Big banks poised for profit renaissance

NEW YORK (CNNMoney.com) -- This earnings season, investors won't have the big banks to kick around anymore.

After a bumpy end to 2009, all six of the nation's largest financial institutions are expected to report a profit for the first quarter.

Even Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500), long considered the laggards of the group, are both expected to report slim profits of less than a $1 billion each, after hemorrhaging a combined $13 billion last quarter as a result of paying back bailout funds to taxpayers.

The latest earnings season, which begins in earnest next Wednesday when JPMorgan Chase (JPM, Fortune 500) delivers its results before the opening bell, would represent the first time in a long, long while that all of the nation's top financial institutions have collectively recorded a profit.

All of the big banks, of course, were profitable during the second quarter of 2009. At the time however, analysts discounted the performance, suggesting instead that lenders dressed up their numbers ahead of the federal government's much-ballyhooed stress-test program for top banks.

This time around however, top lenders' results seem a little more convincing.

What's driving results

For starters, credit trends at the consumer-focused banks have improved modestly in recent months.

Firms like Chase and Bank of America, two of the country's biggest credit-card issuers, each reported a modest decline in early-stage delinquencies during the months of January and February.

Top banks have also offered some hope about the direction of credit losses going forward. Last quarter, a number of lenders, including Citigroup, pared back on their loan loss provisions, or funds earmarked for bad loans.

Analysts suggest that trend could persist this quarter, as banks get more comfortable about future loan losses related to the consumer, particularly as the nation's unemployment rate starts to moderate.

"What I think you will see is generally more stabilization on the consumer side," said Carole Berger, financial services strategist for Luna Analytics, a division of Soleil Securities.

Traditional Wall Street firms, on the other hand, namely Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500), have been buoyed by a recent spate of corporate deals, while their corporate debt underwriting activity has been off the charts.

The volume of corporate high-yield debt issued worldwide surged to $75.5 billion during the quarter, up more than six-fold from a year ago, according to Thomson Reuters.

Problems down the line

Some analysts caution however, that the latest numbers will reveal that not all is well with the nation's top financial firms.

Paul Miller, a managing director for FBR Capital Markets who specifically tracks Wells Fargo (WFC, Fortune 500) and Bank of America, notes that lenders have had to integrate a number of new federally mandated changes this quarter.

One of the biggest has been the CARD Act, which limits banks' ability to raise interest rates on credit card customers and threatens to take a bite out of credit card profits.

The new law is expected to cost the industry as much as $5.5 billion in lost revenue this year, according to the credit card advisory firm R.K. Hammer.

At the same time, loan demand remains tepid at best.

A Federal Reserve report published Wednesday, for example, revealed that consumer demand for revolving credit, which includes credit card debt, fell at an annual rate of 13% to $858 billion.

A separate report published by the Mortgage Bankers Association this week revealed that mortgage application activity also fell amid higher interest rates.

So while profit-hungry investors may be willing to overlook the issue in the current quarter, sluggish loan growth could soon wear on investors who have long awaited big banks' return to the sky-high profits of yesteryear.

"[Banks] are stuck between a rock and a hard place," said Berger. "They would love to fuel loan growth but there is no demand."