By Tatiana Bautzer, Saeed Azhar and Niket  Nishant
       NEW YORK, Oct 10 (Reuters) - Profits at the biggest U.S.
consumer lenders are likely to rise in the third quarter, in
contrast with investment banks still facing a dealmaking slump,
analysts said.
    JPMorgan Chase, which kicks off earnings for big
U.S. lenders Friday, will set the tone for large banks. It is
predicted to post a roughly 25% jump in earnings per share (EPS)
versus a year earlier, LSEG estimates showed.
    Goldman Sachs and Citigroup are expected to
report the biggest EPS declines of 35% and 26% respectively,
according to LSEG estimates. Morgan Stanley's EPS is also
forecast to drop.   
    "This quarter is all about higher interest rates for
longer," said Mike Mayo, an analyst at Wells Fargo. "They will
affect banks' funding, lending, ability of borrowers to repay
loans, losses in securities and capital requirements."
    JPMorgan, the nation's largest lender, is "best positioned"
to handle higher rates and could surprise markets with
stronger-than expected results, said Bank of America analyst
Ebrahim Poonawala, who raised his earnings estimate. 
    U.S. employers added 336,000 positions in September in a
return to the fevered hiring seen during the pandemic,
potentially bolstering the case for another interest rate
increase by the Federal Reserve. Another hike, and the
persistence of elevated borrowing costs, could pour cold water
on a nascent recovery in dealmaking. 
    Wall Street CEOs have cited the return of some initial
public offerings, including for SoftBank's Arm Holdings,
as signs of a market revival after months in the doldrums. The
outbreak of war in Israel could further dampen market sentiment.
    "There is a constructive environment, and investment banking
fees tend to be higher through the end of the year," said Jason
Goldberg, a banking analyst at Barclays. A broader improvement
for capital markets may not come until 2024, he said.
    Despite the renewed optimism, investment banking activity
remains depressed. Global investment banking fees are down
almost 17% in the third quarter from the same period a year
earlier, to $15.2 billion, according to data from Dealogic.  
    Markets could be further shaken by surging U.S. Treasury
yields, knocking investor confidence and posing some risks to
banks that hold a large volumes of the securities on their
books. 
    As rates rise, bond prices fall, representing losses on
paper that would be realized if the banks sold the bonds. After
Silicon Valley Bank collapsed in March partly because of losses
from its securities portfolio, investors have focused on the
risks posed by paper losses on bond holdings across the
industry.
    Unrealized losses from securities will show a "significant
increase" to as much as $670 billion across the industry in the
third quarter, estimated Richard Ramsden, a banking analyst at
Goldman Sachs. That compares with $558 billion in the second
quarter, according to data from the Federal Deposit Insurance
Corporation.
    For instance, Bank of America had more than $100 billion of
unrealized losses on its securities portfolio that it aims to
own until maturity, which have weighed on its shares. Its stock
is the worst performer among the top six U.S. lenders, falling
21% so far this year.
   
    
    Earnings from regional lenders will also remain in focus
after a trio of bank failures earlier this year roiled the
industry. 
    "Investors should be very careful with the regional banks,
which have more ties to the fragile commercial real estate loan
market and some regional banks have weaker balance sheets, which
is concerning," wrote James Demmert, chief investment officer of
Main Street Research, which manages about $2 billion in assets. 
  
    Large banks' consumer divisions are expected to remain a
bright spot in their earnings. The strong job market has propped
up household spending, although the pace of purchases has
slowed, bank executives have noted in recent weeks. 
    Consumer delinquencies on loan payments have also picked up,
but remain at low levels historically. 
    "It's still credit normalization, as opposed to a real
concern about credit losses getting to recessionary type
levels," Ramsden said. More broadly, "we're back into this
environment where investors think interest rates are going to
remain higher for longer," he said.
    
   EPS ESTIMATES FOR THIRD QUARTER
 Bank             3Q23        3Q22        % change
                  Estimate*               
 Citi             1.20        1.63        -26%
 JPMorgan         3.91        3.12        +25%
 Bank of America  0.82        0.81        +1%
 Morgan Stanley   1.33        1.47        -9.5%
 Goldman Sachs    5.35        8.25        -35%
 Wells Fargo      1.24        0.85        +46%
 * Median estimate. Source: LSEG
 

    
 (Reporting by Tatiana Bautzer and Saeed Azhar in New York and
Niket Nishant in Bengaluru; Editing by Lananh Nguyen and Nick
Zieminski)