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Banks Report Muted Quarter

The fourth-quarter earnings season kicked off Tuesday with many U.S. banks reporting profits that either matched or fell short of Wall Street expectations.

Topping the list of big lenders to report modest earnings was Wells Fargo (WFC). The California-based lender said its fourth-quarter profits rose a modest 8% from a year ago to $1.9 billion, up from $1.8 billion. In the quarter, Wells Fargo earned $1.14 a share, compared with $1.04 a share a year ago. Revenue rose 4% to $8.5 billion.

Earnings came in a penny shy of the Thomson First Call consensus forecast of $1.15 a share, a figure that already had been reduced by a penny in recent days. Revenue came in slightly ahead of the consensus estimate of $8.45 billion.

Fourth-quarter earnings were weighed down at Wells Fargo by a surge in consumer bankruptcy filings, as individuals raced to beat the filing deadline for escaping a new and tougher federal bankruptcy law. The new bankruptcy law is expected to be one of the many drags on bank earnings in the fourth quarter.

In the quarter, Wells Fargo reported a $203 million increase in net charge-offs for bad loans. Of that total, the bank attributed $171 million to the impact of the new bankruptcy law.

But Wells Fargo did a better job of managing the other big expected problem for banks in the quarter, which was the narrowing spread between short- and long-term interest rates.

In the quarter, the bank said net interest income rose 9% in the face of a so-called flattening yield curve that has made it difficult for many banks to generate fat profits off their deposit and lending operations.

By comparison, Fifth Third (FITB), the big Midwestern regional lender, reported a 2% year-over-year decline in net interest income. Net interest income is the difference between what a bank makes on its investments and loans and the money it pays out to depositors.

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