updated 10/21/2009 8:48:43 PM ET 2009-10-22T00:48:43

The earnings reports from Wells Fargo & Co., Morgan Stanley and a handful of regional banks show there's a formula for prospering in a weak economy: a strong retail or investment banking operation and plenty of money on hand.

Loan losses are rising across the industry as consumers and businesses still struggle to pay their debts, but banks that can rely on a stream of income from their customers have been able to mitigate the damage. So have the companies that do investment banking.

Wells Fargo and US Bancorp, a regional based in Minneapolis, both said Wednesday the money they made by making loans and managing customer accounts offset higher losses on failed loans and drove their profits higher. Hudson City Bancorp Inc., a regional based in New Jersey, also said Wednesday its profit grew thanks to growth in its retail banking operations. And M&T Bank Corp., based in Buffalo, said late Tuesday it had a similar performance.

Morgan Stanley, whose business is investment rather than retail banking, joined big banks like JPMorgan Chase & Co. that said last week they were able to insulate themselves from higher loan losses with robust trading activity.

But there are also the have-nots. KeyCorp, which also reported results Wednesday, said its loss widened in the third quarter as earnings were overwhelmed by the money it set aside to cover possible failed loans. Earlier this week, Zions Bancorp reported a loss that was wider than expected, also because of soured loans.

Wells Fargo, based in San Francisco, said it earned $2.64 billion, or 56 cents per share, beating analysts' forecasts for 37 cents a share. The company said its credit losses climbed to $5.1 billion from $2 billion a year ago and $4.4 billion in the second quarter. But it also reported that net interest income, or what the bank makes on loans and other assets, rose 43 percent to $5.57 billion after setting aside $6.1 billion to cover credit losses.

And noninterest income, the money a bank earns on fees and other charges, more than tripled from a year ago to $10.78 billion as Wells Fargo reported strong mortgage banking activity.

Wells Fargo, US Bancorp and Hudson City have seen their mortgage banking revenue jump as homeowners scramble to refinance during a time when interest rates are low. That has helped offset weak demand for other types of loans.

Morgan Stanley, meanwhile, returned to profitability for the first time in a year as income from its investment banking operations offset losses in commercial real estate. Morgan Stanley said the stock and debt underwriting from its investment banking operations, and rising profits from its retail brokerage business more than balanced out $400 million in real estate losses.

The New York-based bank earned $498 million in the July-September period, after losing $13.18 billion during the last three quarters combined.

Some banks are seeing some easing of their loan problems. US Bancorp reported a 4.7 percent increase in its third-quarter profit to $583 million Wednesday and said bad loans aren't growing as fast as they were earlier this year.

US Bancorp continued to suffer from stress in home construction and related industries. From the end of June until the end of September, nonperforming loans rose 9.4 percent to $4.39 billion. But the bank said the growth in bad loans and charge-offs was slower than in the previous quarter.

"I would consider this quarter to be much closer to business as usual than we have seen in quite some time," Richard K. Davis, its chairman and CEO, said in a conference call.

Some analysts are uneasy about the way some banks are making their money because of the volatility of revenue sources such as trading or mortgage banking.

Richard Bove, an analyst with Rochdale Securities, issued a research note late Wednesday that questioned items in Wells Fargo's earnings, such as an increase in the fees it gets for servicing mortgages, and whether the gains they give the company can be sustained. Bove's note unnerved the stock market, and the major indexes that were up moderately earlier in the day ended with a loss.

Moreover, every bank with loan losses has warned they're expected to continue into next year. Wells Fargo's nonperforming assets, past-due loans that are an indicator of future losses, nearly quadrupled from the same period last year and climbed 28 percent from the second quarter. The high level of nonperforming assets means the bank will likely need to add even more to its loan loss reserves in the future.

Still, companies like Wells Fargo are doing better than many other banks.

KeyCorp said its loss widened in the third quarter to $438 million as it set aside more money for possible loan losses as borrowers are having a tough time repaying debts. The Cleveland-based company said its results also reflected write-downs on real estate-related investments.

CEO Henry L. Meyer III said "aggressive actions" to improve credit quality, strengthen capital, expand its retail network and other moves would help the company become more competitive.

Zions, based in Salt Lake City, said late Monday it lost $179.5 million in the third quarter as losses from bad loans were higher than expected. Its net loss was bigger than analysts forecast, and Stifel Nicolaus & Co. analyst Brian Zabora said he expects higher credit costs and lower net interest income will worsen the company's profit outlook.

Another factor that has helped some banks is their ability to raise capital. Many of the healthier ones sold stock during the summer, including those that were paying off their government bailout money. Others found private investors eager to own a stake in the banks.

The more cash banks have on hand, the more business they can do.

Conversely, those that have had to raise money out of necessity, including demands by the government that they increase their capital base, don't have as much money to lend, and that limits their growth.

"The banks that had massive exposure in Florida, California, and Georgia where there has been extreme stress, they have not been able to access the capital markets," said Jason O'Donnell, senior research analyst at Boenning & Scattergood.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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