Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Why US banks soon will be singing the blues

Dick Bove: Invest in regional banks

With Wall Street banks about to report on how much money they've been making, estimates are moving in the wrong direction.

Coming off a quarter in which the industry collectively reported $43 billion in profits, analysts had been hoping a rising rate environment and increasing demand would keep things moving for the $15.1 trillion sector.

However, fading hopes for a rate hike in 2015 and other factors are making analysts nervous about just how the quarterly profit reports will shape up. JPMorgan Chase gets things started for the Big Four on Tuesday, with Bank of America and Wells Fargo on tap Wednesday and Citigroup due Thursday. Goldman Sachs reports Thursday as well and PNC will report Wednesday.

As a sector, financials are expected to show a 3.8 percent annualized growth in profits, according to S&P Capital IQ. While that's better than the 5.1 percent decline projected for the entire index, it's a big comedown from initial projections. Revenue is expected to grow 4.4 percent.

A pedestrian walks past the JPMorgan Chase headquarters building in New York.
Scott Mlyn | CNBC

As recently as July analysts had been forecasting 9.9 percent growth, and a year ago that expectation was a gaudy 27 percent. So even if results come in better than expected, they likely will remain well below the initially lofty hopes for financials, which were supposed to be 2015's best-performing sector.

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Individual companies have seen substantial revisions in recent days.

Analysts have cut MetLife estimates from 88 cents a share to 77 cents, Goldman Sachs from $3.46 to $3.20 and Morgan Stanley from 68 cents to 63 cents, according to FactSet. Earnings expectations have been reduced for 53 of the 88 companies in the S&P 500's financial sector.

The weakness comes as loan growth has held fairly steady thanks to a robust climate in commercial real estate. The sector jumped 9.7 percent in the third quarter, its best of the year after rising 6.7 percent in 2014, according to Federal Reserve data.

Investment banking also has been fairly solid throughout the year. While global revenue is down 10 percent year over year, it's been flat at $28 billion in the U.S., thanks to a record $9.7 billion haul in mergers and acquisition revenue, according to Dealogic.

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In a note to clients, Goldman Sachs analysts said risk "seems to be skewed to the downside," with the firm projecting just five companies out of the 15 top banks it covers to beat estimates. Goldman favors Wells Fargo, Signature Bank, SunTrust Banks and Zions Bancorp.

Bank stocks have underperformed in 2015, with the KBW Nasdaq Bank Index off 4.8 percent year to date versus a 2.2 percent decline in the S&P 500. The index is up 1.3 percent in October, lagging the broader market's gain of nearly 5 percent.