First Chicago Corp.'s stock was upgraded to "buy" from "hold" on Wednesday by S.G. Warburg & Co., which particularly lauded growth in the mid-western bank's credit card operations.

Nevertheless, shares of First Chicago fell $1.25, to $43, in afternoon trading as most banking stocks sold off amid a general market retreat.

Warburg's bank analyst, Francis X. Suozzo, said he downgraded the stock last month on worries about the impact of the prime lending rate cut to 5.5%, from 6%, by Morgan Guaranty Trust Co. of New York.

The prime reduction has not spread to other banks, but the Morgan move added to the general slippage in price suffered by bank stocks as third-quarter earnings were announced.

5% Loss on Rate Fears

First Chicago has fallen about 5% since Morgan's Oct. 18 announcement and is well under its 52-week high of $50.625 per share.

Mr. Suozzo said Wednesday that "the stock deserved to be upgraded at this price and the comfortable level of risk I see for it." His price target for First Chicago over the next year is $62, or 10 times his current 1995 earnings estimate for the bank of $6.20 per share.

The analyst said he "continues to like what First Chicago is doing in terms of its core business areas," all of which he expects to show strong revenue growth in the next year.

Other analysts have taken note as well.

Value Unappreciated

"There is considerable unrealized value in First Chicago's diversified banking franchise," said Thomas H. Hanley of CS First Boston Corp., who recommends the stock.

Mr. Suozzo noted the impressive growth in the bank's credit card business, saying it has been gaining market share at a pace that's more typical of specialized credit card issuers like Advanta Corp. or MBNA Corp., as opposed to other commercial banks.

"Their card receivables base has grown by 20% this year, versus 12% for the industry," he said, and the business may contribute half the bank's earnings this year.

"If you priced the stock at a level with Advanta, MBNA, or First USA, which are selling at 13 to 16 times earnings, you would have a $45 stock on that basis alone," without taking into account the contributions of other business lines.

Instead, First Chicago now sells for roughly eight times Mr. Suozzo's 1994 earnings estimate of $5.60 per share, which is below the average multiple of nine times 1994 earnings for regional banks.

Besides credit cards, however, First Chicago's other businesses are also doing well, Mr. Suozzo said.

The wholesale banking business, which includes trading and advisory functions as well as lending, may have 8% to 10% revenue growth next year. The middle-market business may grow similarly, and the community banking area, by 10%.

As a result, First Chicago may post 10% revenue growth next year, a far faster rate than for others in the banking industry, which will probably average 4% to 5%, Mr. Suozzo said.

Operating earnings at the bank should hit $5 per share this year, $5.60 next year, and $6.20 in 1995, the analyst said.

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