Buoyed by a robust economy and gains in fee income, large banks are expected to report a solid second quarter.
An American Banker roundup of bank analysts produced a rosy picture, despite some areas of concern. These included lower trading profits, declines in mortgage revenue, slowing loan growth, and increases in chargeoffs.
But these problem areas are not expected to keep most banks from posting double-digit profit growth when they begin reporting earnings this week.
"By and large we think this is a quarter that will come in as most people expected," said Lawrence Cohn, an analyst for Ryan, Beck & Co. in Livingston, N.J. "It won't be a knock-their-socks-off quarter, but we don't see any worrisome signs."
"The Dow hitting 11,000 meant good results in money management, trust, venture capital, and capital raising activities," said Michael L. Mayo, an analyst with Credit Suisse First Boston in New York.
"You are likely to see strong capital markets income with the pickup on advisory fees to offset more normalized trading results," said Carla D'Arista, an analyst for Friedman Billings Ramsey & Co. in Arlington, Va.
Some analysts also noted that many banks will benefit from cost-saving programs.
"Cost controls are very much in evidence across the board," Ms. D'Arista said.
Ms. D'Arista said she expects the market to begin seeing results from Citigroup's program to slash $2 billion in costs for this year. And William B. Harrison, the chief executive officer of Chase Manhattan Corp., "has really put the screws on" spending, she said.
In addition, many banks are expected to reduce costs as a result of recent mergers, though some have experienced rough riding.
"We're seeing evidence that banks are continuing to make progress in their mergers," said Joseph K. Morford, an analyst with First Security Van Kasper in San Francisco. "Expenses should be flat to down, in part because of all the recently completed mergers."
Third-quarter expenses are likely to decline, because most banks will have completed their year-2000 preparations, Mr. Morford said.
The mortgage banking area could be responsible for unexpected drags on earnings. Climbing interest rates and an abrupt slowdown in refinancing are expected to put a dent in mortgage income, said R. Jay Tejera, an analyst with Ragen MacKenzie Inc. in Seattle.
"Banks with mortgage activities are likely to have a negative downside surprise," said Mr. Tejera, who covers western banks and thrifts. Three companies that might be stung include Wells Fargo & Co., First Security Corp. of Salt Lake City, and Seattle-based Washington Mutual Inc., he said.
Overall loan portfolio growth is expected to be steady-in the 5% to 8% range-said James R. Bradshaw, an analyst with Pacific Crest Securities in Portland, Ore.
"We don't expect to see anything special in the loan-growth area, because banks took a somewhat dour economic outlook coming into the quarter," Mr. Bradshaw said. "They generally decided not to stretch any underwriting standards."
As a result, interest income from traditional lending is expected to be moderate at most banks.
"Traditional lending is showing some weakness around the edges," Mr. Mayo said. "We may see some margin compression at some banks."
In general, the quality of loans already on the books is expected to hold steady. However, some analysts predicted a mild deterioration in the second-quarter postings of some banks, especially in commercial credit.
R. Harold Schroeder, an analyst with Keefe, Bruyette & Woods Inc. in New York, said he expects an uptick in chargeoffs.
Now, there are a few "spots on the radar screen," Mr. Schroeder said, adding that increased chargeoffs are possible in commercial credit portfolios.
Because banks have maintained the strong quality of their portfolios over the past several years, the market could react negatively to any signs-even relatively minor ones-of a deterioration, Mr. Schroeder argued.
