(Updated with Jefferies earnings results)



) -- Analysts are beginning to raise estimates for first- quarter earnings for banks as the macro-economic environment improves.

On Thursday, Bernstein Research analyst John McDonald raised earnings estimates for 2012 and 2013 as well as price targets for six banks, including

Bank of America

(BAC) - Get Report



(C) - Get Report


JPMorgan Chase

(JPM) - Get Report


Wells Fargo

(WFC) - Get Report


Morgan Stanley analyst Betsy Graseck also raised estimates for the big banks as well earlier this week.

Bank stocks have rallied strongly in the first few months of 2012, as investor concerns on the capital adequacy of banks have abated following mostly positive stress test results. Expectations of greater clarity on regulations, reducing uncertainty on legal risks stemming from mortgage putbacks and potentially higher dividends and buybacks have boosted valuations.

However, analysts have warned that investor focus will now shift to earnings power from the balance sheet and given the sharp increase in prices in recent weeks, there is little room for disappointment.

Still, McDonald cites atleast three earnings drivers that had shown a marked sign of improvement in the first quarter.

Capital Markets Revenue Rebounds:

The improvement in the macro-economic environment has helped revive capital markets activity, particularly in fixed income, which has improved the outlook for the big banks. Equity trading volumes remain low, but fixed income trading could push total trading revenues to close to the strong levels witnessed in the first quarter of 2011, according to the analyst.

On Wednesday,


(JEF) - Get Report

became the first Wall Street firm to report first quarter earnings.

The firm, whose first quarter ends a month earlier than peers such as Goldman Sachs and Morgan Stanley, beat analyst estimates as fixed-income trading climbed 6.6 percent from a year earlier and more than doubled from the fourth quarter.

McDonald expects fixed income trading revenues could still surprise on the upside even after his upgrade.

Mortgage Refi Booms:

Mortgage origination volumes were expected to taper in the first quarter, but Bernstein notes that government programs such as the revised Home Affordable Refinance Program are buffeting refinance demand. Bernstein expects mortgage originations to increase 10% sequentially for banks, with the "majority of growth" flowing to Wells Fargo and JPMorgan.

Expense Cuts to Payoff:

Lower compensation levels and declines in cyclically-elevated mortgage and litigation costs should help drive expenses lower by 4% in the first quarter 2012 versus a 1% decline in revenues, according to Bernstein estimates. McDonald says he sees potential for "longer-term expense leverage in the coming years."

"We expect our coverage in aggregate to post y/y net income growth in 1Q as expense management and lower credit costs outshine the difficult revenue environment," the analyst wrote in a note. JPMorgan Chase is Bernstein's top pick, as is Wells Fargo, given their "clearly-defined levers for growth and meaningful capital return potential."

Here's a quick look at the revised estimates and price targets.

Bank of America

Bank of America is likely to post a first quarter earnings estimate of 18 cents per share, up from the 12 cents originally estimated. The analyst raised his earnings estimate for the bank for 2012 by 5 cents to 70 cents per share while the 2013 estimate was unchanged at $1.13. The 12-month price target was also raised to $11 from $9 earlier.


Citigroup saw its first quarter estimate raised by 23 cents to $1.30 per share. The bank is likely to post an earnings per share of $4.20 in 2012. The price target was raised to $45 per share.

JPMorgan Chase

JPMorgan is likely to post a first quarter earnings estimate of $1.19 per share. The analyst raised his earnings estimate for the bank for 2012 by 30 cents to $4.80 and by 75 cents for 2013 to $5.75. The 12-month price target is $56, implying a 22% upside from current levels.

The stock trades at less than 8 times its estimated 2013 earnings per share, the lowest among its peers, the analyst notes. Yet it is best placed from a Basel III capital perspective and is likely to return more capital to shareholders.

PNC Financial Services

PNC Financial

(PNC) - Get Report

actually saw a slight downgrade to its first quarter earnings estimate. The analyst now expects the bank to report an earnings per share of $1.18 compared to $1.22 per share earlier. He however left 2012 and 2013 estimates unchanged at $6.10 and $6.75 respectively. Bernstein has a 12-month price target of $72 on the stock.


U.S. Bancorp

(USB) - Get Report

is expected to report an earnings per share of 65 cents, a upward revision of 1 cent. Estimates for 2012 and 2013 were raised to $2.67 and $2.95 respectively. The analyst has a 12-month price target of $33 on the stock.

Wells Fargo

Wells Fargo saw its first quarter earnings estimate rise 8 cents to 79 cents per share. 2012 earnings estimates were revised to $3.25 from $3.10 previously, while 2013 estimates were bumped up by 10 cents to $3.60. Bernstein raised the price target on the stock to $40, implying a 18% upside from current levels.

--Written by Shanthi Bharatwaj in New York

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