Continuing its yearlong series of banking industry upgrades, Moody's Investors Service Inc. on Friday raised its rating on Chemical Banking Corp. and Chase Manhattan Corp.

Chemical's senior debt was raised to A3 from Baa 1, subordinated debt to Baal from Baa2, and preferred stock to A3 from Baa2.

Long-term deposits of subsidiary banks were increased to A1 from A2.

Besides improved asset quality, Moody's cited Chemical's stronger core earnings, particularly noninterest and trading income.

Ratios Could Be Higher

On the negative side, Moody's said Chemical's capital ratios are still somewhat low compared with those of other banking companies.

At March 31, the Tier 1 capital ratio stood at 7.46%. The average for banking companies with more than $25 billion in assets was 8.81%, according to Keefe, Bruyette & Woods Inc.

At Chase, senior debt was increased to Baa1 from Baa2 and subordinated debt and preferred stock to Baa2 from Baa3.

Long-term deposits of Chase Manhattan Bank were upgraded to A2 from A3, while short-term deposits were raised to Prime-1 from Prime-2.

The upgrades reflect Chase's recent $750 million equity offering and strong reserves against loan losses.

However, Moody's said it will continue to monitor Chase's efforts to improve asset quality, particularly its program to sell nonperforming real estate assets in bulk.

Future upgrades will depend on Chase's identifying and developing its businesses, Moody's said.

The two money-center upgrades got the third quarter off to a good start in terms of bank ratings.

No Downgrades in 1st Quarter

U.S. banks in the second quarter failed to match the record set in the first quarter when Moody's did not downgrade a single one.

Moody's, which upgraded 14 banks or holding companies in the first quarter, upgraded eight and downgraded two in the second quarter.

The two downgrades were Riggs National Corp., Washington, and Bancal Tri-State Corp., San Francisco.

Riggs, whose subordinated debt was cut to Caa from B3, was rocked by losses at its London bank.

Moody's cut Bancal Tri-State's senior debt to A3 from A1, citing low margins, heavy reliance on purchased funds, and asset-quality problems at its parent, Mitsubishi Bank.

S&P Hands Out 7 Upgrades

For the second consecutive quarter, Standard & Poor's Corp. upgraded seven banking companies and downgraded one.

And Thomson BankWatch, which announced 27 upgrades and no downgrades in the first quarter, upgraded 23 and downgraded five in the second quarter. Four of the five downgrades were of smaller California banks.

Analysts warned not to read too much into the smattering of downgrades in the second quarter.

"We believe that the health of the U.S. banking industry today is better than it has been in a long time," BankWatch said.

Tougher Sell Next Time

But future upgrades may become tougher as bank ratings settle at the low-A and BBB levels.

Christopher T. Mahoney, associate director of the financial institutions group at Moody's, said his agency is increasingly looking beyond financial ratios and toward more predictive analytical approaches.

"There has been a huge focus on Tier 1 capital, but some not-so-great banks have high Tier 1 ratios," he said.

One key area Moody's is looking at is "franchise value." He described this as "the ability of an institution to make money in the future because of its competitive position and the defensibility of that position."

How B of A Weathered Storm

For example, BankAmerica Corp., because of its dominant California consumer banking operations, was able to survive serious financial problems in the late 1980s.

Another major rating issue that is developing is whether any banks will be upgraded to the double-A category.

The current double-A bank holding companies include, according to Moody's, include J.P. Morgan & Co., rated Aa1, and Republic New York Corp., rated Aa3. Wachovia Corp. and NBD Bancorp have implied double-A grades.

None in the Pipeline

Moody's currently has no A1-rated banks on review for upgrade into double-A territory. The A1 companies include Bankers Trust New York Corp., Banc One Corp., Norwest Corp., and SunTrust Banks Inc.

"The prospects for upgrade to double-A are the highest since the LDC debt crisis," Mr. Mahoney said.

However, he conceded that many think banking is too cyclical a business to merit such a high rating.

The rating agencies took the following other actions last week:

Bancomer SA: Duff & Phelps assiped a Duff-1-plus rating to short-term peso-denominated obligations of this Mexican bank and a AA-minus rating to peso-denominated long-term obligations.

Short-term dollar-denominated obligations were rated Duff-2, while longer-term dollar issues were rated BBB-minus. Duff & Phelps said the company has solid fundamentals and excellent access to peso-denominated funding. The bank has the largest branch network in Mexico.

Bank of Boston Corp.: Thomson BankWatch affirmed senior debt at BBB-plus, subordinated debt at BBB, and preferred stock at BBB-minus. The ratings followed the bank's issuance last week of $100 million in subordinated notes and $70 million in preferred stock. Bank of Boston agreed to raise the capital in connection with gaining Federal Reserve Board approval for its acquisition of Multibank Financial Corp., Dedham, Mass.

CoreStates Financial Corp.: Moody's assigned ratings of Aa3 for long-term deposits and Prime-1 for short-term deposits to CoreStates Bank of Delaware and to New Jersey National Bank, affiliates of CoreStates Financial. Moody's said the ratings are based on the holding company's strong franchise in the greater Philadelphia region, strong core profitability, and good capitalization.

First American Metro Corp.: Standard & Poor's raised ratings on the uninsured certificates of three former subsidiaries. First American Bank of Virginia, McLean, First American Bank of Maryland, Silver Springs, and First American Bank, Washington, were boosted to A/A1 from B-minus/B. The upgrades reflect the purchase of the banks by First Union Corp. last month.

First Hawaiian Inc.: Standard & Poor's downgraded the company's commercial paper to A2 from A1, citing weakness the state's economy and its impact on the bank's credit quality and growth prospects. However, the A/A1 ratings on unsecured certificates of deposit of the subsidiary First Hawaiian Bank were affirmed.

The agency described the outlook as "stable." Howard Karr, executive vice president and treasurer of First Hawaiian, said the impact of the downgrade will be nil. "We don't have much commercial paper anyway, he said.

Mark Twain Bancshares: Thomson BankWatch assigned a BBB rating to the St. Louis holding company's senior debt and a BBB-minus grade to its subordinated debt.

Marshall & Ilsley Corp.: Thomson BankWatch assigned an AA grade to senior debt and AA-minus to subordinated debt. BankWatch described profitability as consistently strong.

MBNA Corp.: IBCA, the European rating agency, assigned A-plus long-term and A1 short-term ratings to the Delaware-based credit card bank. The subsidiary MBNA America Bank was assigned AA-minus longterm and A1 short-term ratings. IBCA cited the company's dominance in the affinity card sector, with relationships with 3,000 member groups.

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