Shares of Republic New York Corp. were raised to a long-term "buy" rating Tuesday by Merrill Lynch & Co., based on prospects for improved earnings from new business activities.

Analyst Judah S. Kraushaar said he was impressed with the prospects for Republic's private banking services in the United States.

Republic shares gained 37.5 cents, to $44.625 in late trading, amid a broad selloff in the stock market.

"The game plan is to create a fourth major line of business for the company that will hopefully account for[one-fourth of its] earnings within five years," he said.

Republic's three' current business lines, he said, are retail banking in the New York metropolitan area, international private banking,and institutional banking.

The New York bank's shares have recently been mired near their 52-week low of $44.125. The Merrill analyst thinks the stock could reach the $60 price level within 18 months.

Mr. Kraushaar's prior long-term rating on Republic's stock was "above average."

The long-term recommendation is designed to provide investors a perspective beyond one year.

His medium-term rating on Republic remains "above average."

The Merrill analyst said Republic's management anticipates a "material earnings lift" from domestic private banking.

"In five years they think they can generate at least $10 billion of new client-managed assets, and that the revenue potential from that could easily be 150 basis points," he said.

Mr. Kraushaar said Republic's leadership also thinks it can benefit from major economies of scale in this area of banking.

"They held back from giving a bottom-line earnings projection, but my own estimate would be that they can earn between $120 million and $125 million of incremental earnings within five years," he said.

"That would be a 30% or better pickup relative to the current earnings run-rate," he said.

"If they can pull this business strategy off even halfway effectively, it could give some meaningful push to earnings that people may not be seeing very particularly clearly today," he said.

The Merrill analyst said he also felt Republic had improved its longer-term outlook in other ways.

"They entered 1994 with a couple of important restructuring challenges and I think they've succeeded in putting these matters behind them now," he said.

The banking company had to shift its interest-rate positioning to accommodate the current rising rate environment, he said, and has improved the risk-return profile of its securities-related activities.

In the second quarter, Republic took "significant restructuring charges" in connection with these changes, Mr. Kraushaar noted.

"These important reengineering moves are now firmly put in place," he said, "and in the third quarter we should see a fairly material step-up in core earnings."

The analyst said he anticipates that quarterly core earnings will be reported next month at $1.41 a share, versus $1.31 in the second quarter.

Valuation also played a role in Mr. Kraushaar's rating change, of course.

"This stock has underperformed the bank group for three years and trades at only around 15% over .its book value per share," he pointed out.

Elsewhere in Tuesday's market, shares of the Student Loan Marketing Association, Washington, D.C., had dropped $2 to $33.875 by mid-afternoon, on news of a downgrade to 'hold,' from 'buy,' by Morgan Stanley.

Analyst Eric I. Hemel of Morgan Stanley & Co. said he could not elaborate on his rating change for the government-sponsored enterprise.

Its shares have suffered over the last year because of the prospect of direct government lending to students.

Chemical Banking Corp., New York, said it was increasing its quarterly dividend to 38 cents a share from 33 cents. In late trading Chemical stock was unchanged at $36.25.

Fleet Financial Group Providence, R.I., said it anticipates reporting third quarter earnings of between $162 million and $168 million, or over $1 a share.

That would compare favorably with the $129 million, or 78 cents a share, earned in last year's third quarter. But its stock slipped $1 to $37.75.

Fleet, which has been restructuring itself, reported earnings of $148 million, or 90 cents a share, in the second quarter of this year.

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