Rallying Banks Will Try To Vault Earnings Hurdle

Just days before the U.S. banking sector is set to issue fourth-quarter report cards, details came Tuesday about the billions in interest income being generated by the Federal Reserve�s balance sheet � to the degree that the central bank expects to pay the Treasury Department $76.9 billion in excess 2011 profits.

The share prices of those firms have been very much enjoying 2012 thus far, none more than Bank of America, up more than 23% after a year in which it lost nearly 60%. While BofA is the frontrunner, its peers have hardly been slouching, with Citigroup up 18.9% so far this year, Wells Fargo up 7.5% and JPMorgan Chase up 10.3%.

Those gains are facing a round of stiff tests ahead though, starting with JPMorgan�s fourth-quarter earnings report Friday and followed by the rest of the group, along with firms like Goldman Sachs Group and Morgan Stanley, next week.

David Trone, bank analyst at JMP Securities, says traditional banking like making loans to consumers and businesses should be relatively flat as loan growth remains muted and the impact of releasing loan loss reserves continues to peter out. The industry could see some headaches elsewhere though, particularly in capital markets and trading businesses that likely suffered in what was a challenging fourth quarter in financial markets.

Count Trone among those skeptical that any �panacea� is coming for the housing market out of Washington, which means the mortgage putback headache remains an overhang on Bank of America and the weak housing market lingers as a drag on the entire industry. (See �Huge Miss Looms For BofA.�)

While the takeaway from Trone is not to expect much in the way of fireworks out of bank earnings � he does say that the impact of new fee regulations under the Durbin Amendment will bear monitoring � he says the latest round of bank stress tests is another matter. (See �The Fed�s 2012 Stress Test Recipe.�)

Major U.S. banks were required to deliver capital plans to the Fed by Jan. 9, and the central bank is now in the process of evaluating those reports, which include proposals on how and when firms intend to return capital to shareholders.

�The Fed stress tests always have some surprises,� Trone says, and he expects Chairman Ben Bernanke and Co. to remain �supercautious� and err toward being more restrictive on capital return than not, largely �because of the capacity for the Eurozone to meltdown.�