Big banks want to paint it black

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Citigroup CEO Vikram Pandit helped spark a market rally when he told employees the troubled bank was profitable in January and February. The CEOs of other big banks quickly followed suit, telling investors they too were off to a good start to 2009.

The KBW Bank Index, which tracks 24 top banks, has surged this week thanks to rosy comments from Citi, BofA and Chase. But it's still been an awful year for bank stocks.

NEW YORK (CNNMoney.com) -- What do Vikram Pandit and Madonna have in common? They're both trendsetters.

Sure, the Citigroup (C, Fortune 500) CEO isn't making any waves in the world of fashion or pop culture like the Material Girl. But Pandit, who told Citi employees in a memo earlier this week that the battered, partly nationalized bank was profitable in the first two months of the year, quickly sparked a round of me-too responses from his rivals.

Since Citi's disclosure that it was in the black in January and February, JPMorgan Chase (JPM, Fortune 500) chief Jamie Dimon and Bank of America (BAC, Fortune 500) head Ken Lewis have proudly announced that their firms also got off to a profitable start in 2009.

And guess what? Bank stocks have surged this week. Through Thursday's close, shares of Chase have soared 45%, Citi's up more than 60% and BofA has skyrocketed over 85%. The broader KBW Bank Index, which includes these three companies and 21 other banks, is up about 40% for the week.

With that in mind, I'm guessing it won't be long before Wells Fargo (WFC, Fortune 500) CEO John Stumpf, U.S. Bancorp (USB, Fortune 500) top dog Richard Davis and PNC (PNC, Fortune 500) chief James Rohr join the positivity parade and all ''fess up about how awesome their banks are as well.

Still, there is a problem here. Even though some investors may be taking the rosy comments from bank CEOs as a sign that banks have finally bottomed, many analysts still expect the first quarter to be ugly for the group.

According to consensus estimates from Thomson Reuters, analysts are forecasting a loss of 32 cents per share for Citi and a loss of a penny per share for BofA. In fact, analysts are predicting that nearly half -- 11, to be exact -- of the companies in the KBW Bank Index will bleed red ink in the first quarter.

In addition to expected losses at Citi and BofA, analysts are projecting quarterly losses for several big regional banks, including Atlanta-based SunTrust (STI, Fortune 500), Zions Bancorp (ZION) of Salt Lake City, and a trinity of Ohio-based banks: Huntington Bancshares (HBAN), KeyCorp (KEY, Fortune 500) and Fifth Third Bancorp (FITB, Fortune 500).

John Butters, director of U.S. earnings research for Thomson Reuters, said that despite the optimism from CEOs, analysts have cut first-quarter earnings estimates for financials in the S&P 500 -- a group that includes insurers and consumer finance firms as well as banks -- by 8% this week.

Butters added that analysts are forecasting that profits for the overall financial group will fall 37% from a year ago.

So if you are an investor trying to figure out what's next for the beaten down banking sector, you're in a serious pickle.

On the one hand, can anyone possibly take the word of bank executives? After all, many were doing their best Nero impersonation last year and continued to fiddle away as their balance sheets burned. Why should they be believed now?

On the other hand, Wall Street analysts are often wrong about earnings forecasts. In the past year, many banks wound up posting quarterly results that were significantly worse than consensus estimates.

Now, analysts are cutting their estimates as quickly as they can in order to get ahead of the curve. So is it possible that they've slashed estimates too far because they don't want to get burned again and risk missing the boat on the upside as a result?

But it's also likely that both CEOs and analysts could be right, which adds to the confusion. Citi and BofA, for example, pointed out that they operated at a profit in January and February.

Analysts' estimates, however, are for net results. And given that many banks, to their great consternation, are required to report the current market values of many of their soured assets, several banks will probably be forced to take more huge writedowns that could cause big net losses.

With that in mind, money managers stressed that investors still need to be cautious. The worst may not be over for banks just yet.

Frank Barkocy, director of research with Mendon Capital Advisors, an investment firm that focuses mainly on financials, said that banks still have to grapple with deteriorating loan quality in their credit card portfolios as well as the lingering effects of the meltdown in mortgages.

"This could be a tough quarter even though we've had positive reinforcement from some CEOs," Barkocy said. "As we get into April, we may see some warnings and that could take some of the wind out of the sails of the rally."

Christopher Bingaman, portfolio manager of the Diamond Hill Financial Trends (DHFT) fund, agreed that there is still a lot of uncertainty about what's going to happen to banks in the next few months. But he thinks that the stocks may have beaten up so much already that almost all the bad news could be priced in by now.

"At this point, the market is so pessimistic about banks and financials, any glimmer of good news is enough to lift the stocks," he said.

Bingaman added that there are other reasons bank stocks have been rallying as of late. These include hopes that the SEC may soon reinstitute a rule that will make it tougher for short sellers to gang up on a stock, as well as talk that the mark-to-market accounting rule that has led to most of the big bank writedowns may be modified.

But at this point, it probably makes more sense for investors to try and identify actual winners in the banking group instead of betting on a broad recovery that could boost even the shares of the most troubled.

As such, analysts do believe Dimon; they are forecasting a quarterly profit for JPMorgan Chase. Analysts also think Wells Fargo, U.S. Bancorp and PNC will be in the black this quarter and that smaller regionals such as M&T Bank (MTB) and BB&T (BBT, Fortune 500) will also be profitable.

Barkocy said he's more comfortable about the prospects for the banking sector now than he was a few weeks ago. But he said it's worth remembering that there have been many other times in the past few months when people thought the worst of the banking crisis had passed.

This week's optimism can quickly turn to more doom and gloom.

"We're playing it close to the vest with our bank investments. So much can happen in one month's time. Fundamentals have changed in just a two-week time," Barkocy said.

Shameless plug alert: Before I started writing The Buzz, I covered the media business for several years at CNNMoney.com. Some of this reporting is the basis of a book I've written about News Corp. CEO Rupert Murdoch called Inside Rupert's Brain, which will be published on March 19 by Portfolio, an imprint of Penguin Group (USA).