When the largest banks report second-quarter results this month, there will likely be less to brag about on the credit front, and tough questions to answer about the probable impact of financial reform.

The first quarter's numbers benefited heavily from robust trading revenue and increasing confidence, reflected in provisioning and chargeoffs, that consumer credit and asset values had reached a turning point. Some of the improvement was likely seasonal, and there are other indications that the improving credit that allowed banks to ease off of provisioning or even start tapping their capital buffers may be stalling.

Granted, banks' core businesses and credit positions aren't expected to lose ground. But that's all the more reason for the focus of investor and analyst questions to shift to expectations about the reform bill's effect on banks' business. Unlike in past quarters, when executives used earnings calls as a chance to weigh in on the then-unsettled reform debate, they're now going to have to explain to shareholders what it all means — at a time when earnings will remain under pressure.

"The results are probably going to range from weak to very weak, is the sense we're getting," said Moshe Orenbuch, a Credit Suisse analyst. "People are going to be looking for some guidance as how to think about regulatory reform will affect the banks."

Orenbuch's expectation for feeble earnings is the consensus opinion. Among the four biggest U.S. banks, none are expected to match first-quarter earnings, according to Bloomberg analyst data.

Part of the problem is simply that the turmoil in European debt and U.S. equity markets is widely expected to have caused a sharp pullback in risk-taking, preventing the industry from leaning as heavily on trading revenues as it has in the last several quarters. But there is also a sense that stubborn housing and unemployment trends may be restraining the pace of asset value recovery.

"If you chart out the weekly numbers for first-time unemployment claims, that had been falling steadily through 2009, and then it leveled off," said Jay Brinkmann, chief economist at the Mortgage Bankers Association. "That may be something that shows up in the second quarter in terms of trends."

Seasonal factors in consumer and mortgage debt may add to the appearance of continued credit problems. It's typical for early-stage mortgage delinquencies to drop by as much as 50 basis points from the fourth quarter to the first, Brinkmann noted. But that trend typically reverses from the first quarter to the second, and while that won't have much impact on nonperforming assets, it will likely make the overall credit picture seem a little grimmer.

Some analysts said that one culprit for continued doldrums may be the banks' reluctance or inability to rapidly clear nonperforming assets from their books. According to a report released by bank and thrift regulators last month, foreclosure completions increased by 18.5% at the end of the first quarter — but so did the number of foreclosure starts, expanding the ranks of foreclosures in process by 8.5%.

Those bank-owned assets haven't been going anywhere, said Chris Whalen, managing director at Institutional Risk Analytics. He said that leads him to expect the second quarter will add to a growing backlog of repossessed homes and a dribble of losses down the line. "Everybody out there's trying to run auctions" of distressed homes, "but I don't see many deals getting done," Whalen said. "It's cold storage. Nobody's a willing seller, so they're going to stretch it out to eight quarters."

Even areas where there's been better news, such as unsecured consumer debt, may have limited upside. While May numbers from Standard & Poor's showed credit card delinquencies falling to 5.4%, the lowest level in six months, analysts say they don't yet see the conditions for rapid improvement. Ezra Becker, director of strategy for the credit bureau TransUnion, forecasts that 90-day-plus delinquency in unsecured consumer credit will fall slightly this quarter — and then rise slightly in the third, and stay flat in the fourth.

Even if credit conditions remain steady, Becker and others say they'll be looking closely at the portfolios' size and characteristics as an early indication of how successful lenders will be at compensating for the burden of increased regulation. (Many provisions of the Credit Card Accountability Responsibility and Disclosure Act took effect in February, making the second quarter a test for portfolios' hardiness.)

"What's interesting is that while reserves are coming down in my companies that are credit card-heavy, balances are shrinking," Orenbuch said.

Aside from the reform bill, banks will also likely face questions on the trajectory of fee income. Regulation E's ban on automatic overdraft enrollment is scheduled to take effect in August. And high demand for mortgages, a tremendous booster for the largest banks and Wells Fargo & Co. in particular over the last few quarters, will likely drop should mortgage rates come off their record lows.

Continued shakiness in asset quality and fee revenue should put a premium on reserving matters. Orenbuch said JPMorgan Chase & Co. may be the best positioned to benefit over the remainder of the year from reserve drawdowns, given the size of its reserves and the slowing growth of problem assets. But it's hard to see incremental asset quality and reserving gains holding center stage for anyone.

On JPMorgan Chase's first-quarter call, Michael Cavanagh, then its chief financial officer, answered a question about the reform bill this way: "Obviously it is too early to call what kind of regulatory impact there could be in any of these businesses and how business models react, but we are not worried about our ability to compete." This time around, JPMorgan Chase and its peers will need to explain such confidence, not just express it.

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