US banks to post rise in profits, but investment income slumps

Mixed third-quarter predictions blamed on 'lacklustre trading environment'

Wall Street is braced for mixed results from the big US banks next week as plunging investment volumes hit third-quarter earnings and the furore over illegal housing foreclosure rages.

Citigroup will kick off tomorrow, followed by Bank of America and Goldman Sachs on Tuesday and Morgan Stanley on Wednesday.

It is thought that all four will report higher than expected profits because of falling one-off charges, but the results will still disappoint as investment banking divisions are expected to report huge income slumps by as much as 30 per cent. The banks' earnings per share estimates have all been cut by analysts forecasting soft revenues from sluggish trading, poor performances in fixed-income, currency and commodities and equities divisions.

At Citigroup – whose long standing battle with Terra Firma boss Guy Hands over his purchase of music label EMI restarts tomorrow – earnings per share is forecast to be 6¢. Morgan Stanley's expected earnings per share has been slashed from 60¢ to between 15¢ and 20¢ and banks analysts at Oppenheimer have lowered Bank of America's and Goldman Sach's projected earnings per share to 9¢ from 20¢, and to $3 from $4.48 respectively. Oppenheimer said its bearish outlook can be "traced to the lacklustre trading environment that we were all too familiar with this past summer".

Richard Staite, an Atlantic Equities' US banks analyst, said: "The only positive will be the continued decline in impairments [one-off charges] driven by the decline in credit losses. It is surprising that although unemployment has remained high the large banks' credit card losses are coming down rapidly."

JP Morgan set the profitable tone last week, beating analysts' predictions with a profits rise to $4.4bn, up from $3.6bn in the same period last year, but investment trading income slumped by a third.

Mr Staite said: "US companies continue to pay off loans so banks' loan portfolios are shrinking putting pressure on top-line revenues. In a low-interest environment, this will not have a positive effect on the large US banks which will continue to shrink over the next three to four years."

He added that growing concern over the mortgage foreclosure process, where details of improper implementation are emerging, is causing uncertainty. JP Morgan has said it was reviewing 115,000 foreclosure cases.

Declining revenues and rising political pressure will increase the strain on banks looking to award large bonuses. There are fears banks may cut jobs rather than bonuses. Analyst Meredith Whitney estimates 80,000 jobs could be lost in the next two years.

US banks may also indicate this week their responses to capital requirement changes. UK banks are already gaining an advantage with Standard Chartered announcing a £3.3bn rights issue last week and growing talk that Barclays will follow suit.