U.S. banks' first-quarter results will show that losses from credit cards and commercial and real estate loans have not yet peaked, and perhaps dash hopes that the worst of the banking crisis has passed.

The January-to-March period is the first full quarter since the industry got hundreds of billions of dollars of taxpayer bailout money and mergers weeded out several troubled lenders.

Results at large banks such as Bank of America Corp , JPMorgan Chase & Co , Citigroup Inc , Wells Fargo & Co are expected to improve from the fourth quarter, helped in part by a surge in mortgage refinancings, lower deposit costs and fewer writedowns.

But investors will approach with abundant caution as bank results stream in over the next two weeks. They know the bottom lines will reflect a new accounting rule that may further limit writedowns without actually improving bank balance sheets. And the government is conducting stress tests to see which of the 19 biggest lenders may need more capital.

It's going to be such a muddy picture, which will keep a lot of investors on the sidelines, said Michael Nix, who helps invest $650 million at Greenwood Capital Associates LLC in Greenwood, South Carolina. There is an expectation that we see a more favorable earnings environment, but that's relative -- it's a question of whether we've caught the falling knife.

The fourth quarter was the sector's first in the red since 1990. Banks now face a deep recession that may not end before 2010, worry over how much new capital they need, and conjecture over how long executives will keep their jobs.

Chief executives of Bank of America, JPMorgan and Citigroup -- Kenneth Lewis, Jamie Dimon and Vikram Pandit, respectively -- said their banks made money in January and February, though Lewis and Dimon said trading results ebbed in March.

Oppenheimer & Co analyst Chris Kotowski wrote that large commercial and investment banks may have reasonably stable 'core' revenues, expenses and earnings before loan losses and writedowns, but credit deterioration will likely continue in full swing.

Regional banks may fare worse than big banks, given their large relative exposure to accelerating losses from consumer loans such as credit cards, commercial and industrial loans, and commercial real estate.

Analysts expect Comerica Inc , Fifth Third Bancorp , KeyCorp , Regions Financial Corp , SunTrust Banks Inc and Zions Bancorp to lose money in every quarter in 2009, Reuters Estimates said.

And yet bank shares have rallied, gaining roughly 50 percent since March 6, though they have still lost roughly three-quarters of their value over the past two years.

The rally in bank stocks got way ahead of itself, said Michael Mullaney, who helps invest $9 billion at Fiduciary Trust Co in Boston. We would expect a pullback as earnings announcements come in, pretty morose for the most part.

CATCH-22

Goldman Sachs Group Inc is expected to kick off earnings season on April 14 and return to profit after its first quarterly loss as a public company. Smaller rival Morgan Stanley may report results the following week; analysts expect a small profit.

Some banks will need to show they properly assessed the risk in buying lenders felled by mortgages and troubled debt.

Among these: takeovers of Merrill Lynch & Co by Bank of America, Wachovia Corp by Wells Fargo & Co , much of Washington Mutual Inc by JPMorgan, and National City Corp by PNC Financial Services Group Inc
.

Bottom lines may be inflated by a new Financial Accounting Standards Board rule that gives lenders more freedom to value holdings as they would in normal markets, rather than at lower values because current markets are distressed.

There is reason for lenders not to do that.

It may make it harder to sell assets under the government's $1 trillion Public-Private Investment Program if banks write up assets too far. Meanwhile, the government may decide after conducting the stress tests that the assets should not be written up so high and must be written back down.

While the Obama administration hopes to avoid major intervention, it may push undercapitalized banks to raise money privately or take new capital from the government.

The industry is in a Catch-22, the often bearish Calyon Securities USA Inc analyst Mike Mayo wrote on Monday. Either (regulatory) efforts go easy on banks and leave the toxic assets on balance sheet, or go hard and require large, new dilutive capital raises.

The Treasury plans not to reveal stress test results until after earnings season to avoid spooking equity investors, a person familiar with the process said on Tuesday. The source spoke anonymously because no final decision has been made.

I don't expect a lot of color around the stress tests, Greenwood's Nix said, apart from banks saying they will be comfortable coming out of it.

EARNING THEIR WAY OUT

Perhaps no CEO is on the hotseat more than Bank of America's Lewis. Some shareholders are demanding his ouster because of the bank's shrunken share price, the $3.62 billion of bonuses awarded to Merrill workers, and a perception that Merrill was one takeover too many.

Lewis wants to stay until his bank repays the $45 billion it took from TARP and makes $30 billion a year after taxes. Citigroup also took $45 billion from TARP. Treasury Secretary Timothy Geithner this week said he would not hesitate to oust management at big banks that need exceptional assistance.

Some banks that got TARP money have repaid it and others want to, noting that the government can (and does) retroactively impose new restrictions on banks that received funds, and a perception that banks on the dole might be too sick to survive on their own.

But Robert Albertson, chief strategist of Sandler O'Neill & Partners LP, suggested in an April 7 report that banks do not need TARP money as an incentive to lend more.

We can think of no stronger, healthier motive for new lending than knowing you have to earn your way out of past mistakes, he wrote.

(Reporting by Jonathan Stempel; Additional reporting by Karey Wutkowski in Washington; editing by John Wallace)