PREVIEW-Banks to post profits, but loan growth elusive

* Little new loan growth for banks in Q1

* Reserve reductions can only take banks so far

* Q1 seen tough for big banks.

By Joe Rauch

CHARLOTTE, N.C., April 8 (Reuters) – Investors looking for
loan growth and surging revenues at the biggest U.S. banks,
including Citigroup Inc (C.N: Quote, Profile, Research) are likely to be disappointed by
first-quarter earnings.

Banks have been generating most of their profits in recent
quarters from dipping into money they had previously set aside
to cover bad loans. Those reserve reductions make sense if
credit losses are stabilizing, which seems to be the case.

But banks cannot reduce their loan loss reserves forever,
and at this point profit growth must come from making more
money from loans and generating more fees, analysts said.

Boosting interest income from loans is tough when the
interest rates at which banks lend are so low, and loan demand
is still tepid. Fee income, meanwhile, is being threatened by
future regulatory changes.

“The revenue line will be key, that’s what most investors
will be focusing on,” said Jason Ware, senior equities analyst
at Albion Financial Group. The Salt Lake City-based wealth
manager oversees $650 million in client assets.

“The question everyone has is ‘Where does the top line go
from here?'” he said.

Some banks will be particularly hard hit by weak trading in
the quarter, as the stock market sagged on Middle Eastern
political upheaval, a Japanese earthquake and tsunami sent the
yen to record highs, and markets were broadly unpredictable.

But what many analysts are focusing on now is loan growth,
and data show the results may not be great. Bank loans
outstanding declined 0.9 percent in January and 6.8 percent in
February, according to a report from the Federal Reserve.

Commercial and industrial loans were on the rise, which
many analysts see as a positive sign, but meanwhile a broad
array of consumer loans — mortgages, credit cards — are
posting declines, so total bank credit outstanding are

The first quarter, analysts said, is typically the weakest
of the year for banks.

But the analysts with the best track records foresee a
quarter that was tougher than usual for many banks, according
to Thomson Reuters Starmine Smart Estimates. These “smart
analysts” believe other analysts are far too optimistic about
some banks, and only a little too pessimistic about the

The analysts that have historically been the most accurate
believe that results for Citigroup, Morgan Stanley (MS.N: Quote, Profile, Research) and
Goldman Sachs Group Inc (GS.N: Quote, Profile, Research) will fall short of analysts’
average estimates, according to Starmine Smart Estimates.

Starmine’s analyst estimates, for example, indicates Morgan
Stanley may miss estimates by as much as 22 percent.

The Starmine “smart analysts” are projecting that Bank of
America Corp (BAC.N: Quote, Profile, Research), JPMorgan Chase, and Wells Fargo & Co
(WFC.N: Quote, Profile, Research) will beat broader estimates by a fairly small margin.
BofA is projected with the largest earnings beat at 7.7 percent
above the average estimate, Starmine estimates.


For even the largest U.S. banks, interest income from loans
is a key driver of earnings growth, but the total number of
outstanding loans continues to stagnate, even as banks appear
to have solved many of the credit issues that have dogged them
for the last three years.

The fees that banks get from processing debit cards will
likely be limited by provisions of the Dodd-Frank financial
reform bill, which will pressure fee income for banks in the

Marty Mosby, bank analyst with Guggenheim Securities, said
he is expecting banks will show a 10 percent decline in total
charge-offs of bad loans, with some showing charge-offs
shrinking by as much as 50 percent.

While that will be a boost to earnings as banks continue to
release reserves protecting against loan losses, Mosby said he
does not expect loan growth for the next few quarters.

“This will be a different model than what we’re used to
seeing, based more on profitability, consolidation and
efficiency, rather than outright organic growth,” Mosby said.

In the fourth quarter of 2010, loans at U.S. banks totaled
$7.38 trillion, the lowest level since the fourth quarter of
2009 and off from the peak of $8 trillion in the second quarter
of 2008, FDIC data show.

Long term, investors may need to adjust their expectations
for the industry’s earning ability. Mosby said banks that were
once able to produce a 20 percent return on shareholder equity
may not be able to top 15 percent.

Bank’s return on equity could dip to as low or 10 or 12
percent, he added.

Halle Benett, a banker in charge of financial institutions
merger advisory at UBS for the Americas, said: “I do think
you’ve got to come to a decision as to what is generally
accepted profitability for banking institutions and I’m not
sure the cycle we came out of was the long-term norm.”
(Reporting by Joe Rauch; Additional reporting by Clare Baldwin
and Lauren LaCapra in New York; Editing by Gary Hill)

PREVIEW-Banks to post profits, but loan growth elusive