Four major hurdles must be crossed before a broad recovery in the banking sector, and that might not occur for another six to nine months, according to a new research report from Goldman Sachs.

The sector is only likely to rebound broadly when credit costs have stabilized, banks complete a process of recapitalization, consensus estimate ranges for earnings narrow and the yield curve steepens, Goldman Sachs analysts wrote in the report, which it based on looking at past credit cycles.

Goldman Sachs estimates credit losses resulting from continued deterioration in the mortgage and lending markets will not peak until early 2009, making a broad-based rally in the sector unlikely before the end of 2008. Goldman Sachs estimates peak losses will occur during the first quarter of 2009, with charge-off ratios reaching, on average, 1.39 percent.

Charge-off ratios were at about 0.95 percent during the first quarter, and Goldman Sachs expects them to rise to about 1.12 percent for the second quarter. Charge-offs are loans written off as not being repaid. The ratio measures charge-offs as a percentage of the size of a bank's total loan portfolio.

Banks also must continue to raise new capital before share prices can rebound. Goldman Sachs estimates the recapitalization process is about two-thirds complete for U.S. banks and the risk of insolvency has been significantly reduced. U.S. banks have raised about $120 billion and will need to raise an additional $65 billion, Goldman Sachs wrote in the report.

But with loss estimates still changing and some banks still needing to raise capital, analyst estimates vary widely from bank to bank, Goldman Sachs said.

The variations in future earnings estimates means there is no agreement where earnings or book value of banks will stabilize during the credit downturn, according to the report.

"We watch for a tightening of the consensus range, which is at record highs," Goldman Sachs said in the report. "When the range tightens, it will signal confidence in where book values stabilize."

The one factor likely already completed is the steepening of the yield curve, Goldman Sachs said. The Federal Reserve has significantly cut interest rates to try and help boost the financial markets and the economy, which has led to a steeper yield curve.

But, Goldman Sachs notes a steepening yield curve during this cycle might not provide the benefit of past cycles because banks earn more money on fees now and the easing by the Fed has yet to improve tight credit conditions.

Because of revisions to credit costs and loss estimates, Goldman Sachs also reduced price targets and 2008, 2009 and 2010 earnings estimates for some national, regional and trust banks because of the likely continued increase of credit-related losses.

Among 21 banks it covers in the space, Goldman Sachs, on average, cut 2008 estimates by 9 percent, 2009 estimates by 4 percent and 2010 estimates by 2 percent to account for greater credit losses.

Comerica Inc.'s 2008 estimate was cut the furthest. Goldman Sachs reduced its 2008 estimate for Comerica 34 percent to $1.75 per share.

Shares of Comerica fell 37 cents to $31.65 in afternoon trading as broader markets declined, including much of the financial sector.

Western Alliance Bancorp's 2009 and 2010 estimates were reduced the most. The 2009 estimate was cut 17 percent to $1 per share, while the 2010 estimate was lowered 14 percent to $1.25 per share.

Western Alliance shares fell 21 cents, or 2.3 percent, to $8.94.

Price targets among the group of banks were cut, on average, 14 percent. Huntington Bancshares Inc.'s price target was cut the most as Goldman Sachs reduced the target 43 percent to $6.

Shares of Huntington Bancshares fell 40 cents, or 6 percent, to $6.27.

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