Wary of rising stock prices and falling credit standards, analysts at PaineWebber Inc., New York, have lowered investment ratings on nine major bank and thrifts.

"The stocks had gotten expensive," said analyst Lawrence W. Cohn. "The market is not looking beyond the end of its nose and appears to be taking reported earnings at face value."

Cut on Tuesday to "unattractive" from "neutral" were BankAmerica Corp., First Chicago Corp., NationsBank Corp., First Fidelity Bancorp., and First Bank System Inc.

Dropped to "neutral" from "attractive" were Midlantic Corp., Bank South Corp., First American Corp., and Golden West Financial Corp.

"From a health-of-the-industry perspective, I truly believe that the sooner the economy goes into recession, the better off banks will be," Mr. Cohn said.

"Credit underwriting standards have deteriorated noticeably," he said. "The longer a recession is postponed, the more opportunity banks will have to write bad loans.

"It is really distressing to go around the country and listen to chief credit officers tell you standards are falling, but they can't stand up against it because of the pressure from the competition."

The analyst feels loan problems are hidden in part by banks' recoveries on troubled real estate dating from several years ago. That has kept the level of net chargeoffs artificially low, a situation that Mr. Cohn maintains will be coming to an end by later this year.

Based on "normalized" earnings, money-center and large regional banks sell right now at 70% of the S&P 500 index on a price-to-earnings basis, Mr. Cohn said. They should more typically sell at 50% to 60% of the market multiple.

Mr. Cohn and his colleagues calculate normalized earnings by estimating banks' loan losses and their needs for provisions against such losses over an entire business cycle.

Mr. Cohn warns that "there is a lot of downside leverage in bank earnings when you come off very depressed loan-loss provisions, and we think that situation is going to be encountered later this year or early next year."

Mr. Cohn thinks many large banks will soon be facing problems in the fast-growing credit card sector

"Most of them have pumped out a lot of plastic over the last year or 18 months," the analyst noted. "The normal aging cycle on new credit cards is that you get a cresting of loan chargeoffs after 12 to 18 months. We think that will come this year (and) help push the chargeoffs up.

"We've already seen the first of that happen at Mellon Bank, which has had an extraordinary step-up in chargeoffs," he said.

Mr. Cohn said credit quality problems are inevitable later this year, and could be compounded by a slowdown in the economy.

"To the extent we get either a hard or soft landing, which we will probably know within three to six months, there will just be additional pressure on banks to push provisions even higher," Mr. Cohn said.

Mr. Cohn is recommending Bank of New York Co. and Bank of Boston Corp., which he feels are better prepared than many other large banks to meet loan problems on a normalized basis.

He also recommends Bankers Trust New York Corp. and J.P. Morgan & Co., which he feels will benefit from a rally in the bond market.

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