NEW YORK -- All eyes are on Wall Street's heavy hitters this week, but no one is expecting home runs.
As the major banks prepare to report their earnings for the second quarter, analysts are predicting a muddled picture. They expect to see a healthy boost in earnings compared to the same period a year earlier, but also signs of stress as the industry grapples with soft trading revenues and slowing economic growth.
There's no shortage of worries. The euro-zone crisis is depressing economic activity in the region and reining in the kind of risk-taking and corporate fundraising that boosts profits for banks. China's economic growth is decelerating, while there are fresh signs that the U.S. economy is merely shuffling along.
Then there's the latest scandal over the manipulation of a key global interest rate. Authorities on three continents are pursuing civil and criminal probes of the banks that submit estimates to generate the London Interbank Offered Rate, or Libor. The investigations will shadow the industry as it braces for possible prosecutions and a wave of litigation.
Two of the four major banks reporting earnings this week - Citigroup Inc. and Bank of America Corp. - are on the panel of institutions that generates the Libor rate. Meanwhile, Goldman Sachs Group Inc. and Morgan Stanley Inc. can breathe a small sigh of relief since they aren't members of that particular club.
Citigroup opens the week's excitement on Monday. Analysts will be watching for any signs of weakness in its global franchise, since Citi is a truly international operation. Goldman Sachs follows on Tuesday. Europe's debt crisis has hit Goldman where it hurts, namely its huge business-trading bonds, commodities and currencies. The firm is expected to post profit of $1.17 (U.S.) per share, according to estimates compiled by Bloomberg LP.
The earnings season for the financial industry kicked off on Friday, when JPMorgan Chase & Co. reported that a trading blunder had cost it $4.4-billion for the quarter, but still managed to beat analysts' expectations about its overall profits. It earned $5-billion, down nine per cent from the same period a year earlier.
Wells Fargo & Co., which also reported on Friday, fared better. Its earnings were up 17 per cent over the prior year, propelled by strength in its mortgage business as U.S. homeowners raced to refinance at rock-bottom interest rates. JPMorgan chief Jamie Dimon claimed his bank's underlying businesses were solid. "The fact is that underpinnings of the American economy aren't that bad," he said. "Corporate America, the middle-market companies, small businesses are okay."
But he also left investors with a warning. Europe will make progress toward fixing its problems "in fits and starts over time," he said. "Just be prepared for a roller coaster."
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