In a new sign that California's real estate market has touched bottom, a West Coast analyst at Sutro & Co. has removed a long-standing "sell" rating on shares of City National Corp., Beverly Hills.

The upgrade provides a rare piece of good news for City National, which has been clobbered by the real estate downturn.

Big losses in the past two years depressed its stock, and a rebound was reversed recently when the $2.9 billion-bank announced plans for an $80 million shareholder rights offering. The offering, which could be completed today, was prompted by a June 30 regulatory deadline for increased capital.

Turning a Corner

But now Campbell K. Chaney, an analyst for Sutro in San Francisco, thinks the worst of the problems are over.

He upgraded City National stock to a "hold" recommendation, saying "the dilutive effect of the additional capital should be the final blow to the company during this recessionary economic cycle."

The analyst said he could not yet recommend purchase of the shares since "the company's financial recovery will be protracted, and attractive earnings growth will likely not be forth-coming in the foreseeable future."

The rights offering, along with a downturn in bank stocks generally, has hurt City National's shares considerably. They traded at $7.125 on Wednesday, up 12.5 cents on the day, but are 36% below the March 10 peak of $11.125 a share.

Sharing the Pain in L.A.

City National's operations are focused exclusively in Southern California, which has been hit hardest by California's protracted recession. "It can be seen as a proxy for business conditions in Los Angeles," said Mr. Chaney.

Last month, in a sign of a steadier economy in California, PaineWebber Inc. analyst Lawrence W. Cohn endorsed shares of Wells Fargo & Co. after noting that real estate appraisals had stopped falling. City National was founded in 1954 by business people in Beverly Hills and has long catered to movie stars and other wealthy individuals, as well as middle-market corporate borrowers.

For years, the bank was highly profitable. Its return on assets stood at a lofty 1.59% in the second quarter of 1989.

A Big Loser Last Year

But when the real estate markets turned down, roughly a third of City National's portfolio consisted of risky construction and real estate loans. The bank lost $59.3 million last year, the third-largest loss in the industry. on top of $21.2 million in 1991.

In the first quarter of this year, City National lost $25.9 million, reflecting a $40.5 million charge for the sale of foreclosed property and problem loans. The bank's nonperforming assets declined 25% during the quarter.

Despite the woes, the bank's shareholders have remained extraordinary loyal, and its stock, unlike that of many other banks. has rarely traded below book value. Insiders hold 29% of it, stock.

Troubling Fundamentals

Mr. Chaney acknowledged the gains in the stock from its low of $4.625 last Oct. 16 to nearly $12 during the winter, but said the financial fundamentals at the time did not justify removing the sell rating, which he issued in April 1991.

Mr. Chaney thinks there may be trading opportunities in the stock after the rights deal is completed. "The stock could snap back to around the $9 range in the short run." he said.

New management talent has been brought in, and the bank has relatively adequate capital, but a recovery of earnings power likely must await the recovery of Southern California business conditions. he said.

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