8After a big improvement in 2012, banks are about to show what the future of an industry ravaged by the 2008 financial crisis will look like.This week, many of the nation's top banks will disclose fourth-quarter 2012 profits and give their first glimpse of prospects for the new year. In all, 22 of the 37 S&P 500 companies expected to report fourth-quarter earnings this week are from the financial sector, according to FactSet.
One early sign: Wells Fargo reported Friday that fourth-quarter profit rose 24%. The stock fell because investors were disappointed that low interest rates and high expenses kept profits from rising more.
The financial sector overall is expected to post quarterly earnings growth of 8.7%, but excluding insurance companies whipped by Hurricane Sandy losses, growth will exceed 30%, according to the average forecast of analysts surveyed by FactSet. Commercial banks are projected to report 39% growth in earnings.
Among the big financial firms reporting this week are JPMorgan Chase and Goldman Sachs on Wednesday, Bank of America and Citigroup on Thursday and Morgan Stanley on Friday.
JPMorgan and Citigroup are forecast to report double-digit gains in fourth-quarter revenue, besting by far the projected 1% revenue growth for diversified financial firms overall, according to FactSet,
Banks below the top six megabanks are expected to report a 17% increase in full-year operating profits, with another 8% jump in 2013, according to research firm Keefe, Bruyette & Woods.
Loans are getting more available now that banks have shored up their capital. And with loan demand still not growing as fast as banks' piles of cash, industry analysts predict banks are likely to raise dividends and buy back shares as they try to keep up returns to investors in a period of growth slower than during the last decade.
In the last year, the S&P 500 Financial index is up 23%, trouncing the 14% gain of the S&P 500 overall.
"What we saw through 2012 were recovery years, and 2013 will give us more of a look at the new normal,'' said Nancy Bush, an analyst at SNL Financial. "What we hope to see is that a recovery that has been simmering starts to bubble.''
There will be flaws in the picture, Wells Fargo's report and market reaction suggest.
San Francisco-based Wells said commercial loans rose 9%. That wasn't enough to match growth in deposits, making Wells shovel money into low-yielding government securities and mortgages. That pushed down its net interest margin -- the difference between the rate at which it takes in money and the interest it collects on its loans and other investments. Other banks face the same problem, said analyst Fred Cannon at Keefe Bruyette & Woods.
"Banks are working hard to stay even on profitability, and struggling for growth,'' Cannon said.
One effect of margin pressure: More layoffs.
American Express said last week it will cut 5,400 jobs, mostly in its travel services unit, and Morgan Stanley is shedding 1,600 jobs. Citigroup is implementing 11,000 layoffs it announced last month.
New regulations will also mean some banks fire bankers and traders and add lawyers to manage compliance, said Erik Oja, an analyst at Standard & Poor's Capital IQ. Banks announced fewer layoffs in 2012 than in 2011, says outplacement firm Challenger, Gray and Christmas.
"The layoff situation is different at every bank,'' Oja said.
But Wells Fargo CEO John Stumpf said on a conference call with analysts Friday that what will really propel new profit growth is rising interest rates. That, and a recovery that lets new demand for construction and commercial loans replace an expected drop in mortgage refinancing, he said.
Before that happens, banks will see fourth-quarter results trimmed by lawsuit settlements to resolve claims of fraud in mortgage origination and servicing. Wells Fargo took a $644 million charge to pay for its share of a 10-bank, $8.5 billion deal that resolved a federal review of foreclosures done during 2009 and 2010.
Separately, Bank of America agreed to an $11.6 billion settlement with Fannie Mae to resolve claims that it sold the government-backed mortgage financier substandard loans.
