First Union Corp. might not be done with credit-quality problems and rising expenses, but some analysts are beginning to see light at the end of the tunnel.

Katrina Blecher, a managing director of research at Sandler O’Neill & Partners, initiated coverage for the Charlotte, N.C., company with an “outperform” rating, saying First Union might not grow as much as management predicts but that its restructuring is moving it up the right track. Shares of First Union have been battered in the past year. They trade at a 10% discount to other superregionals, Ms. Blecher wrote in her report, reason enough to bet on a recovery. Still, Ms. Blecher did not give the stock a lot of upside potential — 3% growth is her target.

First Union is under new management, led by chairman, president, and chief executive officer G. Kennedy Thomson and chief financial officer Robert P. Kelly. The executives are focusing on building the company’s capital management and capital markets business — two strong drivers of fee revenues.

Ms. Blecher said in her research note that capital management is her “favorite” part of First Union’s business but added, “We believe First Union’s ability to meet its mid-term bottom-line growth rates of 10% to 12% will hinge on its ability to grow the retail division.”

Capital markets activities are less impressive, Ms. Blecher said, because they tend to expose the bank to more volatile earnings and drag the stock price down. Counterbalancing that, she said, management is doing a good job of emphasizing the importance of General Bank, the company’s retail banking arm.

“That is the backbone of every strong bank,” she said. “They have an attractive branch network, but they need to build market share” in addition to cutting more costs to increase efficiency, she said.

Still, Ms. Blecher is not as sanguine as the company is. “Earnings will decline in 2001 due, in part, to lower venture capital gains and slower revenue growth at the General Bank,” she said in her report, adding that she expects earnings to grow 8% in 2002.

Ms. Blecher expects 8% to 10% mid-term earnings growth, compared with management’s 10% to 12% goal.

Richard X. Bove of Raymond James & Associates in St. Petersburg, Fla., said that once the restructuring is finished and the company’s growth rate accelerates investment banking and capital management will push retail banking to the side.

Mr. Bove maintained his “strong buy” recommendation on First Union shares, saying asset-quality issues are generally overblown. He said that he expects gains from widening net interest margins to offset credit chargeoffs this year.

Andrew Collins, an analyst at ING Barings, was less upbeat about First Union. He also predicted that growth will be negative again this year. He has First Union on a “hold” recommendation and said he is “still waiting for the inflexion point.”

On Friday, First Union was down 22cents, or 0.67%, to $32.48, while the overall market for financial stocks ended the week on a positive note.

The American Banker index of top 50 banks was up 0.07% on Friday, and its index of 225 banks rose 0.9%.

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