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Bank's Earnings Will Be All About Outlook

NEW YORK ( TheStreet) -- When JPMorgan Chase (JPM - Get Report) and Wells Fargo (WFC - Get Report) kick off bank earnings season on Friday, all focus is likely to be on how rising interest rates have affected their outlook for the second half of 2013.

Analysts expect banks to report a reasonably good quarter when compared to the second quarter of 2012, which was a tough trading quarter for the big banks, especially JPMorgan, which was hit by the "London Whale" derivative trading losses.

The consensus estimate among analysts polled Thomson Reuters is for JPMorgan to report earnings of $1.44 a share on revenue of $24.84 billion. The bank reported earnings per share of $1.21 on revenue of $22.89 a year earlier.

Wells Fargo is forecast to post earnings of 93 cents a share on revenue of $21.22 billion. In the year-ago quarter, the bank reported EPS of 82 cents on revenue of $21.29 billion.

Still, a sharp and sudden rise in interest rates late in the second quarter after the Federal Reserve indicated that it may wind down its big bond purchase program has jolted expectations.

"This won't be a blowout quarter," KBW analyst Chris Mutascio told reporters in a presentation on Tuesday.

The market rate on10-year U.S. Treasury bonds rose from a low of 1.63% on May 2 to a high of 2.74% on July 5. A sharp rise in long-term rates has an effect on many facets of the banking business, including mortgage production, fixed income trading and bond portfolio valuation.

While analysts had already begun to factor in slowing mortgage banking income for banks as the refinancing boom tapers, the volatility in fixed income trading and the impact of rising rates on bond portfolios of banks have caused analysts to adjust second-quarter estimates more recently.

Trading volumes were likely strong, but banks may have had to mark down their portfolios to reflect the impact of rising rates.

Unrealized gains on "available-for-sale" securities dropped by more than $20 billion through June on a net aggregate basis, according to FBR Capital analyst Paul Miller. This won't affect earnings but could result in a 1% to 2% hit to book value, which could be a negative for banks lean on capital.
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