Lending is slowed by cautious banks; Bank of America reports loss, Wells Fargo records a profit

Two of the nation's largest banks said Wednesday that loan losses generally have stopped increasing but that relatively few customers are seeking new loans, reports that are in broad agreement with other indicators showing that the economy remains weak.

Bank of America and Wells Fargo posted starkly different annual results. Bank of America said it lost $2.2 billion during 2009, its first annual loss in at least 20 years, and Wells Fargo reported an $8 billion annual profit, among its largest ever.

But that was last year. Executives at the companies, which need broad economic growth to profit, spoke in the same cautious key about the year ahead.

"We're not yet seeing the typical level of business activity for a recovery," said Bank of America's new chief executive, Brian Moynihan. But he added, "We believe the economy is stabilizing, markets are opening and customer sentiment is improving."

Said Wells Fargo's chief executive, John Stumpf: "While the economy is starting to show some signs, positive signs and pockets of stability, the unemployment rate is still too high and housing price improvement continues to be spotty."

Annual reports from regional banks Wednesday painted a similar picture of a damaged industry and economy. U.S. Bancorp of Minnesota said profit declined for the fourth straight year, to $2.2 billion, even as loan losses moderated. M&T Bank of Buffalo, which has a large presence in the Baltimore area, reported that profit fell 32 percent, to $379.9 million, and that loan defaults continued to climb.

Several of the banks said that new laws and regulations imposed in response to the crisis threatened to constrain their profitability and their lending.

Bank of America said that it lost $160 million in fourth-quarter revenue through the imposition of restrictions on overdraft fees ahead of new federal rules. It also estimated that a credit card law taking effect next month would cost the bank about $800 million.

Wells Fargo warned that a tax on large banks proposed by President Obama could constrain lending, limiting the company's ability to help revive the economy.

But the banking industry's central challenge remains the inability of many customers to repay loans, as the financial health of many Americans continues to be strained by high unemployment and low housing values.

The nation's largest retail banks, including J.P. Morgan Chase and Citigroup, which already reported annual results, continue to lose billions of dollars, in particular on mortgage and credit card loans. Executives said that the scale of losses is no longer increasing with each passing quarter, but the sums remain vast by historical standards.

Bank of America set aside $10.1 billion in the fourth quarter to cover projected loan losses, an amount that declined for the third straight quarter, but the $48.6 billion the company set aside during 2009 was up 81 percent over the previous year.

"It feels to us like we're moving from stability to an actual improvement, but obviously, given the weak economy, we remain cautious," Bank of America executive Joe Price told analysts on a Wednesday conference call to discuss the results.

Wells Fargo, dealing with fewer problems, set aside $21.7 billion for loan losses in 2009, up 36 percent from last year.

Banks also are struggling to generate revenue, in part because new lending continues to decline.

Bank of America said the total amount of money extended through loans and leases fell by $31 billion, or 3 percent, last year. Wells Fargo reported an even steeper decline of $63 billion, or 7 percent, over the nine months since March 2009, the first time it reported results that included its acquisition of Wachovia.

Both companies blamed the declines on weak demand for new loans. But the Federal Reserve has reported that banks also have tightened lending standards significantly, and political leaders including President Obama have called for banks to make greater efforts to find people and businesses in need of loans.

Financial analysts noted that both Wells Fargo and Bank of America are holding billions of dollars in deposits and low-yield investments that could be used for lending.

Stumpf of Wells Fargo said the company is working to find borrowers: "We're hiring more people; there are more feet in the street; we're doing a double look on loans that we turn down to make sure that we're turning them down to the right reason."

Wells Fargo, based in San Francisco, roughly doubled in size last year through the acquisition of the Charlotte-based Wachovia, creating a coast-to-coast banking business that closely rivals Bank of America as the nation's largest financial services company.

So far, Wells Fargo's results have significantly outpaced those of its rival, particularly in the retail banking business at the heart of both companies. Wells Fargo said it earned $8.6 billion in retail banking last year, while Bank of America lost $6.9 billion. The companies compete most fiercely in mortgage lending, where Wells Fargo reported a profit of $3.4 billion while Bank of America posted a loss of $3.8 billion.

The reports also provided information about compensation at the two banks. Bank of America said its personnel expenses for 2009 would total $31.5 billion, up from $18.4 billion in the previous year as it absorbed traders and bankers from Merrill Lynch at the start of the year. The average pay per employee was up 45 percent, to roughly $111,000. At Wells Fargo, compensation-related expenses totaled $26.5 billion, up from $12.9 billion in 2008, before its acquisition of Wachovia.

Shares of Bank of America climbed 1 percent, to $16.49, Wednesday. The company's shares are up 10 percent this year. Wells Fargo's shares fell 1.6 percent, to $27.82. Its shares are up 3 percent this year.

Another major bank reporting results Wednesday was Morgan Stanley, which said it lost $907 million for 2009, compared with a loss of $731 million in 2008.

The firm said it had earmarked $14.4 billion for compensation expenses, a bulk of which is year-end bonuses. That amount is 31 percent higher than last year, but it translates to a slightly lower average payout per employee, $235,193, because Morgan Stanley added thousands of brokers to its payroll through its Smith Barney joint venture with Citigroup.

Staff writer Tomoeh Murakami Tse contributed to this report from New York.

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