NEW YORK -- If the nation's major banks report big third-quarter profits, don't take the numbers at face value.

Although trading gains could drive strong earnings for banks like JPMorgan Chase & Co. and Goldman Sachs Group Inc., mounting loan losses and the prospect of tougher capital requirements and higher deposit insurance fees are expected to eat into the banks' profits well into 2010 and beyond.

Moreover, after all the reports are in, investors might be seeing a fragmented earnings picture, with profits at large companies obscuring festering problems at banks of all sizes, and in the broader economy as well. Disappointing earnings could dim hopes for a meaningful economic recovery and slow the stock rally that began in March and propelled the Dow within sight of the 10,000 level.

A year after the housing crisis prompted a massive government bank bailout, the industry still faces the same problem: growing losses on loans as consumers and businesses default on debt.

Nationwide, 98 banks have failed this year and 416 are deemed a problem. Analysts expect more closures among small and regional banks caused by losses on commercial real estate loans.

"Consumers still have problems, so that means more credit problems for banks," said Brad Hintz, analyst at Sanford C. Bernstein & Co. "Those banks with strong capital markets activity will do better in the quarter. Those without will face challenges."

Loan losses and related costs will likely keep the banking industry "from returning to normal until 2011," Hintz said.

Investors are focused on reports this week from heavy hitters including JPMorgan, Goldman Sachs, Citigroup Inc. and Bank of America Corp. Investors are looking to banks for signs that an economic recovery is under way.

Better-than-expected results from banks in the first half of the year stirred hopes that the economy is healing, and that optimism helped drive the stock market's seven-month rally. The benchmark Standard & Poor's 500 index is up 59.1 percent since hitting a 12-year low in early March. The KBW Bank Index, which tracks 24 of the largest U.S. banks, has risen a staggering 144.3 percent.

Despite that impressive performance, investors are still wary about the industry. Financial stocks mostly fell Tuesday after influential bank analyst Meredith Whitney downgraded Goldman Sachs' shares to "Neutral" from "Buy," saying investors should consider taking profits.

It's true that some of the biggest banks are faring much better than anyone expected at the height of the financial crisis. Several have raised significant amounts of money in the capital markets and some, including JPMorgan and Goldman Sachs, have been able to return government bailout funds they received last fall at the height of the financial crisis.

JPMorgan, which reports Wednesday, is expected to post profits of 49 cents a share, up from 11 cents for the same three-month period a year ago. Goldman, meanwhile, is expected to report profits of $4.24 per share on Thursday, up 57 percent.

But profits may not be the most important indicator of a bank's health. Even banks that make money will have to convince investors they've socked enough away in reserves to withstand future loan losses, said longtime banking analyst Bert Ely.

The cost of loan losses and putting money into loan-loss reserves is expected to soar 90 percent in the third quarter over the previous year, Keefe, Bruyette & Woods said in a note. Bank of America alone is expected to boost loan-loss reserves in the quarter to $13.4 billion.

"Bank earnings will only look healthy if institutions have adequate loss reserves," Ely said.

Investors also want to see how struggling regional banks have fared. Regional banks lent heavily to the now-teetering commercial real estate market and have less diversified operations to offset losses than their larger rivals.

Commercial real estate loans account for more than three out of 10 of all loans issued by regional banks, according to Keefe, Bruyette & Woods, which is predicting higher losses from those loans in 2010.

That could weigh on earnings at regional banks like Regions Financial Corp., which analysts expect to post a third-quarter loss of 25 cents per share.

"Regional and community banks that have heavy exposure to commercial real estate and construction lending could post uglier results than the larger banks," said Gerard Cassidy, banking analyst at RBC Capital Markets.

Beyond the bad credit environment, banks also face big regulatory challenges going forward. The Federal Deposit Insurance Corp.'s reserve fund has been so sapped by bank failures that it has fallen into the red.

Faced with that sobering prospect, the FDIC board took the unprecedented step last month of proposing to have U.S. banks prepay $45 billion, or three years' worth, of insurance premiums.

At the same time, the Obama administration and Congress are considering new rules to require large banks to keep more capital as part of a broad overhaul of the financial system.

The tougher requirements will likely curtail earnings and keep banks in a defensive crouch for the foreseeable future, said Christopher Whalen, managing director of Institutional Risk Analytics.

"They will not be lending to the real economy," he said of banks. "They're going to shrink themselves."