First Union Corp., which helped cool the market for bank stocks and big mergers last year by missing earnings targets, could now be sowing the seeds for a recovery by the group.

First Union, the nation's sixth-largest bank, at $253 billion of assets, lost credibility with a series of earnings revisions in 1999 and has been doing damage control ever since. But a series of operational changes - such as more stringent accounting procedures, more spending on its retail branch system, and efforts by the new president, G. Kennedy Thompson, to boost morale - are helping the Charlotte, N.C., banking company to regain support.

On Wednesday, Michael E. Plodwick, an analyst with Lehman Brothers Inc. in New York, became the latest to upgrade the stock. Mr. Plodwick, who changed his rating to "outperform" from "hold," said the company's recent operational changes - and a low stock price - make the stock a tempting value.

The company is "moving in the right direction," Mr. Plodwick said.

First Union was the first of several large banking companies with high-profile, liquid stocks to reduce earnings targets after large mergers. As U.S. Bancorp and Bank One Corp. followed suit, investors and bankers lost their appetite for deals. Low stock prices made dealmaking much more difficult, bringing the consolidation of the industry to a near standstill last year.

Though First Union has said it is out of the bank acquisition market, analysts suggested a reversal in its fortunes could lift stocks industrywide.

"In the same way that earnings shortfalls put stress on the sector's performance, indications for a resolution of those difficulties could have a springboard effect for the group overall," said Carla D'Arista, an analyst at Friedman, Billings, Ramsey in Arlington, Va.

Six large-capitalization banks missed earnings targets by more than $5 billion combined last year, Ms. D'Arista said. Coupled with the specter of rising interest rates, the resulting ill will helped drag down the American Banker index of the top 50 U.S. banks 7% in 1999.

Mr. Plodwick cited a number of recent changes at First Union that helped prompt his upgrade, including Mr. Thompson's impact. Since taking the reins in December, Mr. Thompson has held more than 50 meetings with rank-and-file employees to boost morale. Budgets are tracked with greater scrutiny, and the banking company has restaffed branches of the former CoreStates Financial Corp. to stem customer defections that resulted from integration problems in the Philadelphia area.

Analysts also said First Union is a case of bank stocks' being abused, with investors ignoring banks' future potential. At First Union, for example, the banking company's capital markets and brokerage groups are well positioned, said Andrew Collins, an analyst with ING Barings.

"They are ready to make this banking and brokerage model work," Mr. Collins said. "The ability to cross-sell brokerage products to their customers gives them the automatic win" against traditional brokerages.

Partly because of the reinvestment, Mr. Plodwick predicts a 6% increase in 2000 earnings per share, to $3.60. But he expects a 10% increase, to $3.95, in 2001. Now trading at 8.2 times 2000 earnings, the stock has become a value play, he said.

"The bulk of the bad news has been more than reflected in First Union's stock price," Mr. Plodwick said.

That low price has moved analysts to recommend First Union. Off 46% in 1999, the stock is now trading with a dividend yield of 6.4%. That is higher than 10-year and 30-year Treasury bonds, said Mr. Collins, who upgraded First Union to a "buy," from "hold" in January.

With the stock paying dividends comparable to bonds, "you are just buying an option on First Union's earnings," Mr. Collins said. "If there value buyers are still out there, this is the one to buy."

On Wednesday, First Union's shares gained $1.0625, or 3.6%, to $30.5625, as most bank stocks fell.


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