Investors looking for loan growth and surging revenues at the biggest U.S. banks, including Citigroup Inc are likely to be disappointed by first-quarter earnings.

Banks have been generating most of their profits in recent quarters from dipping into money they previously set aside to cover bad loans. Those reserve reductions make sense if credit losses are stabilizing, which seems to be the case.

But banks cannot reduce their loan loss reserves forever and at this point profit growth must come from making more money from loans and generating more fees, analysts said.

Boosting interest income from loans is tough when the interest rates at which banks lend are so low and loan demand is still tepid. Fee income, meanwhile, is being threatened by future regulatory changes.

The revenue line will be key, that's what most investors will be focusing on, said Jason Ware, senior equities analyst at Albion Financial Group. The Salt Lake City-based wealth manager oversees $650 million in client assets.

The question everyone has is 'Where does the top line go from here?' he said.

Some banks will be particularly hard hit by weak trading in the quarter, as the stock market sagged on Middle Eastern political upheaval, a Japanese earthquake and tsunami sent the yen to record highs and markets were broadly unpredictable.

But what many analysts are focusing on now is loan growth and data show the results may not be great. Bank loans outstanding declined 0.9 percent in January and 6.8 percent in February, according to a report from the Federal Reserve.

Commercial and industrial loans were on the rise, which many analysts see as a positive sign, but meanwhile a broad array of consumer loans -- mortgages, credit cards -- are posting declines, so total bank credit outstanding are shrinking.

The first quarter, analysts said, is typically the weakest of the year for banks.

But the analysts with the best track records foresee a quarter that was tougher than usual for many banks, according to Thomson Reuters Starmine Smart Estimates. These smart analysts believe other analysts are far too optimistic about some banks, and only a little too pessimistic about the others.

The analysts that have historically been the most accurate believe that results for Citigroup, Morgan Stanley and Goldman Sachs Group Inc will fall short of analysts' average estimates, according to Starmine Smart Estimates.

Starmine's analyst estimates, for example, indicates Morgan Stanley may miss estimates by as much as 22 percent.

The Starmine smart analysts are projecting that Bank of America Corp , JPMorgan Chase, and Wells Fargo & Co will beat broader estimates by a fairly small margin. BofA is projected with the largest earnings beat at 7.7 percent above the average estimate, Starmine estimates.

NEW NORMAL

For even the largest U.S. banks, interest income from loans is a key driver of earnings growth, but the total number of outstanding loans continues to stagnate, even as banks appear to have solved many of the credit issues that have dogged them for the last three years.

The fees that banks get from processing debit cards will likely be limited by provisions of the Dodd-Frank financial reform bill, which will pressure fee income for banks in the future.

Marty Mosby, bank analyst with Guggenheim Securities, said he is expecting banks will show a 10 percent decline in total charge-offs of bad loans, with some showing charge-offs shrinking by as much as 50 percent.

While that will be a boost to earnings as banks continue to release reserves protecting against loan losses, Mosby said he does not expect loan growth for the next few quarters.

This will be a different model than what we're used to seeing, based more on profitability, consolidation and efficiency, rather than outright organic growth, Mosby said.

In the fourth quarter of 2010, loans at U.S. banks totaled $7.38 trillion, the lowest level since the fourth quarter of 2009 and off from the peak of $8 trillion in the second quarter of 2008, FDIC data show.

Long term, investors may need to adjust their expectations for the industry's earning ability. Mosby said banks that were once able to produce a 20 percent return on shareholder equity may not be able to top 15 percent.

Bank's return on equity could dip to as low or 10 or 12 percent, he added.

Halle Benett, a banker in charge of financial institutions merger advisory at UBS for the Americas, said: I do think you've got to come to a decision as to what is generally accepted profitability for banking institutions and I'm not sure the cycle we came out of was the long-term norm.

(Reporting by Joe Rauch; Additional reporting by Clare Baldwin and Lauren LaCapra in New York; Editing by Gary Hill)

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