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Wells Fargo posts surprise profit as Bank of America loses $5.2 billion

NEW YORK — Wells Fargo says the economy is getting better — it sees signs of recovery in its loan business.

But the big bank may be more of an exception than a leading indicator.

Breaking from the cautious, even downbeat forecasts of rivals like JP­Morgan Chase & Co., Wells Fargo on Wednesday used words like "favorable" and "confidence" about its future amid tentative signs that its loan defaults are close to a peak or already have peaked. The company, which surprisingly earned $394 million during the fourth quarter, believes the recession-weary consumer could be making a comeback.

Wells Fargo is way ahead of other banks, although Brian Moynihan, CEO of Bank of America, which lost $5.2 billion last quarter, expressed mild optimism that sagging consumer sentiment may be turning around.

Many banking analysts aren't so sure. The reason: Ongoing problems including the deteriorating commercial real estate market and rising credit card defaults could still trip up a recovery. And while Wells' profit report was good news, the bank is ahead of its competitors by having already taken losses on many of its bad loans.

Wells Fargo and Bank of America are the two biggest banks operating in Florida.

Bert Ely, a banking analyst in Alexandria, Va., called Wells' performance a "good surprise" but said several potential pitfalls could upend the bank's bold statements about a potential recovery. Specifically, yet-to-be-realized losses on commercial real estate, prime mortgages and credit cards could weigh on all banks' earnings well into 2010.

"We still have a lot of problems on the horizon," Ely said.

Adam Barkstrom, a managing director at Sterne Agee, said Wells Fargo is still highly exposed to risky mortgage markets like Florida and California. It has also restructured many troubled mortgages, which could mean the bank is "just kicking the can down the road" if those borrowers still can't pay their bills.

Other analysts aren't so pessimistic. Gerard Cassidy, banking analyst at RBC Capital Markets, said Wells' earnings report could signal that a credit turnaround is in the offing. He said losses from failed loans historically peak six months after the end of a recession, which means lending could pick up again in the second quarter of this year.

Given Wells' surprise profit, "it seems to us that there's ample evidence that banks' credit problems will be peaking shortly," he said.

Bank of America, meanwhile, said its Merrill Lynch investment banking operations helped offset the lending losses. JPMorgan Chase and Citigroup also reported that their investment banking businesses helped to mitigate the impact of their troubled loans.

Like Wells Fargo, Bank of America's prospects going forward are uncertain, said Bart Narter, a senior vice president at consulting firm Celent. While the acquisition of Merrill Lynch is starting to pay off, giving Bank of America an income boost from investment banking, the retail banking part of the business still faces problems. Chief among them is dwindling profit from retail deposits, a trend that's expected to grow after legislation takes effect this summer limiting bank fees like overdraft charges.

Wells Fargo posts surprise profit as Bank of America loses $5.2 billion 01/20/10 [Last modified: Wednesday, January 20, 2010 11:00pm]
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