NEW YORK (CNNMoney.com) -- The big three banks are set to report a sluggish third quarter as disappointing equity underwriting combined with higher rates and increased competition for deposits could take their toll on profits.

Citigroup (Charts), JPMorgan Chase (Charts) and Bank of America (Charts) are slated to report their third quarters in the coming week, and analysts aren't looking for any major surprises to the upside, unlike some of the investment banks that reported unexpectedly solid earnings a few weeks ago.

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Goldman Sachs (Charts) and Lehman Brothers (Charts) were among the investment banks that report on a fiscal quarter and wowed Wall Street with strong merger and acquisition activity and a robust pipeline of equity offerings, despite the slowdown in the economy.

But analysts expect the big 3 banks to show some weakness in third quarter capital markets activity, as equity underwriting succumbed to a seasonal slowdown in the summer months.

According to earnings tracker Thomson First Call, a consensus of analysts expect Citigroup to report third-quarter earnings of $1.03, while JPMorgan could post profit of 86 cents a share and Bank of America could report income of $1.15 a share.

Piper Jaffray analyst Andrew Collins expects investment banking revenue for Citigroup to fall to $1.12 billion - a 10 percent decline from the unusually strong second quarter and down about 6 percent from last year.

JPMorgan, likewise, is expected to show a 16 percent quarterly drop in investment banking revenue and a one percent drop from last year. while Bank of America's investment-banking revenue should have fallen 20 percent from the second quarter and 6 percent from 2005, Collins said.

Equity underwriting and weaker trading in the third quarter are expected to have been the major drags on capital markets in the third quarter, although M&A activity - while down from the previous quarter - remained relatively solid and could provide some boost for the banks, analysts said.

But banks are in for a rough road ahead as the inverted yield curve continues to put pressure on net interest margins and profitability. Banks and securities firms tend to get hit hard when rate spreads narrow since they borrow money at short-term rates and lend at long rates.

A flat yield curve, therefore, squeezes margins and an inverted one hurts a bank's profits.

David Hendler, an analyst at CreditSights, said that the ongoing pricing war among retail banks to attract more deposits will only add to margin pressure.

"Deposit costs continue to move higher with most all banks experiencing similar pressure from depositors shifting balances to higher-yielding accounts," Hendler said in a research note. "Deposit pricing was among the most vicious in the Big Bank arena as they compete in many overlapping markets, especially on the West Coast and in the Northeast."

Smaller banking rivals and high-yield online bank accounts that pay over 5 percent interest on deposits are particularly making it difficult for banks to attract and, in some cases retain, deposits unless they raise rates as well.

That propelled Citigroup to launch its online banking Citibank Direct in May. While CEO Chuck Prince has been enthusiastic about the online bank's ability to attract deposits, some of those deposits are coming from current Citigroup customers - a cannibalization of sorts that may, in fact, be putting pressure on profits.

Bank of America, however, is in better shape than its peers, said Dick Bove, analyst at Punk Ziegel & Co. Bove said Bank of America, with its 10 percent market share on deposits, isn't aggressively competing by raising rates.

"They've convinced customers it makes sense to do business with them because of the suite of products they offer," he said. "They may be losing some market share by keeping rates below the market but they're not getting any real margin squeeze either."

But Bank of America has seen a rise in credit card delinquencies, raising some concerns on Wall Street that credit quality - which has held up remarkably well over the past year - could finally be taken a turn for the worse. And that brings up the possibility of more loan losses to come.

Merrill Lynch analyst Guy Moszkowski said Morgan Stanley's (Charts) Discover unit reported a significant increase in it loan loss provisions and banks such as Citi and JPMorgan may follow suit.

While third-quarter earnings are largely expected to fall within analysts estimates, Wall Street is keeping a close eye on guidance for the fourth quarter and 2007.

CreditSights' Hendler said banks are likely to issue cautious outlooks for the coming quarters due to interest rate pressures and concerns that consumer lending may be in for a slowdown.

"We think the full implications of the cooling mortgage market have not yet been experienced by the banking sector," he said.

Hendler said banks may run into difficulties in 2007 due to lower mortgage origination income, less home equity lending growth and an increase in foreclosures and losses from single-family borrowers.

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• Fewer fees could mean more deposits