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Housing slowdown may hit bank profits
Regulators warn that the few 'positives are starting to fade' in banking.

Earnings at U.S. banks were strong in the second quarter but may soften with a cooling real estate market and higher lending costs as the economy digests the recent spate of interest rate hikes, a U.S. bank regulator said on Friday.

The Office of the Comptroller of the Currency said during a briefing with reporters on the condition of the banking industry that a few positive aspects of the economy that helped banks achieve record earnings are showing signs of slowing.

"Positives are starting to fade," said Nancy Wentzler, deputy comptroller for global banking and financial analysis, pointing to the once-hot real estate sector.

"It certainly started to cool this summer in August," she said. "And now we are seeing a little more emphatic reduction in some of the housing and housing-relating activity that had been a big boon to bank earnings."

Banks that have enjoyed strong growth in deposits are experiencing slower growth as the rise in interest rates has made time-sensitive accounts such as certificates of deposits, which carry higher interest rates, more appealing to customers, she said.

Real estate nightmares
Another trend putting pressure on banks' bottom lines is the growth of branches throughout the country.

The OCC found that 38 percent of depositary institutions - big and small - have increased their branch presence over the last several years by 5 percent or more while the U.S. population has remained largely constant.

About 33 percent of the counties in the United States have seen a big increase in brick-and-mortar bank locations. Sixty percent of the growth has been in urban areas, a sign that banks are reaching out more to households to increase their deposit base and asset management.

"They're mushrooms and they're growing everywhere," Wentzler told a briefing to discuss the condition of the banking industry.

Overall, banks in the second quarter saw bigger increases in non-interest income on a year-over-year basis due to trading activities, asset sales and fee income, the OCC said.

The increase was mainly driven by the top five U.S. banks - JPMorgan Chase (down $0.19 to $46.96, Charts), Citigroup (down $0.26 to $49.67, Charts), Bank of America (up $0.05 to $53.57, Charts), Wachovia (up $0.16 to $55.80, Charts) and Wells Fargo (up $0.06 to $36.18, Charts).

Over the last several years, banks have increased the real estate portion of their loan portfolios, with big banks having increased loans in residential properties while smaller banks have increased commercial real estate loans.

http://money.cnn.com/2006/09/29/news/companies/banks_housing.reut/index.htm?postversion=2006092917