PREVIEW-U.S. bank results to show who flunked credit class

* Losses to swell from credit cards, commercial lending

* Several big lenders with taxpayer funds to lose money

* Capital markets, mortgages could help

By Jonathan Stempel

NEW YORK, July 7 (Reuters) - For the largest U.S. banks, the second quarter and beyond may be all about credit.

With concerns about large lenders' capital levels on the wane after well over $60 billion of stock sales last quarter, investors will focus on how broadly credit is deteriorating, with particular emphasis on credit cards, commercial loans and commercial real estate.

At the same time, banks will need to demonstrate strong profitability before accounting for credit weakness, in the face of weak demand for loans as consumers worried about the recession and near 10 percent unemployment try to save more.

There is growing optimism for the sector, especially after the federal government in June let 10 of the largest lenders repay more than $68 billion of bailout money taken from the Troubled Asset Relief Program.

Yet there is no sense that the credit crisis, which set in roughly two years ago, is anywhere near over.

"I don't think we're out of the woods, though we're getting closer," said Michael Nix, who helps invest $700 million at Greenwood Capital Associates LLC in Greenwood, South Carolina.

"Investors will focus on how banks are dealing with credit cards and commercial loans after some pretty significant erosion."

The firm owns Bank of America Corp (BAC.N), Morgan Stanley (MS.N) and State Street Corp (STT.N) shares.

Goldman Sachs Group Inc (GS.N) kicks off second-quarter earnings season on July 14. JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N) and Citigroup Inc (C.N) also report results that week. Many rivals report the following week, including Wells Fargo & Co (WFC.N).

Banks with large capital markets, mortgage and proprietary trading operations may get a boost to results. Regional banks with higher concentrations of commercial loans may fare worse and many small banks could be hit hard.

Fifty-two federally insured lenders have failed this year, the most since 1992, Federal Deposit Insurance Corp data show. Analysts say hundreds might follow over the next three years.

INDIGESTION

While results may be the best since the financial crisis exploded in September, Fox-Pitt Kelton analysts said profit could fall 67 percent from a year earlier.

Banks "are still in the early stages of realizing lifetime credit losses," they wrote.

Indeed, many lenders that have yet to repay more than $1 billion of bailout funds are expected to lose money in the quarter and over the rest of 2009, Thomson Reuters data show.

The roll: Citigroup, SunTrust Banks Inc (STI.N), Regions Financial Corp (RF.N), Fifth Third Bancorp (FITB.O), KeyCorp (KEY.N), Comerica Inc (CMA.N), Marshall & Ilsley Corp MI.N, Huntington Bancshares Inc (HBAN.O) and Zions Bancorp (ZION.O).

Banks will report results on the heels of two months of investor indigestion from financial company stocks. The 24-member KBW Bank Index .BKX more than doubled from early March to early May, but has declined in six of the last eight weeks.

Results are likely to be noisy, with many banks incurring charges to repay TARP funds and support the FDIC, which found 305 "problem" lenders as of March 31, a 15-year high.

Rising long-term Treasury yields and near-zero short-term yields should benefit the industry's lending margins, despite still-strong competition to attract stable, low-cost deposits.

Some of the credit losses may be severe -- and not just from housing, where Moody's Economy.com said roughly one in five mortgage borrowers owe more than their homes are worth.

Meanwhile, the American Bankers Association said on Tuesday that credit card delinquencies are the highest on record. Statistics such as these make lenders cautious.

"Banks after this cycle will make less money," Richard Davis, US Bancorp's (USB.N) chief executive, said in a July 1 interview.

The bank and Wells Fargo are among the top holdings of Warren Buffett's Berkshire Hathaway Inc (BRKa.N)(BRKb.N).

RISING LOAN LOSSES

Bank of America might suffer a 15 cents per share quarterly operating loss as it sets aside $12.5 billion for credit losses, Credit Suisse analyst Moshe Orenbuch wrote on Monday.

Citigroup, meanwhile, might set aside $13 billion, leaving operating profit of just a penny per share, Orenbuch wrote. The bank is conducting a preferred stock swap that is expected to leave the government with a 34 percent ownership stake.

Poor performance could add to pressure on Kenneth Lewis and Vikram Pandit, the respective banks' chief executives.

Both banks have taken $45 billion of federal bailout money and, under pressure from regulators, have shuffled their boards to add directors with bank and financial experience.

U.S. stress tests showed the banks could face a respective $136.6 billion and $104.7 billion of loan losses through 2010.

Still, both, along with Wells Fargo and JPMorgan, could benefit from the mortgage refinancing surge.

Fox-Pitt stock picks include Bank of America, JPMorgan, Wells Fargo, Regions, Texas Capital Bancshares Inc (TCBI.O) and Wintrust Financial Corp (WTFC.O). It is cautious on Citigroup, citing "technical pressure" from the stock conversion. (Reporting by Jonathan Stempel; editing by Andre Grenon)