Top US banks to reveal improved quarterly earnings

By Justin Baer in New York

Published: January 13 2011 20:48 | Last updated: January 13 2011 20:48

Big US banks are poised to report higher quarterly profits after the release of billions of dollars in reserves set aside for bad loans.

The fourth-quarter earnings season for the industry, which kicks off with results from JPMorgan on Friday, is expected to show improving bottom lines from a year ago when many financial institutions were still grappling with mounting credit losses.

Apart from the release of provisions for bad debts, loan balances increased during the last three months of 2010 after eight straight quarterly declines, according to Barclays Capital analysts.

Yet as the worst of the financial crisis fades further, investors’ attention has turned.

They increasingly are focusing on whether lenders are on track to meet new capital requirements, when they can begin to return surplus cash to shareholders in the form of dividend increases and stock buy-backs and how banks will boost revenue in the post-crisis era.

“Incremental guidance on how banks plan to navigate the current challenges, including the low interest rate environment, slow loan growth and the negative effects of regulatory reform will be the focal points,” wrote Moshe Orenbuch, an analyst with Credit Suisse.

“Separately, we expect management teams to address potential capital management plans.”

The Federal Reserve began this week with a new battery of stress tests on 19 large US financial institutions, including JPMorgan, Bank of America and Goldman Sachs, to determine whether their balance sheets were healthy enough to support plans to return capital to shareholders.

Some lenders may begin to raise dividends as early as this quarter, analysts have forecast.

“Capital is a really big issue here,” said Mike Mayo, a CLSA analyst.

Mr Orenbuch predicted that large banks have cut their loan-loss provisions by 50 per cent in the fourth quarter from a year earlier. This would help lift earnings per share for the large US banks by 30 per cent in spite of a revenue slump.

The Barclays Capital analysts said many banks were expected to report declines in fee income as new restrictions on credit card fees and a dearth of mortgage originations offset growth in investment banking and processing revenue.

Another weak quarter for fixed-income trading is expected to crimp results at the largest US banks, especially Goldman and Morgan Stanley.

Those two investment banks, along with Citi, BofA and Wells Fargo, report results next week.

Analysts predict JPMorgan earned $1 a share in the fourth quarter, up from 74 cents a year earlier, according to a Bloomberg poll. The bank aims to boost its dividend, which currently pays out 5 cents a share, in the second quarter, pending the results of the stress tests.