NEW YORK—Investors are bracing for a rough earnings season from banks.
Turbulence in stock and bond markets, combined with waning confidence among business and consumers, hurt banks' business in the third quarter. IPOs were shelved, companies postponed plans to sell bonds, and acquisitions were put on ice. Consumers also held back on spending.
The sharp drop in business activity hurt banks, which rely on borrowing by companies and consumers to make money. Most Wall Street analysts lowered their earnings estimates for large U.S. banks.
The intense global market turmoil during the third quarter has already taken a toll on bank stocks. The KBW index of leading banks plunged 27 percent during the third quarter.
Howard Chen, an analyst at Credit Suisse, estimates that mergers and acquisitions volume in the third quarter plummeted 34 percent from the prior quarter, while stock underwriting sank 54 percent.
Chen said it was the weakest quarter for total debt issuance since the financial crisis. Overall debt and loan underwriting volume fell 27 percent from the previous quarter, leading to a 35 percent decrease in fees.
Worries about Europe's debt problems continued to hang over U.S. banks in the third quarter. Investors expect bank executives to offer more clarification on how exposed the banks are to the crisis when the banks host conference calls to discuss their earnings.
Most large banks have disclosed the amount of European debt they own, but it's unclear how much exposure they have via more complex derivatives trades they conduct with their counterparts in Europe. For example, U.S. banks sell financial contracts that act as insurance to protect against defaults on riskier European bonds.
Growth in U.S. business loans is expected to be a bright spot. According to the Federal Reserve, corporate borrowing grew rapidly during the third quarter. At the 25 largest banks by assets, commercial and industrial loans grew 15 percent, the Fed reported.
Here are the consensus earnings forecasts and highlights for each of the large U.S. banks from analysts surveyed by FactSet:
-- JPMorgan Chase & Co. reports Thursday. It is expected to earn 96 cents per share on revenue of $23.6 billion. Considered one of the strongest and most stable among the large banks, analysts expect JPMorgan to grab market share from competitors. However, it might be forced to once again to put aside more reserves to offset costs from increased litigation and repurchasing poorly written mortgage loans.
-- Citigroup Inc. reports on Monday, Oct. 17. The New York bank is expected to report earnings of 84 cents per share on revenue of $19.3 billion. Barclays Capital analyst Jason Goldberg reduced his estimates by 11 cents because of weakness in investment banking and the increasingly uncertain global economy.
-- Wells Fargo & Co. also reports Monday. The San Francisco bank is expected to earn 72 cents a share on revenue of $20.2 billion. Wells has one of the largest mortgage origination businesses of all banks and will likely have benefited from lower mortgage rates. Rates on 30-year mortgages hit a historic low of 4.08 percent in the third quarter.
-- Bank of America Corp. reports Tuesday, Oct. 18. Analysts expect the Charlotte, N.C. bank to report earnings of 26 cents per share on revenue of $25.8 billion. The bank has been battling lawsuits related to mortgages. It paid out $12.7 billion to settle claims in the first half of the year. Its Merrill Lynch investment banking and brokerage division helped lift earnings in the first half of 2011, but Merrill is unlikely not be of much help this quarter because of low trading volumes.
-- Goldman Sachs Group Inc. also releases results Tuesday. It is expected to earn 23 cents per share on revenue of $5.3 billion. Chen, of Credit Suisse, is more negative than other analysts on the New York bank. Chen wrote in a report that the difficult market conditions and low appetite for risk among investment banking and trading clients could lead to a third quarter loss of 70 cents a share. If that happens, Chen notes that it would be only the second quarterly loss for Goldman since the bank went public in 1999.
-- Morgan Stanley will report on Wednesday, Oct. 19. Analysts estimate it will earn 31 cents per share on revenue of $7.5 billion. A sharp downturn in the investment advisory business is expected to hurt Morgan Stanley. Wells Fargo analyst Matthew Burnell lowered his earnings estimate to 26 cents from 56 cents per share because of weakness in trading. Executives are expected to shed more light on the bank's exposure to European debt and derivatives during their conference call. Worries about Europe have spooked Morgan Stanley investors lately, helping send the stock down 44 percent this year.