Goldman Sachs Group, whose shares have fallen 43 per cent this year, may report its lowest quarterly profit since the 2008 financial crisis.
Far from Wall St, Wells Fargo is headed for record earnings.
Publication of third-quarter US bank earnings figures, which kick off with JPMorgan Chase on Friday, will show that investment banking businesses such as bond trading and merger advice declined, while retail operations like mortgage lending prospered, according to analysts including Richard Staite at Atlantic Equities in London.
It's a reversal from 2009 and early 2010, when rising markets and a perfect trading record propelled New York-based Goldman Sachs to its highest profits ever, as commercial lenders including SunTrust Banks in Atlanta charged off billions of dollars of delinquent mortgages.
"You're going to see a big divergence between very poor earnings from pure capital-markets businesses and quite solid performance from the pure retail banks, particularly those that have a mortgage-origination business," said Staite.
Slowing economic growth and heightened worries about European sovereign debt has weighed on bank stocks all year.
None of the 24 members of the KBW Bank Index has posted a gain in 2011, and the worst performer, Bank of America, is down 53 per cent.
A jump in borrowing costs at some banks, including New York-based Morgan Stanley, began to subside last week as investors became more optimistic that European policy makers would solve the region's sovereign debt and banking crisis.
"I hope European Governments manage to come to a solution that causes an end to the kind of fear that the markets have lived through for the last 90 days," said David Hilder, a New York-based analyst at Susquehanna Financial Group.
"And if that happens, then I think you'll see activity levels pick up, possibly in the fourth quarter and certainly in 2012."
A decline in trading revenue over the past two quarters has led large investment banks to focus on cost reductions, including job cuts. Goldman Sachs, led by chief executive Lloyd Blankfein said in July that it would cut about 1000 jobs after its second-quarter drop in trading revenue was bigger than analysts estimated.
Bank of America, the largest US lender by assets, announced plans last month to eliminate 30,000 jobs in the next few years. UBS, Switzerland's biggest bank, said in August it would cut about 3500 positions, or 5.3 per cent of its workforce. Morgan Stanley said it wanted to bring down annual costs by US$1 billion over the next three years.
The focus on expenses is likely to lead to lower compensation. Year-end bonuses for fixed-income traders and salespeople across Wall St may fall 20 per cent to 30 per cent from last year, Johnson Associates, a New York-based compensation-consulting firm, estimates. Johnson said bonuses for equity traders will be flat to down 15 per cent.
Executives at some Wall St firms are planning more cuts to jobs and compensation after third-quarter results are released because they don't expect the industry to recover soon from a slowdown that's partly driven by regulatory changes says Richard Bove, an analyst at Rochdale Securities in Florida.
"The only action that they can take to deal with the expected environment is to cut costs," Bove wrote.
Stock- and bond-market investors were spooked during the quarter by Standard & Poor's decision to downgrade the US Government's debt rating, a protracted Congressional debate over raising the government's borrowing limit, and by the Federal Reserve's decision to leave rates near zero until 2013 to combat stalling economic growth.
Goldman Sachs, which made more than 70 per cent of its revenue in the first six months from investing its own money and trading, will likely be most affected by the market declines.
The company's earnings will collapse to breakeven in the third quarter from US$2.98 per share a year earlier, according to the average of 24 analysts' estimates compiled by Bloomberg.
That would be the lowest since the fourth quarter of 2008, when the firm posted its only quarterly loss since going public in 1999.
Twelve of the analysts expect Goldman Sachs to report a loss for the three months on October 18, driven by declines in its investments in companies such as Industrial & Commercial Bank of China, which fell 35 per cent in the quarter in Hong Kong trading, and other assets such as real estate.
- BloombergBy Christine Harper, Michael Moore