed loans. Now they are saying mortgage and credit card defaults are declining.

A drop in loan defaults and the amount of money set aside for future loan losses is among the clearest signs that the economy is recovering, albeit slowly, from a recession. It means customers are better able to repay debt.

Even JPMorgan Chase & Co. chief executive Jamie Dimon was more optimistic than he had been in the past.

He told investors that JPMorgan "continued to see delinquencies stabilize, and in some cases improve."

JPMorgan Chase earned $3.3 billion, or 74 cents per share. Its nonperforming loans, those that are in default or close to being in default, totaled $2.7 billion, down $763 million from the previous quarter.

Not all analysts are convinced, though, that loan losses are permanently on the downswing.

Banks have done a good job setting aside money to cover losses, "but I think it's still too early to say we're turning a corner," said Paul Miller, head of financial institutions research at FBR Capital Markets.

Until that time, though, many big banks have relied on other ways of earning money, particularly their trading operations. Banks like JPMorgan Chase, Citigroup and Bank of America were able capitalize on improved markets to go along with modest improvements in lending operations.

However, trading can be a fickle business. Banks have been profiting in recent quarters from continuing low interest rates that allow them to borrow money cheaply and put it into higher-yielding investments such as stocks and corporate bonds.

If rates go up, it won't be so easy for them to make so much money.

Still, the Federal Reserve has repeatedly said it plans to keep interest rates low to sustain economic growth.

FBR's Miller said trading profits should remain strong while the Fed maintains its current strategy.

"It's not sustainable in the long run, but for now will help them earn through the crisis," Miller said.

Other earnings

A summary of top companies' earnings reports released Wednesday:

. AT&T: The telecommunications giant added fewer wireless customers with contracts in the first quarter than it has since 2004, while it earned $2.48 billion in the first three months of the year. That was down 21 percent from a year ago.

. McDonald's: The No. 1 fast-food chain earned $1.09 billion in the first quarter, up 11 percent from a year earlier.

. Boeing: The airplane maker and military contractor earned $519 million during its first quarter, down almost 15 percent from a year earlier, as it delivered fewer aircraft.

. AMR: The parent of American Airlines says it lost $505 million in the first quarter as traffic stabilized but didn't improve much.

. Starbucks: The coffee chain said second-quarter profit soared to $217.3 million, compared with $25 million in the year-ago period, as revenue climbed 9 percent to $2.53 billion.

. Lockheed Martin: The military contractor's first-quarter earnings fell 18 percent to $547 million after it was hit by a big charge due to the recent U.S. health care overhaul.

. EBay: The online auctioneer's first-quarter profit rose 11 percent to $397.7 million as consumers spent more on its main Web site and transferred more money through its PayPal payment service.

Banks profit from investments as loan losses decline 04/21/10 [Last modified: Wednesday, April 21, 2010 8:21pm]
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