If You Want to Raise Your Rating, Merge

Unlike mergers of yore that turned investment-grade companies into fallen angels, mergers between banks are having a salutary effect on credit ratings.

In fact, merging may be the surest way for most banks to boost their ratings now.

Although the rating agencies have been slow to dole out actual upgrades, they have increased the lists of banks whose outlook has improved.

Ameritrust Corp., Cleveland; South Carolina National Corp., Columbia, S.C.; C&S/Sovran Corp., Norfolk, Va.; and Security Pacific Corp., Los Angeles, for example, are all showing signs of improvement to Standard & Poor's Corp., and all are currently involved in mergers.

Wait-and-See Attitude

But analysts are warning bankers not to misread a more positive outlook for a handful of banks as a sign of wholesale improvement.

That will have to await more definitive signs of health in the nation's economy.

"You will probably be able to count on one hand the number of upgrades over the next couple of years," said Fred W. DeBussey, senior vice president of Fitch Investors Service Inc.

Mr. DeBussey's counterparts tend to agree. "We don't expect any quick upswing in banking ratings," Charles Orabutt, vice president of Duff & Phelps, a rating agency based in Chicago.

"While asset quality shows some encouraging signs of stabilizing, demand for new loans is not going to be there for several years."

So far this year, Fitch has upgraded only three bank holding companies: BankAmerica Corp., San Francisco; First Fidelity Bancorp, Lawrenceville, N.J.; and First Bank System Inc., Minneapolis.

All three institutions are exceptions to the current banking scene in that they encountered difficulties before asset quality problems hit banks in general. As a result, they began corrective efforts earlier and are now ahead of the rest of the industry.

Similarly, Standard & Poor's Corp. current CreditWatch list contains far fewer banking names than it did a year ago when rating-change activity in the banking sector was seemingly at an epidemic level. The bulk of the banks are involved in mergers, either as buyers or sellers, which typically calls for a fresh look by the agencies.

|Recession Is Not Over'

But Mr. DeBussey said ratings upgrades based on mergers belong in a different category from those based strictly on fundamental business conditions, which he does not see improving anytime soon.

"The recession is not over, in my view," said the analyst, who expects the nation's economy to resume contracting - a "double dip".

"At best, the economy sloshes forward," said John Lonski, senior economist for Moody's Investors Service Inc.

PHOTO : Looking Better Source: Standard & Poor's

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