Beaten down for much of the year, financial stocks have returned to favor in recent weeks as their cheaper multiples and prospects for consolidation after the financial modernization bill is signed have sparked buying interest despite a rising interest rate environment.

One of the clearest signs of renewed bullishness has come from Merrill Lynch & Co., which is in the process of pitching a fund aimed specifically at investing in the sector. The Merrill Lynch Global Financial Services Fund, targeted to retail investors, could attract as much as $1 billion, the firm says.

Though global, the fund will be weighted more heavily to U.S. investments. James Ellman, the portfolio's manager, plans to invest 65% in U.S. financial institutions and the rest in international financial funds.

Mr. Ellman said that he is an "earnings momentum" manager who "looks for companies that have rising earnings estimates or companies that are meeting, preferably exceeding, their earnings expectations."

Some of these companies are: New York-based Citigroup Inc. and Chase Manhattan Corp., and credit card companies MBNA Corp. and Capital One Corp. Internationally, candidates include Paris-based insurance company AXA, the Royal Bank of Scotland, and HSBC Holdings PLC.

Small- and mid-cap companies will also be considered. The timing of the fund's launching means investors will achieve a blend of value investing and a play on what may be a consolidation wave. The shares of the banks and other financial firms are likely to take off in the next 12 months as investors are drawn to the group's low valuations, said Mr. Ellman, and as financial modernization allows for a new wave of deals.

"Convergence among the financial institutions will create the universal bank or financial services supermarkets," said Mr. Ellman. "Citigroup will be the model for many companies, and the stock of Citigroup has done very well in the last 12 months."

Banking companies may have additional impetus for deals in 2000 because, after that, a window is expected to close on the use of a favorable merger accounting treatment known as pooling of interests.

Bankers perceive that the end of pooling will slow merger activity in the sector, said Mr. Ellman.

"So, many will scramble to bulk up between now and the end of the year."

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