If you hoped that the end of 2008 would finally bring relief to the banking sector, think again.

A growing chorus of analysts have been ratcheting down bank earnings estimates for the fourth quarter and into next year as the prolonged credit crisis cuts deeper into the U.S. and global economies.

"Next year is probably going to be worse than this year," says Nancy Atkinson, a senior analyst at Aite Group, an independent research and advisory firm. "What's become pretty clear is that this credit issue is deeper and broader than people expected and frankly hoped for. It's going to take longer to recover from it."

Richard Staite, a London-based analyst at Atlantic Equities, who covers the large U.S. banking institutions, wrote in a research note that the deterioration in the economy will have a "significant negative impact" on bank earnings in 2009 and 2010.

"The principal driver will be higher credit costs," Staite wrote in the Dec. 10 note. "However, there will also be some negative impact on revenues from lower volumes and lower fee income. Unlike in previous cycles, we do not expect to see an improvement in net interest margins because deposit competition is too intense."

This year, earnings within the

S&P 500

financial sector are expected to fall about 80% compared to 2007, according to Thomson Reuters. For the fourth quarter, Thomson estimates the sector will report combined earnings of just $6.7 billion, better than the sector's loss of $15.6 billion in the fourth quarter of 2007, but worse than the $57 billion of profit in the last quarter of 2006.

Already,

US Bancorp

(USB) - Get Report

recently warned that it was boosting its loan loss reserves, while

Fifth Third Bancorp

(FITB) - Get Report

slashed its dividend two weeks before the quarter ended to just a penny a share.

Regions Financial

(RF) - Get Report

also said late Monday that it plans to increase its loan loss provision above the level of net charge-offs to reflect the economic weakness and to sell an additional $500 million to $600 million of nonperforming assets.

2008 was characterized by further writedowns from securities backed by real estate, surging losses on residential mortgage loans and delinquencies and defaults in other asset classes, such as residential construction and credit cards as the economy worsened.

The turmoil escalated in the second half of the year as the banking landscape became permanently altered after

Washington Mutual

failed and two other large, mortgage-centric banks --

Wachovia

(WB) - Get Report

and

National City

(NCC)

-- were acquired after teetering on the brink of a similar fate.

Further,

Citigroup

(C) - Get Report

had to be bailed out after investors were concerned over the viability of the banking titan as it struggled to reverse its bad fortunes.

Capital raises were prevalent, whether through dividend slashes, private infusions or, later in the year, the U.S. Treasury's Troubled Asset Relief Program (TARP). Even the biggest banks -- whether they needed it or not at the time -- were told to take part in the government capital plan.

Both

Bank of America

(BAC) - Get Report

and

Wells Fargo

(WFC) - Get Report

took on large acquisitions this year. BofA, which acquired

Countrywide Financial

in July, is about to close on its purchase of

Merrill Lynch

(MER)

. Wells Fargo is about to complete its acquisition of Wachovia.

JPMorgan Chase

(JPM) - Get Report

this year acquired

Bear Stearns

and Washington Mutual's deposits and other assets.

Analysts say banks will most likely need to raise more capital next year as credit losses swell even further into the next problem asset classes,

credit cards

and

commercial loans

.

"We have no doubt that banking is about to enter a more traditional credit cycle, causing commercial business loans and real estate loan losses to escalate, which will lead to more volatility, risk of capital raises and possibly another round of dividend cuts," BMO Capital Markets analysts said in a Dec. 8 note. "There is very little impact to 2008 since most banks did not receive the TARP money in time to have to pay a

fourth quarter dividend, but the impact will be felt in 2009."

Those that look most vulnerable to cutting their dividend include

KeyCorp

(KEY) - Get Report

,

SunTrust Banks

(STI) - Get Report

and Fifth Third, among the large-cap names, and

Synovus

(SNV) - Get Report

,

Marshall & Ilsley

(MI)

,

The South Financial Group

(TSFG)

and

Umpqua

(UMP)

among smaller names, according to Todd Hagerman, an analyst at Credit Suisse.

"While we recognize the Treasury plan will likely give some regional banks time/flexibility to implement a more comprehensive capital plan, the preferred equity stakes do not replace the need for some banks to raise

common shares to ensure solvency over the near/intermediate term," he writes.

Fox-Pitt, Kelton Cochran Caronia Waller analysts expects more "US Bancorp-like reserve builds" over the next several quarters, according to a note.

US Bancorp said it could take charges of up to $1.7 billion to reflect provisioning, charge-offs and lower mortgage-backed securities valuations, at the Goldman Sachs conference in early December.

The provision brings US Bancorp's reserve-to-loan ratio to roughly 2% of loans.

For the three largest banks, Atlantic Equities' Staite estimates that loans that will have to be charged off in 2009 will jump to $66 billion, up from $35 billion this year. The analyst evaluated the banks' credit card portfolios, corporate loans, commercial real estate, home equity and mortgages.

"Credit card losses are directly linked to unemployment, which we assume will peak at about 9%," Staite wrote. "Corporate and commercial real estate losses tend to lag deterioration in the economy and have until recently remain below normal levels. However, we expect rapid deterioration through 2009 with bankruptcies becoming a regular news item."

Smaller banks could see cumulative losses of up to $69 billion, nearly 8% of the group's loan portfolios, according to a separate Fox-Pitt industry note. The analysts say so far the 42 regional banks covered have only incurred roughly $7.4 billion, or 11%, of those losses.

"Every bank in our universe has potential losses that exceed

loan loss reserves in our stressed scenario," writes Fox-Pitt analyst Al Savastano.

JPMorgan Chase could be an exception next year.

Ladenburg Thalmann analyst Dick Bove cut fourth quarter estimates on JPMorgan Chase, but raised estimates for the New York bank in 2009. While the bank faces "a tough fourth quarter," he writes in a Dec. 8 note, its $1.8 billion acquisition of Washington Mutual after it was seized by regulators in September "should contribute meaningfully to earnings," Bove writes.

"This was a sweetheart deal," he writes. "JPMorgan Chase acquired all of the positive aspects of Washington Mutual -- its deposits and branches -- and avoided taking on most of the negatives -- its mortgage business and capital obligations."

JPMorgan Chairman and CEO Jamie Dimon took a more cautious tone in a recent interview with

CNBC

.

"We took a lot of risk with Bear Stearns and WaMu," he said. "If home prices go down 25% it could cost us another $10 billion to $20 billion in WaMu. So we're not sitting here declaring a victory."

Robert Pavlik, the chief investment officer at Oaktree Asset Management, is hopeful that next year will bring a "somewhat return to normalcy" and that banks begin lending again. Oaktree owns shares of BofA, JPMorgan Chase and Goldman Sachs.

This year "was almost the worst case scenario," Pavlik says. "With that being said, three to five years out, most long-term investors will be saying I should have bought these bigger name banks."