April 16, 2009

A few months ago, a teetering U.S. banking system seemed ready to take down the global economy. Now the stocks of the biggest banks have been on a tear, following rosy earnings announcements by Wells Fargo (WFC) and Goldman Sachs (GS).But the strong first-quarter numbers may not be as strong an omen as they seem. Analysts expect a good chunk of the industry's gains to prove fleeting, leaving banks to grapple with the grim economy and investors to deal with stock market fallout."Bank earnings benefit from a number of things that don't have a lot to do with fundamentals," says Fred Cannon, chief equity strategist at investment bank Keefe, Bruyette & Woods (KBW).

Consider the refinancing boom, which was triggered by record-low mortgage rates. The flurry of activity helped propel Wells to a $3 billion gain this quarter and will likely boost other banks as well.But the trend may quickly peter out since there's a limited pool of people who can refinance their loans. Among the borrowers who don't typically qualify: the one in five owners who are underwater on their mortgages, meaning their homes are worth less than their loans.The record-low rates are goosing bank earnings in other ways. Many banks service the mortgages in large investment pools, collecting homeowners' monthly payments and distributing them to investors.