Updated from 1:10 p.m. EDT

At least one analyst thinks the positive trends that have supported bank stocks will prevail through the current earnings season.

Catherine Murray, an analyst at J.P. Morgan, is forecasting second-quarter earnings to grow 8% for the bank group as a whole. And she thinks traditional spread-driven -- or interest rate sensitive -- banks could post even stronger results as a result of continued steepness in the short end of the yield curve and solid mortgage banking revenue. (Such steepness implies low borrowing costs for banks and a continuation of profitable lending.)

"We expect banks' second-quarter earnings to be solid, marked by continued strong top line growth and an improving outlook for asset quality," said Murray, in a research note on Tuesday.

That's good, she argued, given the paucity of alternatives. "Bank stocks should continue to benefit from positive earnings cyclicality without experiencing significant valuation pressure from rotation into other economically sensitive sectors," Murray wrote. She thinks the S&P Bank Index's forward P/E could move to 14 or 15 over the next six months from 13.5, where it is now.

Performers

Since the beginning of the year, the bank index is up 7%, compared to a 15% decline in the

S&P 500

. Over the past few years, regional banks have traded at a P/E of 13 or 14.

Though Murray predicts non-performing assets will be up 10% sequentially in the second quarter, reflecting

WorldCom

(WCOME)

and other credit quality issues, she believes that they will peak in June.

"Good news on the outlook for asset quality should be the highlight for the quarter," Murray said.

David Hendler, an analyst at CreditSights, an independent research firm, says that while non-performing assets will not accelerate at the rate they had been, they will still be at levels of concern. "The economy will be sluggish at best, which should maintain pressure on credit quality," he said.

Recent evidence has shown consumers are not spending as much as they had been in the past, prompting automakers

Ford

(F) - Get Report

and

General Motors

(GM) - Get Report

to reintroduce zero-percent financing.

Rate-Sensitive

Of further concern to Hendler is the extent to which banks have interest rate risk. In 1994, banks lost a lot of money when the yield curve flattened, a situation Hendler fears may happen again.

"Banks have been making increasingly larger bets on interest rates," Hendler said. "But when the Fed reverses its policy, the banks that are enjoying enormous gains will be having enormous losses."

Opinions on when that will happen vary. On Tuesday, Goldman Sachs put out a research note saying it does not expect the Federal Reserve to tighten until the second half of 2003, as a result of a slowdown in consumer spending, weakness in equity prices. It also cited the Fed's own study of the Japanese experience, which suggests that a Central Banks should err on the side of over-accommodation.

Meantime, Murray said she is expecting particularly strong second-quarter results from

Fifth Third Bancorp

(FITB) - Get Report

,

Wells Fargo

(WFC) - Get Report

, and

Cullen Frost Bankers

(CFR) - Get Report

.

She sees good 2003 earnings potential for

Bank of America

(BAC) - Get Report

and

KeyCorp

(KEY) - Get Report

.

The analyst said there is downside risk to the valuations of market-sensitive banks, such as

Northern Trust

(NTRS) - Get Report

,

Mellon Financial

( MEL),

Bank of New York

(BK) - Get Report

, and

State Street

(STT) - Get Report

.

And Murray doesn't think that banks with larger amounts of highly leveraged and telecom related credits -- which includes

Citigroup

(C) - Get Report

,

FleetBoston

( FBF),

Bank One

(ONE) - Get Report

, and possibly

Wachovia

(WB) - Get Report

-- will be able to call the turn in credit.