Banks Face More Pain in '09

If you hoped that the end of 2008 would finally bring relief to the banking sector, think again.

A growing chorus of analysts have been ratcheting down bank earnings estimates for the fourth quarter and into next year as the prolonged credit crisis cuts deeper into the U.S. and global economies.

"Next year is probably going to be worse than this year," says Nancy Atkinson, a senior analyst at Aite Group, an independent research and advisory firm. "What's become pretty clear is that this credit issue is deeper and broader than people expected and frankly hoped for. It's going to take longer to recover from it."

Richard Staite, a London-based analyst at Atlantic Equities, who covers the large U.S. banking institutions, wrote in a research note that the deterioration in the economy will have a "significant negative impact" on bank earnings in 2009 and 2010.

"The principal driver will be higher credit costs," Staite wrote in the Dec. 10 note. "However, there will also be some negative impact on revenues from lower volumes and lower fee income. Unlike in previous cycles, we do not expect to see an improvement in net interest margins because deposit competition is too intense."

This year, earnings within the S&P 500 financial sector are expected to fall about 80% compared to 2007, according to Thomson Reuters. For the fourth quarter, Thomson estimates the sector will report combined earnings of just $6.7 billion, better than the sector's loss of $15.6 billion in the fourth quarter of 2007, but worse than the $57 billion of profit in the last quarter of 2006.