JP Morgan cuts banking sector's earnings outlook

(Reuters) - J.P. Morgan Securities slashed its earnings estimates on the banking sector and cut its share-price targets on several banks.

The government is seeking to maintain liquidity in the economy and systemic risk appears to have been removed, but more needs to be done, analyst Carla Antunes da Silva said in a note to clients.

The government will not be a passive investor for the banking sector and may be pressed to exert more influence as the economy deteriorates, she said.

"Where this will leave earnings is hard to tell."

The analyst cut her 2009 earnings estimate on the sector by 31 percent and 2010 outlook by 34 percent.

Banking profitability will not be the same again for a long while, she said and maintained her "underweight" rating on the sector and each of its constituents.

The analyst said margin growth will slow as the lower interest rate environment will put pressure on liability spreads.

Fixed cost of writing business will be more expensive and it will be harder for Royal Bank of Scotland Group Plc (RBS.L) and Lloyds TSB Group (LLOY.L) to aggressively reduce headcount, she said.

"We believe the only real way to "clean" the situation would be to adopt a 'good bank, bad bank' type structure. This would reduce the risk of rising impairments on equity, improve wholesale funding and make the system investable once again," the analyst said.