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Bank Stocks' Fed 'Destruction' Will Hit Hard in 2013

A way for Wells Fargo and other large cap banks to cushion against falling earnings would be to significantly ramp up loans, which carry an earnings opportunity even at 4% to 5% rates compared with low cost deposits, notes Cannon. In comments made to the press after announcing QE3, Fed chairman Ben Bernanke noted that loan growth has been a missing element at large banks, even as recent quarterly earnings were buffeted by rising mortgage refinancing's.

Still, as CFO Sloan indicated on Tuesday, extending loans at record low rates carries a big risk if rates do rise sharply, signaling that bank CFO's and investors face a bit of a guessing game on the impact of Fed policy, that's tempering animal spirits.

Meanwhile, some lenders like Citigroup may have seized upon four years of beneficial Fed policy to prepare for what may be an industry-wide earnings drain.

Bush of NAB Research notes low rates have helped Citigroup carry non-performing assets at a low cost, as the bank purges its balance sheet of toxic assets. Even after divesting $600 billion of $850 billion in CitiHoldings toxic assets since 2009, the unit still absorbs 25% of the bank's capital but represents just 10% of assets. Without low rates, it could have been much worse and because of dogged divestiture and reinvestment efforts by CEO Vikram Pandit, Citigroup may be in a uniquely strong position were rates to remain low for a long period of time.

Fearing a third Fed easing effort would signal the U.S. is headed into a Japan-like era of low growth, interest rates and bank earnings, Sinegal of Morningstar highlights Citigroup's emerging market exposure as an opportunity. It may be a differentiating factor in coming years as Sinegal's not very optimistic on the outlook for U.S. rates and their impact to bank earnings.

"I wouldn't be surprised if the next three years look a lot like the last three years," says Sinegal.

For more on bank earnings prospects, see why preferred securities will highlight banks braced for growth and why Wells Fargo got the boot from Goldman's Conviction Buy list

-- Written by Antoine Gara in New York

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