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Lenders less likely to count funds from reserves in earnings

JPMorgan Chase & Co. is expected to earn $1.15 per share for the first quarter on revenue of $25 billion. JPMorgan Chase & Co. is expected to earn $1.15 per share for the first quarter on revenue of $25 billion. (Scott Olson/ Getty Images)
By Pallavi Gogoi
Associated Press / April 13, 2011

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NEW YORK — A lot of big banks had a free ride to higher earnings the last few quarters. That could be ending soon.

As the economy gets better, investors want to see if banks can improve their core businesses of writing loans, issuing credit cards, and advising on corporate deals.

Several major banks including Wells Fargo & Co., JPMorgan Chase & Co., and Citigroup Inc. recorded substantial gains in income in recent quarters from accounting adjustments in their loan loss reserves.

Those adjustments, which are legal, reflected a decline in the likelihood that their borrowers would default on loans. That allowed banks to release cash from reserves that had been set aside to cover future losses, which increased their income.

Of course it’s a good thing in the long run for banks and the overall economy that borrowers are less likely to default. Now analysts are saying the benefits from these kinds of reserve adjustments may be winding down as the economy continues to improve.

Jason Goldberg at Barclays Capital suspects that some banks may have overdone it with the adjustments. “We wonder if some companies stretched to put up better results” in the fourth quarter, Goldberg wrote in a recent report.

Income at banks with investment banking operations will probably get a boost from a pickup in corporate deals in the first quarter. Consumers are also spending more, which means banks are probably earning more from charging interest and fees on credit cards. Increased demand from consumers also tends to lead to more borrowing from businesses.

But trouble in the housing market is sure to weigh on bank earnings. A sharp increase in mortgage rates over the past six months could hold back income from issuing new mortgages and refinancing existing ones. The average rate on a 30-year mortgage rose to 4.87 percent last week from 4.32 percent at the end of September, according to Freddie Mac. JPMorgan’s banking analyst Vivek Juneja said he expects the largest drop in income at banks to come from lower fees tied to new mortgages and a drop in the number of refinances.

Meanwhile, all 50 state attorneys general are continuing their investigation into allegations that banks bungled foreclosure proceedings. Analysts expect banks to pay fines, but it’s unclear how big they will be.

Higher investment banking revenue should boost earnings at some banks. Global investment banking revenue reached $19 billion in the first quarter, up 19 percent from the first quarter of 2010, according to the research firm Dealogic. Global mergers and acquisitions volume totaled $809 billion in the first quarter, up 28 percent from the same period last year.

Here are the forecasts of analysts surveyed by FactSet:

■ JPMorgan Chase will be the first bank to report earnings today. It is expected to earn $1.15 per share for the first quarter on revenue of $25 billion. One of the healthiest banks, JPMorgan increased its quarterly dividend by more than any other, to 25 cents a share from 5 cents.

■ Bank of America Corp. goes next on Friday. The bank is expected to report earnings of 27 cents per share on revenue of $26 billion. It was the only one of the four largest banks that wasn’t allowed to increase its dividend.

■ Citigroup reports on Monday. The bank is expected to report earnings of 9 cents per share on revenue of $21 billion.

■ Goldman Sachs Group Inc. reports on Tuesday. It is expected to earn $2.39 per share on revenue of $10 billion.

■ Wells Fargo is expected to report earnings of 66 cents a share on revenue of $21 billion on Wednesday.

■ Morgan Stanley, which reports next Thursday, is expected to earn 42 cents a share on revenue of $8 billion.