Later this week the nation’s six largest banks will start trotting out second quarter earnings that are expected to be significantly lower than earnings in the first quarter. A portion of those earnings could come from an accounting rule that permits banks to book as profit the funds created when a bank’s bonds fall below par value.

An analyst at Oppenheimer & Co. calls the practice an accounting “abomination” in The Wall Street Journal, and points out that “fluctuations in the value of the debt don’t change the amount the banks owe.” JPMorgan Chase & Co. (NYSE: JPM) leads off the financial earnings on Thursday, followed by Citigroup Inc. (NYSE:  C) and Bank of America Corp. (NYSE: BAC) on Friday. Next Tuesday, July 20th, reports are due from Morgan Stanley (NYSE: MS) and Goldman Sachs Group Inc. (NYSE: GS), followed on Wednesday by Wells Fargo & Co. (NYSE: WFC).

The debt-valuation adjustments could result in a $1 billion gain for both BofA and Morgan Stanley for the second quarter according to a Citigroup analyst. Goldman Sachs could have $375 million in gains and JPMorgan may have gotten a $300 million boost. These four banks could see an average 18% jump in pre-tax earnings from these adjustments. A BofA analyst estimates that Citigroup will book $400 million worth of profit in the second quarter from this adjustment.

The banks are trying to make up for falling revenues in fees for mergers and acquisitions, slow demand for loans, and rising commercial real estate delinquencies. Even with the debt-value adjustments, the outlook for second quarter earnings is weak.

At Bank of America, analysts expect EPS of $0.20 on revenues of $29.69 billion. In the same period a year ago, BofA posted EPS of $0.33 and revenues of $32.77 billion. In the first quarter, BofA reported EPS of $0.28 on revenues of $32.3 billion

Analysts expect Morgan Stanley to post second quarter EPS of $0.48 on revenues of $8.08 billion. Last year’s second quarter results were awful: an EPS loss of -$1.10 on revenues of $5.41 billion. But compared with a first quarter EPS of $1.03 and revenues of $9.1 billion, 2010’s expected second quarter results don’t look so good.

At Goldman Sachs, analysts expect EPS of $2.27 on revenues of $9.69 billion. In the second quarter of 2009, Goldman posted EPS of $4.93 on revenues of $9.69 billion. For the first quarter of 2010, Goldman rang up EPS of $5.59 on revenues of $12.78 billion.

Analysts expect Citigroup to report second quarter EPS of $0.05 on revenues of $22.35 billion. For the same period a year ago, the bank reported EPS of $0.05 on revenues of $29.97 billion. In the 2010 first quarter, Citigroup posted EPS of $0.15 on revenues of $25.4 billion.

At JP Morgan, analysts expect EPS of $0.71 on revenues of $25.96 billion. In the second quarter of 2009, JP Morgan posted EPS of $0.28 on revenues of $27.71 billion. Last quarter, the bank reported EPS of $0.74 on revenues of $28.2 billion.

Analysts expect Wells Fargo to report EPS of $0.48 on revenues of $21.38 billion. In the same period a year ago, Wells Fargo posted EPS of $0.57 on revenues of $22.51 billion. Last quarter the bank posted EPS of $0.45 on revenues of $21.4 billion.

The story is pretty clear: the second quarter of 2010 will not be as good as the first quarter. At its best, the quarter will be flat with last quarter. And if all the banks have to counter this trend with is accounting razzle-dazzle, the rest of 2010 won’t improve much either.

Paul Ausick

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