Livelier credit market to aid U.S. bank Q2 profit

By Vikram S. Subhedar

NEW YORK (Reuters) - A possible resurgence in investment banking and trading may bolster U.S. bank profits in the second quarter, but worries over consumer weakness persist, analysts said at the Reuters Investment Outlook Summit.

Wells Fargo & Co (WFC.N), JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N) beat forecasts for first-quarter earnings, helped by mortgage refinancing activity, debt trading and underwriting revenue.

The same trends, coupled with a credit market recovery, are expected to underpin results in the latest quarter.

"The market has been quite favorable for financials this quarter. You've seen a tremendous amount of new issue flow, both on the equity and debt side, and a steep yield curve clearly helps," Greg Peters, Morgan Stanley's head of global fixed-income and economic research, said at the Reuters Summit this week.

Banks, which borrow at short-dated interest rate levels and lend over the longer term, profit when the Treasury yield curve steepens. The spread between 2-year Treasury notes and 10-year issues hit its highest on record in recent weeks.

Robust capital-raising among U.S. banks sent equity capital markets issuance in the Americas to $48.8 billion in May, the highest monthly volume ever in the United States and the largest volume worldwide since June 2000, according to Thomson Reuters data.

Thomas Lee, JPMorgan Chase's chief U.S. equity strategist, who sees the S&P 500 index .GSPC rising another 20 percent from current levels by the end of the year, said financial stocks are his top sectoral pick.

Lee expects investment banking profits for the second quarter to be very strong on the back of debt and equity issuance and refinancing activity.

Investor confidence in the sector is likely to recover after touching a low in March, Lee said. Banks, insurers and asset managers worldwide have laid off more than 380,000 people since August 2007.

"Job cuts on Wall Street probably bottomed in March," Lee said. "As you go through the sectors in the economy, when they make the last cuts in jobs, confidence in that sector bottoms and confidence actually starts to recover."

CONSUMER WEAKNESS

Still, consumer weakness, especially in credit cards, and a further decline in house prices could create headwinds as the banks try to put the crisis behind them.

Credit card charge-offs are likely to outstrip the worst-case scenario in the U.S. Treasury's recent stress tests of the banks' capital levels, Morgan Stanley's Peters said.

U.S. credit card defaults rose to record highs in May, highlighted by a steep deterioration in Bank of America Corp's (BAC.N) portfolio in another sign that consumers remain under severe stress.

A majority of fund managers polled in Bank of America Merrill Lynch's fund manager survey are still underweight on the banking sector globally, Michael Hartnett, the bank's chief global equity strategist said.