PREVIEW-Loan losses still weighing on bank results

* Regional bank results divided by loan mix, geography

* Large banks benefit from debt, equity underwriting

* Investors look for rate of increase in bad loans to slow

By Elinor Comlay

NEW YORK, Oct 8 (Reuters) - Higher capital markets revenues may pull the largest U.S. banks' third-quarter earnings into the black, but many regional banks will struggle to turn a profit as loan losses rise further.

Bank of America Corp (BAC.N) and JPMorgan Chase & Co (JPM.N) benefited as debt and equity underwriting remained busy in the normally quiet third quarter.

"Banks that have exposure to the capital markets are going to have a very strong quarter," said Tim Ghriskey, chief investment officer at Solaris Asset Management.

The flip side is the gloom in banks' loan books, where losses continue to rise from mortgages, credit cards and, increasingly, commercial real estate, as retailers go under and companies end office leases.

Citigroup Inc (C.N), which has suffered steep losses in its consumer loan and lease portfolio, is expected to report a loss this quarter of 21 cents a share, according to analysts polled by Thomson Reuters I/B/E/S.

Citi had an even wider loss a year ago of 60 cents a share, but comparisons are clouded by the massive number of shares the bank has issued over the past year. Like Bank of America, Citi is propped up with $45 billion of taxpayer money and it has yet to follow rivals that have repaid bank bailout funds.

Analysts on average expect JPMorgan to lead the sector, with average estimates putting its expected earnings at 49 cents a share. A year ago, the New York-based bank reported earnings of 11 cents a share.

Bank of America is expected to report a loss of about 6 cents a share, weighed down by $425 million in charges to cancel a government guarantee of high-risk assets and its large residential mortgage portfolio.

Among regional banks, earnings are likely to vary depending on the bank's loan mix and geographic exposure.

Minneapolis-based U.S. Bancorp (USB.N) -- which has avoided much of the writedowns of its peers -- is tipped to improve on its last three quarters with analysts expecting on average earnings of about 27 cents a share.

However, analysts expect Ohio-based KeyCorp (KEY.N), which reported a jump in second-quarter loan loss reserves, to report a loss of 41 cents a share.

COMMERCIAL REAL ESTATE

Several executives including JPMorgan's Chief Financial Officer Michael Cavanagh have recently said the rate of consumer-related loan losses appears to be easing -- but several also warn that commercial real estate loans may be deteriorating at a faster pace.

Commercial mortgages and construction loans are the main drag for regional banks, particularly those such as Zions Bancorp (ZION.O) in Salt Lake City, where its $14.5 billion in commercial real estate loans make up about 35 percent of its total loan portfolio, according to Federal Reserve data compiled by bank specialist FIG Partners.

Zions is expected to report a loss of $1.16 a share in the third quarter, compared with a profit of 31 cents a share in the same period a year earlier.

Beyond the headline numbers, analysts and investors will be focused on banks' bad loan tallies, looking for any sign that loans are going bad more slowly.

"This is the cancer in credit," said Gerard Cassidy, analyst at RBC Capital Markets. "Once the tumor, so to speak, is starting to shrink, that is the sign that the patient is getting better."

Investors will also be watching to see how much money banks are putting aside against future loan losses.

"We're also looking for a slowdown in the above-average loan-loss reserves," said Ben Wallace, securities analyst at Grimes & Company. "What we'd like to see is a sign of an inflection point."

Even if expectations of future losses fade in the third quarter, revenues for banks without a capital markets business are still patchy and it may be some time before share prices reflect any improvement.

"The stocks are still driven in part by the macro economic indicators," said Todd Hagerman, analyst at Collins Stewart. "Until we get more comfort in terms of the shape of the economic recovery I don't think the stocks are going to do a whole lot in the near term."

Through Wednesday, the KBW Banks Index .BKX is up about 6 percent this year. It fell 50 percent in 2008. (Editing by Gary Hill)