business

In a time of financial turmoil, good news is in the eye of the beholder.

Minnesota's biggest banks are getting set to report earnings for the tumultuous third quarter, and most analysts are projecting that they'll turn in flat, rather than falling, results.

In the banking industry right now, that's about as good as it gets.

Bad mortgages, weaker consumer credit demand and declining profit margins dragged down the performance of even the best-managed banks in the July-through-September period.

The Federal Reserve's move to cut short-term interest rates last month could help improve profit margins for many banks, but that balm is just beginning to work.

In the meantime, bank investors may have to look for encouragement where they can.

"Looking at this quarter's earnings, I think expectations are very low," said Tom Kersting, a financial services industry analyst at Edward Jones, the St. Louis-based brokerage.

"The numbers could be messy for some of these financial services companies," he said.

Banks all face the same challenge, said Richard Bove Sr., a securities analyst at the Tampa, Fla., office of Punk, Ziegel & Co.

"The issue with all banks around the country is there's likely to be an increase in loan losses, because there's been a general deterioration in the consumer's financial condition," he said.

That said, U.S. Bancorp, Wells Fargo and TCF -- the top players in Minnesota banking -- get better marks from market watchers than do the likes of Citigroup and UBS -- big international banks that have recently warned that their third-quarter results will be ugly.

"We don't think they have some of the lightning-rod issues that larger money-center banks have," said Jon Arfstrom, who covers U.S. Bancorp, TCF and M&I from the Minneapolis office of RBC Financial Group.

For instance, banks that have big footprints in the Midwest were less likely than money-center banks to sell their mortgages to third parties, many analysts noted. And a bank that holds on to mortgage debt has greater incentive to monitor the creditworthiness of borrowers.

"A bank that originates loans for its own books will pay attention to the quality of that loan, because it's going to bite them if it doesn't work out," said Ben Crabtree, a Minneapolis-based analyst with Stifel Nicholas.

Nevertheless, analyst Gary Townsend has pared a few pennies from his profit estimate on Wells Fargo's quarterly earnings. The headline on the advisory that Townsend sent to investors began, "Not immune."

The average consensus forecast for Wells Fargo calls for earnings of 70 cents a share for the third quarter, up from 64 cents for the period last year. The consensus for the year is $2.47 per share, up from $2.49 in 2006.

Townsend, who is with FBR Research in Arlington, Va., expects Wells Fargo to be a long-term beneficiary, however, of the turmoil in the banking industry, especially in the mortgage business.

Thinning the field