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Bank Profits: Will the Good News Fade?

So far this earnings season, bank profits have appeared strong, or at least above the very low expectations of just a week ago. Some of this strength might be deceptive.

Morningstar analyst Jaime Peters explained why yesterday (when I was talking to her for a story on Bank of America): After all the alarm this month about Fannie Mae and Freddie Mac, and after the collapse of IndyMac Bank, financial stocks plunged. That caused strong banks, eager to prove that everything was OK, to move up their earnings releases. Some other strong banks were already early on the calendar.

Wells Fargo (WFC), Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC) and several smaller regional names beat analyst expectations in the past week.

Today, however, Wachovia (WB) is reporting weak earnings. Tonight, troubled Washington Mutual (WM) reports.

So, whereas the strong banks reported early, the next couple weeks could bring financial results from some of the more stressed big banks and from regional banks in hard-hit areas like California and Florida. We’ll see.

One benefit of this earnings season — if you can call it a benefit — might be to add some subtlety and nuance to investor behavior. Faced with the looming uncertainty of the credit crisis, investors have punished nearly all financial stocks. As investors get more information, they might learn to distinguish between the strong, the weak and those in between.

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