Is it possible that the great big bank stock rally is already done? Shortly before the closing bell on Tuesday came words of warning from Fitch Ratings that the U.S. banking sector’s improved results in the first quarter were going to difficult to sustain for the rest of 2013. We just recently highlighted some of the risks of this in our “Sell in May and Go Away” primer and blueprint for 2013 and this goes well beyond the bank sector risks. Fitch’s warnings go many steps further and the result is that unless bank stocks correct further then the share prices will be very hard to maintain.

Some of the issues are very focused for investors. Fitch showed that overall revenues broadly fell for the large U.S. banks even though net income improved on a linked-quarter basis. Lower provision expenses and cost controls managed to mitigate poor revenue figures. While expected, Fitch also said that a decline in mortgage refinancing activities managed to helped bank earnings. Fitch did signal that it now expects mortgage revenues to decline throughout the banking sector in 2013 due to lower refinancing activities. Here were some additional points made:

top five U.S. banks showed capital market activity aggregate revenues were 7% below a strong first quarter 2012, but were up 36% above the seasonally weaker fourth quarter in 2012. Capital markets were also shown to be a key contributor to overall revenues for the top five at 35% of consolidated revenues. Fixed income, currencies, and commodities activity were the largest segments of the capital markets.

Additional concerns were brought up around the balance of accruing troubled debt restructurings on balance sheets. The legal and regulatory costs also remain elevated. We would add to what Fitch said here by pointing out that Jamie Dimon of J.P. Morgan Chase & Co. (NYSE: JPM) warned in his most recent annual letter to shareholders that more regulatory actions against the banks (or his bank) would be coming down the pipe.

Fitch even said, “Earnings for U.S. banks generally improved during the first quarter although these levels will be difficult to sustain over the remainder of 2013… The first quarter is generally the strongest period, and the industry still faces unpredictability on capital markets revenues and earnings.”

We did note in our own analyst upgrades and downgrades this morning that there were two dissenting upgrades which may take a 180-degree turn from Fitch’s note. Bank of America Corp. (NYSE: BAC) was raised to Overweight from Equal Weight and its target price was raised to $16 from $13 by the analyst team at Morgan Stanley. We also saw that Morgan Stanley (NYSE: MS) was raised to Buy from Neutral with a $25 price target at SunTrust Robinson Humphreys.

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