It's show-me time for the banks.
The nation's biggest financial institutions are getting set to issue second-quarter earnings reports this week.
will lead the profit parade off Wednesday, to be followed in short order by
Bank of America
, among others.
The big banks have been showing solid numbers, but shares across the sector have been hit this year by worries about possible credit losses and slowing revenue gains. Smaller regional banks have struggled to overcome loan losses fueled by a declining housing market.
Analysts expect the big banks to post strong gains, bolstered by a boom in M&A advisory business and the recent record run in the stock market.
The large banks are not "tied in like many of the regionals to spread income and you have a good balance of fee-generating activities," says Frank Barkocy, the director of research at Mendon Capital Advisors and the former director at hedge fund manager, Keefe Managers. "They're less vulnerable to major negative surprises in the marketplace."
In the first six months of the year, JPMorgan Chase and Citi together generated about $6.5 billion from global investment banking activities, according to Dealogic. JPMorgan Chase brought in $897 million in investment banking fees from
"The folks that have capital markets exposure will do well ... because it's been a strong second quarter," says Meredith Whitney, an analyst at CIBC World Markets.
Want more? Check out TheStreet.com TV video. Laurie Kulikowski takes a closer look at the latest earnings reports in the battered banking sector.
Analysts are predicting Citi will earn $1.13 a share, up 8% from a year earlier, while earnings at JPMorgan Chase are expected to rise 9%, to $1.08, according to Thomson Financial.
Analysts aren't quite as optimistic for the two Charlotte lenders. BofA is expected to earn $1.20 a share, 2% lower than a year earlier. Wachovia is expected to make $1.22, up a meager 3%.
Investors will be tuning in to hear what the big banks have to say about the pipeline for investment banking, as well as proprietary trading and client risk, some say.
They will also want to know whether tightened credit standards -- both on the consumer and corporate sides -- will affect the big banks' businesses.
While large-cap bank earnings should fare better through their diversified businesses and strong balance sheets, some observers worry that the revenue banks make off of securitizing mortgages and other loans -- which generated fat profits for the banks in recent years -- could fall.
Bank stocks were pulled down in the second quarter amid jitters about how interest rate hikes would affect the banks.
Several regional banks warned that earnings would come in lower due to troubled residential and construction loans as a result of a declining housing market in the Midwest.
The KBW Bank index fell 0.9% in the quarter, while the
"It was undeniably a challenging second quarter for financial stocks. A spike in long-term rates fueled investor concern about the implications of rising rates and also renewed fears of credit deterioration," writes Melissa Roberts, an analyst at Keefe Bruyette & Woods, in a recent note.
"It gives people a lot of jitters about second-quarter earnings," Roberts said in an interview. "Once we get through this quarter we will get a better sense of where we are headed from here."