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Big 4 Bank Earnings: The Gift of Low Expectations (Update 1)

Updated from 8:13 a.m. ET with additional detail on revenue and earnings comparisons for the "big four" U.S. banks.

NEW YORK ( TheStreet) -- If there is one silver lining for banks this earnings season, it is the fact that expectations are pretty low.

That should prevent any nasty surprises for shareholders when banks report their third-quarter results in the next couple of weeks.

Analysts have already slashed estimates ahead of third-quarter earnings announcement, factoring in substantially weaker trading revenues, the meltdown in mortgage refinancing volumes, tepid loan growth, flat net interest margins and for some banks, particularly JPMorgan Chase (JPM - Get Report), higher legal costs.

According to the Financial Times, more than $1 billion has been wiped off earnings estimates for Wall Street's five biggest banks in the past month.

Bank stocks have also underperformed in recent months , although year-to-date, the KBW Bank Index still outpaces the broader S&P 500.

Sentiment has changed since the beginning of the year when the revival in housing and the overall improvement in the economy buoyed bank stocks, even though earnings estimates had not really changed.

Investors were betting that an improving economy will lead to higher interest rates which would in turn lift bank profitability.

But with the Federal Reserve deciding to continue bond purchases instead of tapering the program, the outlook for a rise in short-term rates has dimmed, quashing expectations for an expansion in net interest margins or NIMS.

Net interest margin is the spread between the average interest earned on loans and investments and the average interest paid on deposits and borrowings. For so-called asset sensitive banks, rising interest rates are an advantage as banks can raise interest rates more quickly on loans and investments, while their cost of borrowing adjusts with a lag.

Not only are margins likely to remain flat or slightly lower for most banks, loan growth has been disappointing amid a lackluster economic environment.

The rapid rise in interest rates since May has crushed the mortgage refinancing market. JPMorgan CFO Marianne Lake has said the bank expects its mortgage origination business to make a loss in the third quarter.

Wells Fargo (WFC - Get Report) also said that it is cutting jobs to adjust to the lower volumes as refinancing activity shrinks. It has announcd 4,800 layoffs so far this quarter.
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