April 13 (Bloomberg) -- No amount of enthusiasm for Wall Street earnings reported this month -- and there was plenty on April 9 to send Wells Fargo & Co. shares up 32 percent after the bank announced a record first quarter -- can overcome what President Barack Obama may soon have to say.

That’s because the results that matter, the ones that will determine whether San Francisco-based Wells Fargo and 18 other U.S. banks need more government cash, won’t be revealed until the end of April, when the Obama administration’s stress tests are completed. Treasury Secretary Timothy Geithner has said he expects some lenders will require “large” amounts of capital, and that could take the bloom off any rosy first-quarter report.

“There will be a pregnant pause until the outcome of the stress test is known,” said Dino Kos, a managing director at Portales Partners LLC in New York who has worked at Morgan Stanley and the Federal Reserve Bank of New York. “The test is ultimately about who gets diluted and how much.”

The six largest U.S. banks by assets are set to report their latest quarterly figures over the next two weeks. Analysts’ estimates compiled by Bloomberg show that four of them will post a profit. Only Citigroup Inc. and New York-based Morgan Stanley may disclose losses.

Citigroup, Goldman Sachs Group Inc. and JPMorgan Chase & Co., all based in New York, are scheduled to announce results this week. Bank of America Corp. in Charlotte, North Carolina, and Morgan Stanley will report next week. Wells Fargo pre- announced earnings last week, saying first-quarter net income was $3 billion, or 55 cents a share, more than double the average estimate of analysts surveyed by Bloomberg. Earnings were bolstered by an increase in the bank’s mortgage business, mainly from homeowners refinancing loans at lower rates.

Stress-Test Results

“We do expect first-quarter earnings will be better than previous quarters, but what investors are really looking most forward to are the results of the stress tests,” said Tom Kersting, an analyst at Edward Jones & Co. in Des Peres, Missouri. “Just looking at the first-quarter results may mislead some people as far as the results of the stress test.”

One reason quarterly results may not be enough to win the confidence of investors is that the Financial Accounting Standards Board approved new rules earlier this month that make it harder to determine how much capital banks will need if the longest recession since the Great Depression deepens.

“The question is how regulators are going to deal with the kind of FASB-adjusted earnings that we’re going to see, which are going to look very rosy, but will of course be completely non-cash,” said Joseph Mason, an associate professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.

FASB Rules

Changes to fair-value, or mark-to-market accounting rules approved by FASB on April 2 allow firms to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities. The changes, which apply to first-quarter results, could boost capital balances by 20 percent and earnings by as much as 15 percent, said Robert Willens, a former managing director at Lehman Brothers Holdings Inc., who now runs his own tax and accounting advisory firm in New York.

Banks will also be allowed to exclude from net income any losses they deem “temporary,” making it easier to provide a flattering earnings picture, said Kersting at Edward Jones.

The accounting changes probably won’t offset loan charge- offs that are growing so quickly “that by the end of the year all the top-line revenue will be eaten up by credit costs,” according to Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

‘Under-Reserving’

Wells Fargo, which bought Wachovia Corp. about three months ago, said last week it set aside $4.6 billion in the quarter to cover bad loans and reported net charge-offs of $3.3 billion for uncollectible loans at the combined companies. That wasn’t enough, Miller wrote in a research note the same day. He estimated Wells Fargo needed $6.25 billion in loan provisions.

“Wells Fargo is under-reserving for expected future losses,” Miller wrote.

Investors should focus on the banks’ bad-loan charges and provisions as opposed to revenue or loan growth, Miller said in an interview.

“It doesn’t matter how much money you make if you lose it on the back side,” he said. “And right now these guys have lost a lot of money relatively speaking because of the loans they put on their books years ago.”

Goldman, Morgan Stanley

Goldman Sachs, the sixth-biggest U.S. bank by assets, may post a profit of $1.70 a share on April 14, according to the average estimate of 15 analysts surveyed by Bloomberg. Morgan Stanley, the fifth-largest bank, probably will report next week that it had a 19-cent loss, according to the average of 11 analysts’ estimates.

The two former securities firms, which converted to banks in September, will also announce their results for the month of December because they changed their reporting year. Both companies had a loss in the three months from September through November, when their fiscal year previously ended, and analysts predict they also lost money in December.

Analysts and investors expect the banks to try to record losses in December instead of the first quarter in the hope that people will overlook the one-month results.

“They can probably throw a number of things under the rug and put that behind them,” said David Killian, who helps oversee about $500 million, including investments in Goldman Sachs and Morgan Stanley, at Sterling Asset Management LLC in King of Prussia, Pennsylvania.

Mark Lake, a spokesman for Morgan Stanley, and Lucas van Praag, a spokesman for Goldman Sachs, declined to comment.

TARP Payback

Morgan Stanley and Goldman Sachs each received $10 billion in loans from the government last year under the Troubled Asset Relief Program. While Goldman Sachs Chief Executive Officer Lloyd Blankfein, 54, said this month that banks have “an obligation to the taxpayers” to repay government money as soon as they can, Morgan Stanley CEO John J. Mack told employees on March 30 that “it’s the wrong time to do it now.”

Banks should keep the government money “to help us get through this very difficult time in financial markets and a very difficult time in the economy,” the 64-year-old Mack said.

Goldman Sachs may announce plans to raise money through a share sale this week, the Wall Street Journal reported on April 10. Raising fresh funds would make it easier for the bank to repay the government. Still, some analysts cautioned that such a move would pressure rivals to do the same, making those unable to pay more vulnerable.

JPMorgan, Citigroup

JPMorgan CEO Jamie Dimon, 53, also has said his firm would like to repay the $25 billion it received in TARP funding. The second-largest U.S. bank probably will report earnings April 16 of 32 cents a share, according to the average estimate of 17 analysts surveyed by Bloomberg. Dimon said on March 27 that the last month of the quarter was “a little tougher” than January and February, which he said were profitable for the bank.

Citigroup, scheduled to announce its results on April 17, may lose 35 cents a share, according to 14 analysts surveyed by Bloomberg. It would be the sixth straight quarterly loss for the bank, which has received $45 billion in bailout funds. CEO Vikram Pandit, 52, said in March that the lender was profitable during the first two months of the year.

Bank of America, the largest by assets in the U.S., may post earnings of 4 cents a share, according to an average of 19 analysts’ estimates. The bank, scheduled to report first-quarter results on April 20, may require a third round of government capital, according to David Fanger at New York-based Moody’s Investors Service, which downgraded the firm’s credit rating last month.

‘Rumor-Mongering’

Regulators may push the bank to raise $36.6 billion in capital after the stress tests are completed to bring its capital ratios in line with peers, Oppenheimer & Co. analysts said in an April 8 report.

The stress tests, designed by President Barack Obama’s administration to show how much extra capital the 19 largest U.S. banks may need to survive a deeper economic downturn, are controversial. Wells Fargo Chairman Richard Kovacevich called them “asinine” in a speech at Stanford University in California on March 13, saying the results would provide opportunities for short sellers to drive down bank stocks.

Wayne Abernathy, executive vice president of the American Bankers Association in Washington, said his group is concerned that investors will place too much weight on the results of tests based on scenarios that are unlikely to happen. He also noted that banks can open themselves up to “rumor mongering” in the markets. That view was echoed by Camden Fine, president of the Independent Community Bankers of America, a Washington trade group that represents community banks.

‘Into a Corner’

“The Treasury has painted themselves into a corner,” Fine said in an interview last week. “They are damned if they do and damned if they don’t when they announce the results. If they don’t give out enough information, or the information is presented in the wrong way, it could cause markets to plunge.”

While Treasury officials say they haven’t decided how much information will be released, the results will become known once it is determined how much capital each bank is required to raise. The U.S. Federal Reserve has told banks, including Citigroup and Goldman Sachs, not to discuss the tests during earnings calls with investors.

Two Scenarios

Regulators are using two economic scenarios for the tests. The first is a “baseline” forecast of 8.4 percent unemployment and 2 percent economic contraction in 2009, followed by 2.1 percent economic growth and an 8.8 percent jobless rate in 2010. The other is a “more adverse” scenario, with 8.9 percent unemployment and 3.3 percent contraction in 2009, followed by a 10.3 percent jobless rate and 0.5 percent growth in 2010.

The U.S. unemployment rate has already exceeded the baseline forecast, reaching 8.5 percent last month, the highest level since 1983. Gross domestic product probably fell at a 5 percent annual pace in the first three months of 2009, more than in the adverse scenario, according to the median estimate of economists surveyed earlier this month.

“The bottom line is if the unemployment rate peaks at 10 percent these banks can make it through,” FBR’s Miller said. “But if it peaks closer to 12 percent, nobody makes it. Or very few people make it.”

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

Last Updated: April 12, 2009 19:01 EDT