The biggest U.S. banks have stepped away from the brink of failure, but fourth-quarter earnings will likely show the financial crisis continues to weigh on profits.

Banks are still settling with investors over soured mortgages, and new regulations are expected to cut into profits in areas like debit card processing.

But the news isn't likely to be all bad -- credit losses are declining for many types of loans. JPMorgan Chase & Co kicks off fourth-quarter results on Friday.

As banks close their books on 2010, charge-offs, delinquencies, all that stuff's getting better -- slowly, but it is, said William Smith, founder of Smith Asset Management. You're going to start seeing how these banks are performing in a more stable environment.

But countering that recovery is the hangover from the crisis. Bank of America Corp , for example, said last week it expects to report about $5 billion of charges in the fourth quarter related to an agreement to buy back toxic mortgages from Fannie Mae and Freddie Mac .

We are in an unbelievably difficult regulatory environment, and it's going to be pretty costly, said Smith, who owns shares of banks including Citigroup Inc and Bank of America. It's going to be a nightmare.

Bank of America has said it will start charging fees for most of its accounts in 2011, in part to make up for revenue lost as a result of the Dodd-Frank financial reform law. Rules proposed as part of that law will cap the fees that banks can charge merchants for processing debit cards, slashing such revenues by up to $13 billion, or about 75 percent, annually .

The rules capping debit card fees will also cut into consumer banking revenues at regional banks and JPMorgan Chase, which had an estimated $1.9 billion in 2010 debit card revenues.

A big question is, what's the revenue outlook ... given the squeeze on fee income. And to what extent are bank companies going to be able to offset that by other income? said banking consultant Bert Ely.


Investors and analysts expect banks to continue reducing the money set aside to cover losses as bad loans shrink. That reduction in loan loss reserves has been happening for several quarters, and likely continued in the fourth quarter, which helps profits.

But the industry struggled to boost revenue in the second half of 2010 amid weak consumer demand for new loans. Faltering investment banking revenues could also slightly dampen quarterly results at the largest banks.

The industry will continue facing those challenges in 2011, although investors and analysts expect modest loan growth.

You have easier earnings comparisons (from low levels a year earlier), but I still think revenues, regulation and trading will create some difficulties, said Matt McCormick, a portfolio manager and banking analyst with Bahl & Gaynor, which owns bank stocks.

Analysts on average expect JPMorgan to report fourth-quarter earnings of 99 cents per share, up 18 percent from a year earlier.

According to StarMine, the analysts with the best track records are optimistic about JPMorgan beating that forecast. Those same analysts generally agree with the average forecast of 8 cents a share for Citigroup.

The analysts with the best track records had been most optimistic about Bank of America -- until the bank said last week it would pay $2.8 billion to settle claims over soured mortgages. The charge will be recognized in the fourth quarter, along with a $2 billion goodwill writedown in its mortgage division.

Since Bank of America announced the hit to earnings, only three analysts have revised their estimates, according to StarMine.

Other mortgage-related problems cast a shadow over the industry in the second half of the year. Bank of America, JPMorgan and privately-held Ally Financial Inc temporarily suspended foreclosures last fall amid an industrywide scandal over faulty foreclosure documents.

KBW analysts assessed the big banks' exposure at $26 billion to $48 billion for rebuying toxic mortgages from Fannie Mae and Freddie Mac. Other analysts have said total repurchase claims, including from private investors, could be around $100 billion.


By historical standards, bank stocks are still cheap, with most shares trading at 20-year lows to their tangible book values, according to analysts and investors.

Losses fell at most banks over the course of 2010, with JPMorgan and Citigroup reporting profits in each of the first three quarters. Bank of America would have joined them but for a goodwill writedown of its cards business in third quarter.

We've gone from investors focusing on surviving the downturn, to looking at how these companies are going to perform and produce earnings, said Marty Mosby, bank analyst with Guggenheim Securities LLC.

Investors are also starting to expect more return on their investments. Before the financial crisis, banks paid out as much as 50 percent of their quarterly earnings in dividends. But those payouts were slashed to 1 cent a share -- or were eliminated altogether -- as the crisis peaked.

Some bank executives, including Bank of America CEO Brian Moynihan, have said they plan to start boosting dividends this year. But regulators will not likely allow payouts to be too high because profits are still recovering and it is unclear how much capital banks will need under new rules.

(Reporting by Joe Rauch in Charlotte and Maria Aspan in New York; editing by John Wallace)