Things are looking up for First Chicago Corp.

Improved earnings, a new management team, and the perception that money-center companies are undervalued have driven up First Chicago's shares. The company's stock passed a significant benchmark in late June, when it climbed above book value for the first time since 1989.

What's more, analysts are turning bullish on its earnings outlook.

Two weeks age, Salomon Brothers Inc. raised its investment opinion to "buy" from "hold".

"We believe the bank under new chairman Richard Thomas has made a strategic commitment to lower its risk profile and improve its often-erratic operating performance," a Salomon report said.

And First Boston Corp. has sharply raised its earnings estimates for the bank, to $3 a share this year from $2.75, and to $3.90 next year from $3.65.

The resurgence of First Chicago, the nation's 12th-largest banking company, with $47.4 billion in assets, was slow in coming. Its shares lagged behind those of industry peers during much of the long recovery in bank stocks.

During 1990, a depressed year for bank stocks, First Chicago's shares traded at a slim 62% of book value. They climbed to 82% last year and finally surpassed book value in late June.

Last month, the stock traded at a median price of $35.625, or about 105% of its second-quarter book value of $34.09 per share.

The last time they traded consistently above book value was around the end of 1989, when book value was $34.82 per share and the market price was about $37.125. On Monday, First Chicago's shares were unchanged at $36.

Part of the recent rebound stems from the belief of investors that shares of money-center banks, particularly First Chicago and New York's Chase Manhattan Corp., are better buys right now than superregional banks, analysts say.

Spotting a Value

"These banks, on average, are trading at around half the multiples of anticipated earnings that we're seeing for top regionals," says Francis X. Suozzo, banking analyst at S.G. Warburg & Co., New York.

"Some investors have spotted value at a reasonable price in the balance sheet of First Chicago," he says.

The stock has also been helped by a better-focused business strategy that emphasizes retail and middle-market banking.

A Question of Quality

That strategy, which was highlighted during recent presentations for a secondary equity offering, is the hallmark of Mr. Thomas, who succeeded long-time chief executive Barry Sullivan at the beginning of the year.

The fresh interest in First Chicago has also been spurred by its first-quarter earnings results, which were far better than expected. The company earned 79 cents a share, compared with a Wall Street consensus estimate of 67 cents.

The big question mark that remains is First Chicago's asset quality. Its nonperforming assets declined slightly in the quarter to $1.274 billion, or 2.7% of assets. But the big worry is its $2.3 billion real estate loan portfolio. Some 20% of the loans were made in economically hard-hit Southern California.

The bank may move to sell as much as $3 billion of nonperforming, nonstrategic, or otherwise undesirable assets by yearend. The market for them is uncertain. A "bad bank" may be formed to handle them or a bulk sale may be considered.

"There are still some fairly big unknowns out there when it comes to the asset disposition program everyone is expecting," says David Berry, an analyst at Keefe, Bruyette & Woods Inc., New York.

Intriguing Prospect

Analysts are expecting an announcement near the end of this quarter, but the bank remains noncommital. "We are still investigating the feasibility of various alternatives," a First Chicago spokeswoman, Lisabeth Weiner said Friday.

"Once First Chicago's asset quality is finally cleansed, the investment opportunities in the company's shares may become extremely compelling," said Thomas H. Hanley, an analyst with First Boston.

He contends "hidden values" in First Chicago's pension plan and credit card and venture capital portfolios "could understate the company's book value by up to $14.20 a share."

He adds that excess loan loss reserves, even after allocating some portion to a bad-bank structure, could represent another $2.16 per share of hidden book value.

For Now, Caution

Despite his enthusiasm, however, Mr. Hanley is keeping a hold rating on the stock "pending final resolution of the asset disposition strategy."

As a result, he did not offer a target price for the stock, but says it may be "one step away from breaking out" of its long-time price pattern.

In June, analyst George M. Salem of Prudential Securities Inc., New York, upgraded the stock to hold from buy. Noted for his cautious view of the industry, Mr. Salem said First Chicago had "taken charge of its destiny" and that its plans could lead to "a cleaner balance sheet and brighter outlook."

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