Dean Witter downgrades a trio of regionals.

Dean Witter Reynolds downgraded three more banks Wednesday, as rising interest rates and the improving economy continued to take their toll on bank ratings. Analyst Anthony R. Davis downgraded First Union Corp., PNC Bank Corp., and Central Fidelity Banks Inc. to "neutral" from "accumulate."

He had cut his rating on Central Fidelity only two weeks ago, when he also downgraded Barnett Banks Inc., Crestar Financial Corp. and Integra Financial Corp. Last week Dean Witter downgraded Commerce Bancshares.

In all, the investment firm has downgraded 23% of the 31 banks it covers in the last two weeks. The Dean Witter' actions have been pan of a wave of downgrades, as analysts reassess their views on the banking industry.

First Union closed unchanged at $4425. PNC closed up 37.50 cents to finish at $26.50. And Central Fidelity closed down 12.5 cents to end the day at $31.

Like others, Mr. Davis cited the pressure on net interest margins as rates rise. But he also cited the psychological effect the improvement in cyclical stocks, due to the healthy economy, was having on the languishing bankstock sector.

"The continued strength of the economy is causing earnings prospects for cyclical-based companies to diverge positively from those of regional banks," Mr. Davis said. "While firmer interest rates are negating the-profit contribution of 7% year-to-year loan growth within the banking industry, price increases and accelerating volume gains at chemical, steel, auto, and many technology companies are boosting earnings at cyclically sensitive firms."

Since the Federal Reserve began tightening interest rates last February, Dean Witter's bank group has outperformed the Standard and Poor's 500.

More recently, however, the picture has changed. This will mark the third consecutive month the banking group has under performed the S&P 500. Bank stocks have corrected an average of 9% since hitting their 52-week highs, Mr. Davis said.

Banks like Central Fidelity with liability-sensitive balance sheets are facing great pressure on their net interest margins, despite improved loan growth, he said.

Mr. Davis predicted margins would compress by five basis points per quarter through 1995.

And because of higher loan-todeposit bases, he said, superregionals will see sharper margin compression than smaller regionals.

As a result, Mr. Davis and his colleagues are awarding "buys" only to a select group of banks, including Fleet Financial Corp., Mellon Bank Corp. and First Fidelity COrp. The better buys, he said, were smaller regionals, including Compass Bancshares, First Commerce, SouthTrust, Signet --Ban Corp. and Star Banc Corp.

Some banks have taken action to reposition their balance sheets, he added. These steps include shortening the maturities of secu| rities portfolios and lengthening CD maturities.

Because bank stocks continue to fall, he added, the mergers-andacquisitions boom could be stalled. The currency with which superregionals acquire smaller banks will become devalued, he explained.

"In an ironic twist of timing, at the moment nationwide interstate banking legislation is finally enacted, potential acquirer banks may find themselves unable to exploit new market opportunities," he said.

One bank stock that has fallen precipitously the last few weeks is First Empire State Corp. of Buffalo, N.Y. Its shares have nosedived 11% in the last seven trading days. It closed down 75 cents yesterday at $146.50.

Analysts did not point to any one event to spur the slide, but cited the general downturn for banking stocks.

In New York City in particular, where First Empire has a presence., banks and thrills have seen a sharp downturn, said Kevin T. Timmons, senior bank analyst with First Albany Corp.

For example, he said, Haven Bancorp, which peaked at $17.625 last month, has fallen to $15.25, a 14% drop.

But this is an opportunity for investors who failed to buy earlier this year when the stocks were undervalued, he said.

The Dew Jones Industrial Average closed up 15.14 points at 3,878.18, with bank stocks generally up for the session.

Other movers included First Security Corp. which jumped 62.50 cents to close at $28.875 and Bankers Trust Corp. which rose one dollar to close at $67.375.

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