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By Sam Mamudi

NEW YORK (Dow Jones) -- Banking stocks traded lower Monday, retreating as Deutsche Bank analysts cut their profit outlook and warned that trouble is likely to spread to more types of loans this year as the economy worsens.

The outlook for the banking sector should become even gloomier still, according to Deutsche Bank, which published a note suggesting that commercial banks' loan losses could surpass the 3.4% peak reached in 1934, during the Great Depression.

And even if losses don't reach to quite these levels, the analysts expect them to double from the 1.5% seen in the third quarter of 2008 to about 3% by the end of 2010.

"Reasons include an increased percentage of loans with higher losses (construction, credit cards, home equity), greater consumer leverage, and sooner problem recognition by banks," wrote lead analyst Mike Mayo and his team.

"About one-fourth of bank portfolios have so far seen significant problems (particularly residential mortgage and construction) -- these problems are likely to continue, but the other 75% is likely to see an acceleration in the pace of problems."

As a result of these dire projections, Deutsche Bank has cut 2009 estimates on 16 large commercial banks. "These estimates are now about one-third below consensus," said Mayo.

The banks that saw their estimates cut included Dow Jones Industrial Average components J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C), and Bank of America Corp. (BAC) as well as Wells Fargo & Co. (WFC), all of which continue to carry hold ratings.

The SPDR KBW Bank ETF (KBE), an exchange-traded fund that tracks U.S. banking stocks, was down 2% at last check.

'Increased risk' in bank industry

The 2009 earnings estimate for J.P. Morgan Chase got cut by 65 cents, to $2.05 a share, but Mayo sees opportunistic landscape for the company. "Despite these earnings challenges, we expect [the company] to gain share in many areas (especially capital markets)," he wrote.

The outlook for Citigroup isn't as rosy, and the bank rates as a hold for more negative reasons. "We believe that the share price is not currently trading on fundamentals given recent high volatility," said Mayo.

Accordingly, Deutsche Bank's price target for Citigroup shares is set at $9. In morning trading Monday, they changed hands at $7.39, up 3.5%.

Mayo cut Citigroup's 2009 bottom-line estimate by 30 cents, forecasting a loss of $1 a share.

As for Wells Fargo and Bank of America, both have share prices that "reasonably reflect risks and rewards," said Mayo.

However, he updated his 2009 profit estimate for Wells Fargo to reflect a cut of 30 cents to $1.70 a share, while Bank of America's projection was lowered by $1.15 to $1.35 a share.

"The bank industry has taken on increased structural risk in additional to mortgages that should become more apparent during the cyclical slowdown," Mayo said in his sector note.

"The industry is likely to reduce risk-taking to achieve greater long-term strength and stability even if it means lower returns and less growth."

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