Wells Fargo profit hit by home loans

Wells Fargo & Co. said Tuesday that third-quarter profit rose 4%, the slowest pace in more than six years, hurt by rising losses from home loans that it expected to increase further.

Earnings set a record but fell short of forecasts at a bank considered among the industry’s best at managing risk.

Credit losses are mounting industrywide as the U.S. housing sector slumps and credit markets tighten. San Francisco-based Wells Fargo is the nation’s No. 5 bank and one of its largest mortgage lenders.

“It was a tough environment,” Chief Financial Officer Howard Atkins said. “Credit markets seized up and the housing market took another downturn.”

Wells Fargo shares fell $1.40, or 4%, to $34.55.

The bank’s net income rose to $2.28 billion, or 68 cents a share, from $2.19 billion, or 64 cents, a year earlier.

Revenue rose 10% to $9.85 billion. Results included a $160-million gain from a sale of $27 billion of low-yielding mortgage securities.

Analysts on average expected profit of 70 cents a share on revenue of $10.02 billion.

The bank reported $490 million of write-downs related to mortgages. Wells Fargo also said home equity losses rose more than fivefold to $153 million. It expects such losses to rise in the fourth quarter and to stay “elevated” in 2008.

Net credit losses totaled $892 million, up 35% from a year earlier and 24% from the second quarter.

“The real story was weaker-than-expected credit trends and an associated increase in provision expense, which are likely to reduce future earnings,” wrote Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. Townsend downgraded Wells Fargo to “market perform” from “outperform.”

Wells Fargo said almost half its increase in credit losses was in home equity, hurt by declining home prices, and the rest was in auto loans and unsecured consumer credit.

Payments on $1.26 billion of loans were at least 90 days late as of Sept. 30, up 16% from the end of June.

Net interest margin tumbled to 4.55% from 4.89% in the second quarter. Wells Fargo said it bought $17 billion of securities late in the quarter, which it said should benefit the margin in the fourth quarter.

Rivals that have also posted higher credit losses include Citigroup Inc. on Monday and U.S. Bancorp, Regions Financial Corp. and KeyCorp on Tuesday.

Wells Fargo’s net interest income rose 5% to $5.28 billion, while fee income rose 18% to $4.57 billion.