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Originally published Thursday, July 18, 2013 at 9:30 PM

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Banks’ earnings pop masks deeper concerns

Major U.S. banks have turned in big profit gains this season, but the jury is stil out on the second half of the year.

The Associated Press

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NEW YORK — Major U.S. banks have turned in big profit gains this season, but the news isn’t all rosy.

“It was a very good quarter with headline numbers better than expected,” said Anthony Polini, an analyst at Raymond James. But, he added, “the jury is still out” on the second half of the year. And he, for one, isn’t overly optimistic: Polini thinks that revenue from mortgages and trading activities, which helped earnings this time around, will suffer through the end of the year, and questions whether the U.S. economy can grow enough to support anything more than sluggish loan demand.

There were several big factors driving second-quarter earnings growth.

The banks were able to set aside less money for potential bad loans, because consumers are defaulting on loans less often and because banks have gotten stricter about who they make loans to — though that’s a double-edged sword, because making fewer loans also means lower revenue.

Banks have also benefited from a recent increase in interest rates, which means they can charge higher interest on their loans.

On the other hand, results from consumer banking have tended to be sluggish, a troubling sign in an economy built mostly on consumer spending. Loan growth across the banking industry is down so far this year, and the industry’s loan-to-deposit ratio is at its lowest since 1984, added CLSA analyst Mike Mayo.

“This is not the stuff that robust recoveries are made of,” Mayo said.

Banks were also able to earn more money because they slashed costs. But analysts question how long cost-cutting can prop up earnings; there’s only so much a company can cut before it becomes counterproductive.

Mortgages have helped drive results at the banks for the past year, but it’s not clear how much longer that will last. Most of the boom has come from people refinancing their mortgages, rather than buying new homes, and that is likely to peter out as interest rates rise.

Another hot topic during bank earnings was the so-called leverage ratio.

Last week, U.S. regulators proposed rules that would require big U.S. banks to hold greater levels of capital. While the new rules wouldn’t take effect until 2018, the debate was another reminder of the government’s stricter control over the industry. The banks say the new rules could constrain them from lending and put them at a disadvantage to international competitors.

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