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Banks See a Leveling Off in Bad Consumer Loans

Since the financial crisis hit, banks have chipped away at the mountain of mortgages and credit card debt looming over struggling Americans. At last, those efforts appear to be paying off, at least for the banks.

At some of the nation’s largest lenders, the number of consumer loans that are going bad is starting to level off. And while no one is declaring a full-scale recovery, executives at Bank of America, Wells Fargo and other big banks sound optimistic that the worst may soon be over.

“Credit quality appears to be stabilizing, if not improving,” Brian T. Moynihan, chief executive of Bank of America, said Wednesday, as the bank reported fourth-quarter earnings.

“The good news is there is light at the end of the tunnel, and it’s not an oncoming train,” added Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. “A year ago, you couldn’t have said that.”

The good news for banks is not quite so good for many consumers, however. Given their losses on loans, banks have stanched the flow of credit, particularly by reining in the number of new loans issued and by tightening underwriting standards. In recent months, the rate of losses has started to moderate.

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A Bank of America branch in New York City. The bank is beginning to write off fewer bad loans.Credit...Mark Lennihan/Associated Press

“We believe that if these trends continue, losses in about half of our 13 consumer lending businesses would have already peaked,” said Howard I. Atkins, Wells Fargo’s chief financial officer. “And it is possible — emphasis on the word possible — that consumer losses in total may have already peaked,” he added.

The number of loans turning sour still remains extraordinarily high. And Mr. Atkins, along with a number of experts, said that any new hit to the fragile national recovery, including a further rise in unemployment, could stall the decline in losses or even reverse the trend. While banking experts now believe consumer loan losses will peak in 2010, they expect losses to remain high until the overall economy and job situation show more robust improvement.

“In the second half of the year, it will be more and more important for the overall economy to improve at a faster clip,” said Anthony Polini, a banking analyst at Raymond James.

For now, the tepid recovery is still hampering people’s ability to repay their debts. Bank of America said Wednesday that it had to write off twice as many troubled loans in 2009 as it did the previous year, a total of $33.7 billion from $16.2 billion in 2008. Write-offs on domestic credit cards alone accounted for $6.5 billion in 2009.

But the rate of loss is declining. In the fourth quarter, the bank wrote off 3.7 percent of its loans, down from 4.1 percent the previous quarter.

“One quarter doesn’t make a trend, but we feel much better about the loss levels of this quarter and that they signal stabilization,” said Joe L. Price, chief financial officer at Bank of America. He acknowledged that a delayed recovery of the national economy “beyond our expectations or unforeseen events could obviously keep pressure on the performance.”

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Brian T. Moynihan, chief executive of Bank of America. Credit...Jim R. Bounds/Bloomberg News

Troubles in lending helped lead Bank of America to a loss of $2.2 billion, or 29 cents a share, in 2009, in contrast to a profit of $2.6 billion, or 54 cents, a year earlier.

The bank’s net loss in the fourth quarter surged to $5.2 billion, or 60 cents a share, compared with a net loss of $2.4 billion a year earlier because of costs associated with repaying the federal government bailout.

Wells Fargo, which has one of the nation’s largest consumer lending books, reported profits of $2.8 billion for the fourth quarter, in contrast to a $2.7 billion loss for the period a year earlier. Earnings to shareholders were reduced to $394 million, or 8 cents a share, largely because of the cost of repaying a government bailout. For the year, Wells reported profits of $12.3 billion, or $1.75 a share, up from $2.7 billion in 2008.

The reports come after Citigroup said that the $1.6 billion in losses it had in 2009 came in part from troubles in the bank’s mortgage and credit card units, which overwhelmed gains from investment banking — a trend that is likely to continue. Last week, JPMorgan Chase said its consumer businesses, and particularly its credit card unit, were hemorrhaging money.

Also on Wednesday, Minneapolis-based U.S. Bancorp reported net charge offs of $1.1 billion in the fourth quarter, a 7 percent increase over the previous quarter. Like Wells and Bank of America, U.S. Bancorp, which reported $602 million in profits for the quarter, said the rate of increase for bad loans was moderating.

Meanwhile, many large credit card issuers are writing off 10 percent or more of their portfolios. Bank of America said the percentage of credit card loans it thinks will never be paid hit 13.53 percent in December. JPMorgan Chase expects to charge off 10.5 percent of its credit card portfolios in the first half of 2010.

The level of write-offs, coupled with legislation coming into effect in February that will limit profitability for credit card issuers, suggests that 2010 will be “one of the most challenging in the history of the business,” said Moshe Orenbuch, a banking analyst with Credit Suisse, in a recent note to investors.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Banks See a Leveling Off In Bad Consumer Loans. Order Reprints | Today’s Paper | Subscribe

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