A lot of big banks had a free ride to higher earnings the last few quarters. That could be ending soon.
As the economy gets better, investors want to see if banks can improve their core businesses of writing loans, issuing credit cards and advising on corporate deals.
Several major banks including Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. recorded substantial gains in income in recent quarters from accounting adjustments in their loan loss reserves.
Those adjustments, which are perfectly legal, reflected a decline in the likelihood that their borrowers would default on loans. That allowed banks to release cash from reserves that had been set aside to cover future losses, which increased their income.
Of course it's a good thing in the long run for both banks and the overall economy that borrowers are less likely to default. Now analysts are saying the benefits from these kinds of reserve adjustments may be winding down as the economy continues to improve.
Jason Goldberg, an analyst at Barclays Capital, suspects that some banks may have overdone it with the adjustments. "We wonder if some companies stretched to put up better results" in the fourth quarter, Goldberg wrote in a recent report.
Income at banks with investment banking operations will likely get a boost from a pickup in corporate deals in the first quarter. Consumers are also spending more, which means banks are probably earning more from charging interest and fees on credit cards. Increased demand from consumers also tends to lead to more borrowing from businesses.
But trouble in the housing market is sure to weigh on bank earnings. A sharp increase in mortgage rates over the past six months could hold back income from issuing new mortgages and refinancing existing ones. The average rate on a 30-year mortgage rose to 4.87 percent last week from 4.32 percent at the end of September, according to Freddie Mac.
JPMorgan's banking analyst Vivek Juneja says he expects the largest drop in income at banks to come from lower fees tied to new mortgages and a drop in the number of refinances.
Last year, revenues at most banks shrank after new regulations reduced their income from fees on debit and credit cards. Lawsuits also increased as investors sued banks for selling them investments that were based on faulty mortgages. Several banks including JPMorgan Chase and Bank of America set aside more money for litigation.
Meanwhile, all 50 state attorneys general are continuing their investigation into allegations that banks bungled foreclosure proceedings. Analysts expect banks to pay fines, but it's unclear how big they will be. The investigation is sure to be a topic of discussion in executives' conference calls with analysts.
Higher investment banking revenue should boost earnings at some banks. Global investment banking revenue reached $19 billion in the first quarter, up 19 percent from the first quarter of 2010, according to the research firm Dealogic. Global mergers and acquisitions volume totaled $809 billion in the first quarter, up 28 percent from the same period last year.
Here are the forecasts of analysts surveyed by FactSet and highlights for each of the large banks:
_ JPMorgan Chase will be the first bank to report earnings on Wednesday. It is expected to earn $1.15 per share for the first quarter on revenue of $25 billion. One of the healthiest banks, JPMorgan increased its quarterly dividend by more than any other, to 25 cents a share from 5 cents. JPMorgan is also leading Dealogic's rankings for mergers and acquisitions.
_ Bank of America Corp. goes next on Friday. The Charlotte, N.C. bank is expected to report earnings of 27 cents per share on revenue of $26 billion. It was the only one of the four largest banks that wasn't allowed to increase its dividend. The largest writer of home loans and credit cards, Bank of America has struggled to grow during the slow economic recovery. New regulations took away some of its most lucrative sources of income from fees related to overdrafts and late payments.
_ Citigroup goes next on Monday. The New York bank is expected to report earnings of 9 cents per share on revenue of $21 billion. Barclays' Goldberg hopes to see improvements in its investment banking revenue after disappointing results last quarter. He also expects better results from its global portfolio.
_ Goldman Sachs Group Inc. reports on Tuesday. It is expected to earn $2.39 per share on revenue of $10 billion. Keith Horowitz, an analyst at Citi, expects Goldman's strength in risk management to be in greater demand from its clients at a time of global political unrest, higher gas prices, and rising interest rates.
_ Wells Fargo is expected to report earnings of 66 cents a share on revenue of $21 billion on Wednesday. Wells has a large mortgage business and is likely to be hurt by any increase in mortgage rates.
_ Morgan Stanley, which reports next Thursday, is expected to earn 42 cents a share on revenue of $8 billion. Horowitz expects Morgan's investment banking fees to decline 30 percent from the last quarter.