Don't Bank on a Bottom

Credit Suisse(CS Quote) on Thursday swung to a big first-quarter loss, wrote down more than $5 billion in assets and still investors rejoiced, sending shares up more than 5% on the New York Stock Exchange.

The surge in the Swiss banking outfit's stock price reflects a trend over the past week set by other financials like Merrill Lynch(MER Quote) and Citigroup(C Quote), which also rallied on bad news, as some investors made bets that the sector had hit a bottom -- a view advanced just Thursday by Deutsche Bank analyst Mike Mayo.

"The industry is approaching the later stages of the credit crises that started last summer, given $300 billion of writedowns at global financial firms," Mayo wrote in an industry note. "While the exit may be delayed by greater uncertainty around monoline insurers, the ultimate disposition of CDOs, or continued disruption in short-term money markets, the end seems closer."

But others say the sector has a long way to go before a bottom hits.

"We'd love to tell you that the systemic storm is passed and that valuations for financials are stabilizing, but the fundamental data just does not support such a view," according to Institutional Risk Analytics market commentary published this week. "By way of a time frame reference, we're just barely into the third inning of the credit crisis ballgame."

First-quarter earnings for most banks, many of which reported over the past two weeks, were dismal, paving the way for some to say that the second quarter is likely to be just as bad. Banks and investors will continue to shift their attention from securities-related writedowns to an anticipated spike in charged-off loans, or debts the banks do not expect to be paid back. If that happens, it will eat into the large reserves banks have been setting aside in anticipation of rising defaults in a variety of consumer categories, not to mention the beginning whispers of trouble in commercial lending portfolios.

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