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Wells Fargo Hit by Credit Woes

Shares fall.

Wells Fargo

(WFC) - Get Report

slid 4% in early trading after the big lender missed analysts' expectations over writedowns on mortgage securities and steep credit losses primarily related to home equity loans.

For the three months ending Sept. 30, the San Francisco bank reported net income of $2.28 billion, or 68 cents a share, compared to $2.19 billion, or 64 cents a share, in the third quarter of 2006. Revenue rose 10% to $9.85 billion.

Analysts had expected Wells Fargo would make 70 cents a share on $10 billion of revenue.

Wells Fargo took a $490 million writedown in its net mortgage loan origination/sales activities gains reflecting a writedown of the mortgage warehouse due to the non-agency mortgage securities markets seizing up this summer. The writedown also includes losses related to mortgage loans repurchased in the quarter and an increase in the repurchase reserve for projected early payment defaults, it said.

Mortgage originations at Wells Fargo dropped 12% from a year earlier to $68 billion. Wells Fargo said that mortgage applications in the pipeline fell 18% to $45 billion. The bank's home equity portfolio rose 7% to $83 billion; however it also had significantly higher credit losses as a result of declining home values, it said.

The bank posted net credit losses of $892 million, 24% higher from the second quarter and 35% higher from the year-earlier quarter. The rise in bad loans was concentrated mostly in Wells Fargo's home equity portfolio, "where losses accelerated in the quarter given the steeper than anticipated decline in national home prices," said Mike Loughlin, its chief credit officer.

The remainder came from seasonally higher losses in its auto portfolio and in unsecured consumer loans, Wells said.

During the third quarter, the bank eliminated its correspondent home loans channel in which the bank would purchase home equity loans originated by other lenders. While the correspondent channel represented about 7% of the total loans in its home equity portfolio, it also contributed to approximately 25% of the losses in the quarter, it said.

"Given the current real estate market conditions, credit losses in the home equity portfolio are likely to increase fourth quarter 2007 and remain at elevated levels into 2008," the company said.

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Wells Fargo's results were similar to those at other large banks hit hard by this summer's credit crunch and mortgage downturn.

Citigroup

(C) - Get Report

reported on Monday that profits fell 57% in the third quarter.

The New York banking titan reported more than $3 billion of writedowns on leverage loan commitments and mortgages and related securities in its warehouse. Citi's total credit costs jumped by $3 billion, as the bank recognized $780 million in credit losses and took a net charge of $2.24 billion to increase loan-loss reserves.

Citi CFO Gary Crittenden said he expected the U.S. credit environment to continue to deteriorate in the fourth quarter.

Elsewhere, shares of

KeyCorp

(KEY) - Get Report

dropped 4% after the Cleveland bank reported third-quarter profit dropped 33% from a year ago as the summer's credit crunch crimped trading results.

"The fixed-income market volatility had an adverse impact on our third-quarter results," said CEO Henry L. Meyer III. "While the fixed-income markets continue to remain under some pressure as we head into the fourth quarter, we believe most of the financial impact on our held-for-sale portfolios is behind us and we expect to see improved results from these portfolios over the remainder of the year.

Key also guided lower for the fourth quarter, saying it expects to make 68 to 74 cents a share, against a 75-cent Thomson Financial estimate.