Banks' earnings plummet

Banks reported huge profit declines in the second quarter, raising questions about how long and how miserable a financial sector slump could last.

But bargain hunters and short sellers helped drive up the price of bank stocks on Wall Street on Tuesday, despite the gloomy earnings news, analysts said.

"It was an awful quarter,'' said FTN Midwest Securities Corp. analyst Jeff Davis in Nashville. "Every bank that reported today had dismal earnings."

The Nashville area's largest banking company, Regions Financial Corp., reported a 55 percent decline in profits in the second quarter to $206.4 million, or 30 cents per share. That was below Wall Street's expectations.

And Regions set aside more than $300 million to cover bad loans. But Regions' stock increased by $1 a share and closed at $11.40 in New York Stock exchange trading despite the credit woes.

The company blamed home building, condominiums and home equity loans, mostly in Florida, for its poor results.

"We think it is prudent to plan for no real improvements until 2010,'' Regions Chairman, President and Chief Executive Officer Dowd Ritter said in a conference call. He said it was hard to predict the depth and extent of the "current down cycle."

Birmingham, Ala.-based Regions also said it would slash its dividend from 38 cents to 10 cents per share, effective for dividends payable on Oct. 1, to save money and strengthen its capital position.

Regions officials said the bank has put a moratorium on land and condominium loans, revalued its home equity loan portfolio and put its most experienced bankers in the special asset department, which deals with problem loans.

Elsewhere among big banks, perhaps the biggest loser was Wachovia, the nation's fourth-largest bank, which said it lost $8.86 billion in the second quarter because of charges and reserves for bad mortgage loans.

The Charlotte-based bank on Tuesday cut its dividend for the second time this year and said it would eliminate 10,750 jobs.

Analysts not surprised

"Wachovia's news isn't isolated. I think there is still a structural issue with U.S. banks," said Russell Walker, a risk management professor at the Kellogg School of Management at Northwestern University. "Many of the banks, including Wachovia, are still facing challenges."

Still, Wachovia's stock finished a winner in Tuesday trading, climbing 27 percent to $16.79 per share, as the company's CEO promised major expense trimming.

Wachovia's problems stem largely from its acquisition of mortgage lender Golden West Financial Corp. in 2006 for roughly $25 billion at the height of the nation's housing boom. With that purchase, Wachovia inherited a deteriorating $122 billion portfolio of Pick-A-Payment loans, Golden West's specialty, which let borrowers skip some payments.

Bank of America, also based in Charlotte, reported profits fell 41 percent to $5.76 billion, or 72 cents per share in the second quarter on Tuesday. Analysts on average expected a profit of 53 cents per share. The stock price climbed 13 percent to $32.35 per share in trading on the New York Stock Exchange.

Some analysts said the increase was fueled by a developing recognitions "that the bank's problems, although large, can be contained,'' bank analyst Richard Bove of Ladenburg Thalmann & Co. said in a note to investors. "More importantly, it is beginning to be understood that the bank has formidable sources of revenues that can pay for a great deal of losses."

Loan hurt SunTrust

Meanwhile, Atlanta-based SunTrust Banks Inc., said its second-quarter earnings fell 21 percent due to a sharp increase in its loan-loss provision and a decline in net interest income. Its stock climbed 16 percent to $39.66 per share.

Analysts said the real worry now is whether a softening economy will start to cause problems for commercial loans. Davis said he believes bank real estate losses will taper off by the second half of 2009, but a further contraction of the U.S. economy could put banks in a bad position.

"Is that going to happen? I don't know,'' Davis said. "We haven't seen, at least not yet, commercial loans melt down. The American business community is not very leveraged. Consumers are leveraged and government is leveraged. So, we think businesses will be OK."

Ex-bank official files lawsuit over firing
Fresenius merger shows appeal of generic-drug makers