Big banks try to gird for crises as a matter of course and investors will soon learn how prepared they were for this summer's credit crunch.

Analysts and investors are speculating how badly Citigroup Inc, Bank of America Corp, JPMorgan Chase & Co and smaller rivals may have gotten caught by a flight from risk that caused the value of billions of dollars of mortgages and loans to evaporate.

Hurt by write-downs and loan losses, many banks are expected to post lower earnings than in the second quarter. The question is how long their hangover from the end of the housing and merger booms will last.

Generally, the view is banks will use the third quarter to build reserves or take losses stemming from liquidity issues, said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. The market will overlook what is reported in the third quarter as it looks toward improving conditions in 2008.

Investors will also weigh whether depressed share prices already reflect expected bad news, or may fall further. They want banks to be up front about problems, and show their ills will not endure.

Transparency will be huge, said Richard Moroney, chief investment officer at Horizon Investment Services LLC in Hammond, Indiana. Investors want clarity that banks have a handle on the credit crunch. Banks that are straightforward will be received more favorably.


Recent results at Bear Stearns Cos, Goldman Sachs Group Inc, Lehman Brothers Holdings Inc and Morgan Stanley were driven heavily by write-downs for riskier mortgages and leveraged loans that investors avoided.

Similar exposures will be evident in July-September results at commercial banks. They could even be worse because Wall Street banks' results included June, before much of the credit malaise took hold.

Many banks' shares have already been beaten down.

Through September 26, the Philadelphia KBW Bank Index of 24 large banks was down 10 percent this year, while the KBW Regional Bank Index had lost 11 percent. The KBW Mortgage Finance Index was down 22 percent, including a 57 percent decline at Countrywide Financial Corp.

The Standard & Poor's 500 is up 7.6 percent. That index traded at 15.2 times expected 2008 earnings, well above the 10.8 multiple for the 10 largest banks, according to Reuters Estimates.

Citigroup, Bank of America and JPMorgan, sometimes called universal or money-center banks, may offset some of the market turmoil from their many businesses that are less affected, such as retail banking and credit cards.

Still, the three largest providers of leveraged loans may suffer losses from rocky capital markets. Bank of America has said it expects a meaningful impact on corporate and investment banking results.


The largest remaining banks -- Wachovia Corp, Wells Fargo & Co and the thrift Washington Mutual Inc -- all have significant exposure to mortgages, being among the top eight home-loan providers.

Wachovia has expressed disappointment its $24.2 billion purchase a year ago of mortgage lender Golden West Financial Corp has not gone better. And Washington Mutual may boost loan loss reserves by $500 million, its fourth increase this year.

Wells Fargo has largely been spared because it never offered the exotic mortgages that got many rivals in trouble.

For a high-quality issue with a good yield and a pretty cheap stock price, it's a good play, Moroney said. Wells Fargo carries a 11.9 price-earnings multiple for 2008.

The housing slump is also weighing on smaller regional banks such as Cleveland's National City Corp and Memphis, Tennessee's First Horizon National Corp, both of which are cutting jobs.

Even Salt Lake City-based Zions Bancorp this week warned of rising loan losses amid declining land values and residential construction activity in the southwest.


Lehman Brothers Inc analyst Jason Goldberg said his profit forecasts are farthest below consensus on banks exposed to mortgages, including National City and First Horizon, or construction, including Marshall & Ilsley Corp, Regions Financial Corp and Synovus Financial Corp.

A reason for optimism: lending margins. These have been tight as the rates at which banks borrow and pay out deposits have been high relative to the rates they charge on loans.

Last week's U.S. Federal Reserve decision to cut its benchmark federal funds rate to 4.75 percent from 5.25 percent may help loosen margin pressures, though more likely in subsequent quarters.

The principal headwind over the last 18 months, the rate environment, is improving, Townsend said. The outlook for 2008, due to the Fed's action, is an improving one, so long as the Fed was nimble enough for the economy to avoid recession.