NEW YORK ( TheStreet) -- Bank stocks have been on a roll since October of last year. That suggests fourth-quarter earnings, which kick off Friday with JPMorgan Chase ( JPM) will get closer scrutiny than they have for some time.

Goldman Sachs analysts argue that the newfound bullishness appears to be driven more by a positive macro outlook than issues specific to bank earnings. The analysts point out that consensus earnings estimates in the quarter "have been relatively neutral."

Certainly merger and acquisition activity, something we won't address in this report, has been a contributor to sector bullishness, particularly on weaker names perceived to be ripe for a takeover.

Take Synovus Financial ( SNV), for example, a frequently talked about acquisition candidate, up 36% since the start of December. That compares to a gain of 17% for SPDR KBW Regional Banking ( KRE) an exchange traded fund that tracks regional banks, and 14% Hudson City Bancorp ( HCBK), a conservative lender thought to be a more likely acquirer than a target.

When it comes to individual bank performance, however, there is reason for caution, according to the view of Goldman's analysts.

"Expectations appear to be elevated heading into 4Q earnings, with investors hoping for further clarity on mortgage put-backs, signs of loan growth expected to reemerge, continued credit improvement and updated capital deployment plans," Goldman analysts Richard Ramsden, Ryan Nash and Daniel Paris wrote in a recent research report. They highlighted JPMorgan Chase ( JPM), Bank of America ( BAC)and Citigroup ( C) as their top picks going into fourth quarter earnings.

Deutsche Bank analysts appear somewhat more bullish, on the other hand. They expect 10 of the 18 banks they follow to beat expectations, partly because they see credit improving faster than many analysts expect, and partly because they believe the bar has generally been set too low.

In a Jan. 4 report, Deutsche Bank highlighted Fifth Third Bancorp ( FITB), BB&T Corp. ( BBT), Hancock Bancorp ( HBAN), JPMorgan, Citigroup and SunTrust Banks ( STI) as companies where they see the biggest "potential for upside surprises, though they list their top picks as JPMorgan, Wells Fargo ( WFC) and TCF Financial Corp. ( TCB).

"Primary downside industry risks include declines in real estate prices and economic weakness. Upside risks include a faster-than-expected economic recovery, rising home prices and a more favorable political landscape," Deutsche's analysts wrote in their report.

Here's a breakdown of five key issues to watch out for as the banks report their numbers.

5. Fixed income Trading

It has been a long, prosperous run for bank fixed income departments, but there are clear signs of a shift. Even Pacific Investment Management Co., the world's largest bond manager, has been talking about this issue while moving to launch equity-oriented products.

The simple issue for banks that sell fixed income products is that interest rates have very little room to drop further, and plenty of room to rise.

Goldman Sachs is emblematic of the issue. The above chart of Goldman Sachs revenues shows that Sandler O'Neill analyst Jeff Harte expects a slight revenue drop in the fourth quarter for core fixed income trading. Goldman's own analysts are predicting the drop across the board for big banks, though they expect it to be offset somewhat by a rise in equities. Still, fixed income trading is typically the biggest contributor to most banks' revenues.

How they will replace this remains to be seen. Worse-than-expected weakness in this area for Goldman or any other big bank could give investors a scare.

4. Dividends

Why do bank investors care so much about dividends? After all, Berkshire Hathaway ( BRK.B) has never paid a dividend. Might it be that investors in banks don't trust management to invest their capital as wisely as the Sage of Omaha who runs Berkshire?

Whatever the reason, dividends have been a big focus of bank stock analysts of late. Analysts such as Fred Cannon, strategist at Keefe, Bruyete & Woods, have been advising investors to load up on banks that are expected to boost their dividends in 2011. Banks typically on that list include Wells Fargo, U.S. Bancorp ( USB), PNC Financial ( PNC) and JPMorgan Chase. Citigroup and Bank of America would like to raise their dividends, but it is not clear whether regulators will allow them to do so before 2012.

Still, regulators will have to sign off on the healthier banks as well. What if some banks start slowing down the dividend talk? Investors aren't likely to be happy.

3. Regulatory Clampdown on Fees

While working on financial services reform legislation last year, Democrats in Congress zeroed in on all the fees banks charge to customers, including merchants who accept their credit cards. Probably the legislative feature that has gotten the most attention in this area is the Durbin Amendment, which limits the fees banks can charge to merchants.

But another area that has gotten less attention is a new law requiring banks to get their customers to opt-in if they would like to receive overdraft protection--for a fee, of course.

The above chart shows the banks most impacted by a hit to service charge revenues.

2. Credit

As the chart above shows, credit has improved dramatically after a massive rise in nonperforming assets in 2009. Nonperforming assets refers to borrowers not making interest payments in a timely manner.

"Broadly speaking, we expect credit quality to show continued improvement in 4Q10 but think the pace at which credit strengthens will correlate with broader improvement in the economy and that there will be significant variance among the banks based on their exposures by loan type," Sandler O'Neill stated in a recent report.

The "significant variance" part could translate to some scary surprises from a few banks that may give investors the willies. Keep in mind that unemployment remains at 9.3%, and as The New York Times recently noted on its front page, banks are increasingly scared to foreclose on homeowners.

Are those loans being classified as non-performing? What about the economic effects of seemingly unsustainable spending by all those people who haven't been paying their mortgage? Put simply, the chart above looks a bit too neat and pretty as a picture of an improving economy.

1. Reps and Warranties

This refers to the potential for investors in mortgage backed securities (MBS) to "put back" the underlying mortgage loans to the banks that made them, on the argument that the banks made false representations to investors.

This was the big issue that drove a selloff in bank stocks in October, and indications early loss estimates were blown out of proportion has helped lead a recovery in the sector. As you can see from the chart above, Bank of America has more exposure than any other bank by far in terms of the total dollar impact.

Bank of America is also the most exposed to the issue as a percentage of earnings, at least among the big four banks. But considering that a widely-cited research report from Compass Point Research & Trading had estimated Bank of America's loss at $35.2 billion as recently as November, FBR Capital Markets' "high-end" estimate of less than $22 billion must feel like a big relief to investors.

-- Written by Dan Freed in New York.


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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