Shares of Chase Manhattan Corp. have plunged 21% since Sept. 8 - which was less than one week before it unveiled plans to buy J.P. Morgan & Co. - but analyst Ruchi Madan sees an upside.

Ms. Madan, who started coverage for 14 banks Thursday at her new employer, Salomon Smith Barney, said Chase shares look attractive because the acquisition of the storied Wall Street institution will almost certainly lift profits in the long run. But it won't be an easy ride. Ms. Madan said she expects Chase to report lower than consensus earnings for the third quarter because of continued weakness in profits from private equity investments. Ms. Madan said she thinks current consensus estimates of 96 cents a share are too high, because many analysts have not factored lower venture capital gains into their models.

Ms. Madan added, however, that "the third quarter is the bottom for Chase." Chase shares fell $1.125, or 2.47%, in trading Thursday, to $44.4375.

(Meanwhile, Hudson United Bancorp in Mahwah, N.J., became the latest company to issue a profit warning, saying Thursday that third-quarter earnings would not meet analysts expectations because of slow revenue growth and higher than anticipated expenses. The company said earnings per share would be in the range of 50 cents to 52 cents, while the consensus is tk cents per share. Hudson shares plunged $5.5625, or 21.125%, to $20.84.)

Ms. Madan joined Salomon, a Citigroup Inc., unit Sept. 14 as the managing director of U.S. equity research, covering large-cap banks. She left her previous employer, PaineWebber Group, in the aftermath of its acquisition by UBS AG.

She was accompanied by two of her colleagues from PaineWebber, Keith Horowitz and Robert Sobhani, who will cover regional banks. Together they initiated seven "buy," four "outperform," and 12 "neutral" ratings.

Most of the banks Ms. Madan covers got the same rating as they did when she was at PaineWebber, but PNC Financial Services Group made it into the new listing with an "outperform" from a "neutral" at PaineWebber, and Bank of America slipped to "outperform" from a top-rated "buy." Shares of PNC and Bank of America closed at $67.375 and $53.875 in trading Thursday, up 56.25 cents, or 0.84%, and $1.125, or 2.13%, respectively.

Coverage of Firstar Corp., which on Wednesday announced plans to acquire U.S. Bancorp, was initiated with "neutral." Ms. Madan said in a research note that "we do not expect FSR shares to outperform until the combined company begins to produce greater than expected synergies - and this is not likely until late 2001 or into 2002." Firstar shares fell 75 cents, or 3.75%, on Thursday, closing at $19.25.

The new Salomon analyst team used the time between the move and initiating coverage to look into the effect of interest rates and the mortgage environment on revenues. Ms. Madan then assessed which companies could benefit most from stable rates and named Wells Fargo & Co., SouthTrust Corp., and BB&T Corp., all of which were rewarded with "buy" grades, as well as the "neutral"-rated Firstar and National City Corp.

Further, Ms. Madan said she found that, contrary to common belief, the leverage sector, not growth in syndicated lending, is the main reason for problems with credit quality. "Some of the surprises on credit quality really resulted from some regional banks taking some outsized pieces of these leverage loans," she said. "Deteriorating loan quality would not lead to earnings disappointments."

Taking both of those findings into consideration, she concluded that financials are "a good place to be."

"We think banks will outperform the market."

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