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Banks Post Stellar Earnings, but Face Skepticism

NEW YORK (TheStreet) -- U.S. banks turned in a strong first quarter earnings performance, but face questions about whether they will be able to sustain the strong showing.

Out of 165 banks covered by Keefe, Bruyette & Woods, 80% beat or met consensus expectations in the first quarter and some 96% showed a profit.
JPMorgan Chairman and CEO Jamie Dimon has plenty of reasons for the grim face

Still, both large-cap and regional bank indices, which were outperforming the market before earnings season began, began to lag the market once JPMorgan Chase (JPM - Get Report) kicked off earnings season April 13.

Since that date, the S&P 500 is up 0.8%, the KBW Regional Banking Index (I:KRX) is up 0.7%, and the KBW Bank Index (I:BKX) is down 0.8%.

Weakness in Europe does not appear to explain the big banks' underperformance, since the iShares S&P Europe 350 Index (IEV) is up 0.72% since April 13.

The largest U.S. banks, however, including JPMorgan, Bank of America (BAC - Get Report), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) face pressure from the threat of ratings downgrades and an increasing drumbeat of public support for breaking them up .

Even if they don't break up, new regulations represent a real threat to powerhouses like Goldman and JPMorgan. Meanwhile, Bank of America, the giant hardest-hit by the U.S. housing crisis, has had to shrink substantially, raising questions about earnings potential.

Bank of America, the most volatile of the big bank stocks, may offer the best illustration of big banks' share performance in 2012.

Bank of America shares gained 65% through April 12, as management demonstrated they could strengthen the balance sheet without highly dilutive equity issuance. But assuming analysts are correct in saying the focus has now shifted to ongoing earnings potential, the picture isn't pretty. Bank of America shares are down 11% since April 13.

-- Written by Dan Freed in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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