Banks, under scrutiny, set to announce earnings

NEW YORK (AP) -- The banking industry is on edge.

As big financial institutions like Goldman Sachs and JPMorgan Chase get set to report earnings over the next week, they are under pressure to show investors they can correct mistakes from the financial crisis and still post big profits. While profitable of late, there are worries that the recent run-up in earnings is just masking the problems.

The list of post-crisis challenges banks face is long: lawsuits over mortgage investments that went bust, new regulations that are drying up old sources of revenue, weak demand for loans and pressure from regulators to keep bigger cushions of cash on hand, instead of letting banks deploy it on new investments.

Some banks are trying new strategies and new CEOs to sustain growth. Others are scrambling to make sure they're meeting the government's new regulatory standards. Banks could also face fresh scrutiny in areas like money laundering and protecting customers from predatory lenders. Some lawmakers are questioning whether large banks should be broken up to avoid being "too big to fail" — meaning the government has no choice but to bail them out when they're in trouble.

Estimates for this quarter's earnings vary widely.

Sterne Agee analysts wrote in a recent note that the bank leaders' comments and outlook will "carry significant weight" this time around, "particularly as revenue streams continue to normalize over the course of 2013, and an uncertain loan growth outlook comes into greater focus." Analysts at Raymond James predicted that banks are still about two years away "from normal profitability levels."

By one measure, banks are beating the market. Financial stocks in the Standard & Poor's 500 are up more than 13 percent this year, compared to 12 percent for the overall S&P index. But that's partly because they have so far to go. Of the six megabanks, four are trading below book value, according to fourth-quarter data. That means their value on the stock market is less than the value of the sum of the company's parts. By this measure, only Wells Fargo and Goldman Sachs are ahead.

Jamie Dimon, CEO of the country's biggest bank by assets, JPMorgan Chase, addressed the challenges facing the industry at an investor conference in February. He said that meeting regulatory demands and growing organically would be about all the bank could handle this year.

"So acquisitions, stuff like that, anything material — I would pretty much take it off the table," said Dimon, whose bank is generally considered one of the strongest.

Here's more on each bank.

—JPMorgan Chase and Wells Fargo report Friday.

For these two giants of the mortgage scene, "refi" is key. Low interest rates and government programs have spurred more people to refinance their mortgages, driving earnings at both banks for the past few quarters. Analysts will be looking for hints of how long the "refi" wave can last.

At Wells, analysts may also want to hear more about the bank's strategy, such as whether it plans to expand more in international markets — where it's usually lagged peers.

JPMorgan is still under intense scrutiny over the surprise $6 billion trading loss that it announced almost a year ago. The loss is nicknamed the "London whale" for the location of the responsible trader and its size. In March, a Senate panel excoriated the bank, saying it played down the risks of its trades and hid losses from regulators. JPMorgan has said it made mistakes but never intended to mislead the government.

Last month, when the Federal Reserve released the results of the stress tests that it makes the big banks undergo, it gave only conditional approval to JPMorgan's plans to raise its dividend and buy back shares. The Fed told JPMorgan to resubmit its capital plan by the end of September. Analysts will want details on what the bank plans to do differently and on its relationship with regulators.

—Citigroup reports Monday.

Investors are focused on the new chief executive. This will be the first full quarter under CEO Mike Corbat. He took over last fall, when Vikram Pandit stepped down under pressure from a board that was unhappy with his efforts to turn around the bank. Analysts will want to know more about Corbat's strategy: where does he plan to cut jobs, which business units and countries does he wants to focus on, and what's his plan to deal with regulators and lawsuits?

—Goldman Sachs reports Tuesday.

The investment bank is under pressure to find new sources of revenue. That's because new regulations will crimp activities that Goldman has relied on, including trading for its own profit. Like JPMorgan, Goldman has to submit a new capital strategy to the Fed, which has concerns about weaknesses in the banks' plans or processes.

—Bank of America reports Wednesday.

The bank must rethink its big mortgage business. Its results have been dogged for years by mortgage-related lawsuits and fines, many stemming from its purchase of Countrywide Financial in 2008. Analysts will want some indication of how long those troubles might persist. To move beyond those problems, Bank of America is focusing on lending to people who are already customers and on making loans directly rather than buying loans made by other banks or lenders. Analysts will want to know how the bank's effort to regain more of the mortgage market is progressing.

—Morgan Stanley reports Thursday.

The bank is also changing its strategy. It wants to rely less on risky investment banking and more on steady, if boring, businesses like wealth management, which charge customers fees for managing their money. Last month, Morgan Stanley got permission from the government to buy the remaining 35 percent stake of Morgan Stanley Smith Barney, the retail brokerage it jointly owns with Citigroup.