In times of trouble, the banking industry is returning to its roots: consumer lending.

Over the past week, bank after bank has reported higher second-quarter profits, mainly due to stronger-than-expected revenue growth from lending money to consumers and homeowners.

It may be old-fashioned, but lending to Main Street is proving to be the saving grace for the nation's big banks -- especially at a time that lenders are still writing off losses on big commercial loans.

The Consumer Cushion

Just consider how bad off

J.P. Morgan Chase's

(JPM) - Get Report

second quarter would have been without a 60% gain in operating earnings in the bank's retail and middle-market lending division.

The bank's $686 million in retail earnings power prevented a

disappointing quarter from becoming an outright dismal one, given J.P. Morgan's severe drought in investment banking work.

On Thursday,

Wachovia

(WB) - Get Report

, the nation's fourth-largest bank, became the latest major lender to ride the consumer lending train. The Charlotte, N.C.-based bank, which merged with First Union last September, earned $862 million, or 63 cents a share, compared with $633 million, or 64 cents, a year ago. The bank's earnings from consumer lending, mortgages and loans to small businesses accounted for more than half its overall earnings in the quarter.

Wachovia's loans to Main Street helped it soften some of the blow of being forced to write down in the second quarter some $374 million in bad loans to telecommunications companies and Argentina.

Fancy Spread

The reason banks are feasting on consumer lending is that interest rates are at their lowest levels in four decades. Low interest rates not only make it cheaper for consumers to borrow money, they reduce the borrowing costs for banks. And low interest rates permit banks to enjoy a lot of flexibility in maintaining a healthy spread between the rate at which they borrow money and the rates they offer consumers.

Indeed, just as the consumer has kept the economy from falling off a cliff by continuing to spend money on new cars, appliances and clothes, it's been the consumer who's propping up the bottom line of the nation's big banks with a huge demand for mortgages and home equity lines of credit. The dollar value of home-equity loans and lines of credit issued to American homeowners is expected to set a record this year.

But with corporate America still offering a murky, if not dim, outlook for business prospects in the second half of the year, it's not clear whether the banks can keep counting on the consumer to bail them out in the coming quarters. If the economy doesn't start producing new jobs soon, the worry is that consumers may start to retrench, and the nascent economic recovery will falter.

"We get the sense that the possibility of double-digit recession is greater now than it was three months ago," says Reilly Tierney, a financial-services analyst with Fox-Pitt Kelton. "It's not to say we're pessimistic. But we're more cautious on the consumer end."

Bank stocks have been a reasonably good safe haven, but concerns about another recession and credit delinquencies have prevented them from shining. The Philadelphia Bank Index is down 9% since the market began tanking in April 2000, compared with a 35% drop in the

S&P 500

.

Tierney says what concerns him lately are the recent drops in consumer confidence and retail sales. Those could be the first signs of consumer exhaustion.

Better Borrowers

But another economic indicator offers some hope that maybe the consumer isn't about to throw in the towel. Moody's Investors Service reported Thursday that delinquency rates on credit card balances have fallen for two straight months. (The delinquency rate is the percentage of outstanding credit-card loans that go unpaid after 30 days).

In May, the delinquency rate on consumer credit-card debt fell to 4.86% from 5.04% in April. Even better, the May delinquency rate was down from a year ago, when it stood at 4.96%. Moody's officials say year-to-year comparisons are better because of seasonal changes in the public's spending habits. The delinquency rate during the downturn peaked at 5.52% in February.

"It's been coming down on an absolute basis and compared to a year ago," says John Puchalla, a Moody's economist. "It suggests that we are not seeing a deterioration in consumer debt."

That no doubt is good news to the nation's bankers, who still are waiting for a recovery in the lending business to big businesses. It's also good to investors who are banking on the consumer to keep the economy afloat.