Big banks set for strong Q1 on trading, fixed income

Big banks and major trading desks appear poised to report positive first quarter results as two of the nation's biggest banks beat Wall Street's expectations on Tuesday, analysts said.

Large institutions are benefiting from the strength of trading activity, while medium-size banks may only turn in mediocre results as it remains difficult to drum up income from loans and other interest-based businesses, analyst Dick Bove said.

"I think there will be a split in terms of where the earnings show up. They'll be good for the big banks, won't be as good for the middle-sized banks," Rafferty Capital Markets' vice president of equity research said on CNBC's "Squawk Box."

Shortly after Bove spoke, JPMorgan Chase and Wells Fargo delivered quarterly earnings that topped analysts' expectations.

Read MoreJPMorgan profit up on fixed-income trading rebound; Wells Fargo earnings beat, but Fed moves key

Bank of America releases first quarter results on Wednesday morning. Goldman Sachs, Citigroup and American Express report Thursday.

JPMorgan's performance was driven by growth in its fixed income and equities trading businesses, which grew 5 percent and 22 percent, respectively, said Paul Miller, analyst at FBR Capital Markets.

They've been struggling a little bit on the principle trading because of that lack of volatility in the currency and commodity markets," Miller said on CNBC's "Squawk on the Street," adding that the return to normal levels of volatility should help trading lines.

Traders are typically able to find opportunities for profit when asset prices are volatile.

Other banks with big trading desks—Goldman Sachs, Morgan Stanley and Citigroup—will have some explaining to do if their trading businesses do not follow the same trend as JPMorgan's first quarter performance, Miller said.

Read MoreMarkets look to bank earnings, retail data

As for lending, commercial and industrial loans performed well throughout the winter, which should boost big regional banks, Bove said.

But weakness in residential loans will be a drag on smaller regional and community banks and will continue to weigh on big banks' balance sheets, analysts said.

"Anything to do with residential lending, whether it's home equity loans or mortgages, did very badly," Bove said, noting the poor performance was not due to lack of demand, but government regulation that discourages banks from issuing home equity loans.

JPM beats Q1 expectations
JPM beats Q1 expectations   

Banks need interest rates to rise only slightly in order for mortgage lending and other interest-based income to contribute more to earnings, said Marty Mosby, director of bank equity strategies at Vining Sparks.

"You just need 50 to 100 basis points in the short end of the curve to allow the large banks to be able to create a spread on their deposits," he said. "Right now it's zero. There's no way to create any income off these strong deposit franchises that have been generated since the financial crisis."

Read MoreWells Fargo earnings beat expectations

"If interest rates can start to move up modestly by that 50 to about 100 basis points, the banks can double the S&P 500 over the next 12 months." he said. "If you see the Fed back off and don't see the increase in interest rates, then the banks are going to underperform slightly."

Miller's firm believes Wells Fargo, the nation's biggest issuer of home loans, is a better investment than JPMorgan based on the banks' fundamental businesses and its view that 2015 will ultimately be strong year for the mortgage market.

"It's just a much more cleaner institution, not a lot of volatility in their earnings stream. They're not highly dependent on those trading desks to meet their numbers," Miller said.

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