By Tatiana Bautzer

NEW YORK (Reuters) -U.S. banking giants are expected to report lower profits for the fourth quarter after they set money aside to cover souring loans while also paying more to depositors.

The largest banks' net interest income (NII) - or the difference between what they earn on loans and pay out on deposits - probably fell on average 10% in the fourth quarter, Goldman Sachs analysts said. An estimated 15% decline in trading revenue will also weigh on earnings, they said.

JPMorgan Chase, Bank of America, Citigroup and Wells Fargo report fourth-quarter and full year results on Friday.

Banks' profits will likely be squeezed as they set aside more reserves in the fourth quarter to prepare for customers to default on the loans. Profits could also be curbed by banks paying more to keep depositors' money in their accounts.

Bank of America's earnings per share (EPS) are expected to drop 23% in the fourth quarter versus a year earlier, while EPS at Citigroup and Morgan Stanley will fall 25% and 17%, respectively, according to analyst estimates compiled by LSEG. EPS is predicted to slide 3% for JPMorgan and 2% for Goldman Sachs.

By contrast, earnings at Wells Fargo will benefit from a reduction in expenses, including some related to regulatory orders.

Separately, Citigroup investors will look for signs that its sweeping overhaul will raise returns. And Morgan Stanley's new CEO Ted Pick will provide a strategy update, his first since taking the helm at the start of the year.

The largest banks are also expected to book charges to replenish a Federal Deposit Insurance Corp fund after it was drained by the collapses of Silicon Valley Bank and Signature Bank.

"There is a lot of macroeconomic uncertainty now and it's hard to predict the trajectory for net interest income," said Bank of America analyst Ebrahim Poonawala. He cited the debate about the potential pace of Federal Reserve interest rate cuts this year as one of the key questions hanging over markets.

The health of the U.S. consumer is also in focus as lower-income customers fall behind on payments in greater numbers. Although delinquencies are increasing, the strong job market has kept a lid on loan defaults, Poonawala added.

Last year was a strong year for bank profits despite the expected slump in fourth quarter net income. Earnings at the largest banks probably rose 5%, compared with a 5% decline for regional banks, Poonawala estimated.

The KBW index of banks stocks fell 5.4% last year and accumulates a 0.7% drop in the first days of 2024.