Bank stocks lost some ground Monday as investors cashed in profits won in Friday's record-setting rally. Analysts, however, still expect bank shares to move ahead in coming weeks.

"The profit taking going on today is a temporary pause," said analyst Frank Barkocy of Josephthal Lyons & Ross Inc. "We look for other investors to take advantage of any weakness and step up to bat again."

The Standard & Poor's bank index fell 0.99%, but the Nasdaq bank index, which includes smaller banks, rose 0.08%. The broader S&P 500 was also down, 0.34%, and the Dow Jones industrial average, 0.10%.

Mr. Barkocy said he expects banks to gain "another solid leg up" because of the sector's attractive dynamics. These include reasonable valuations, continued earnings power, and diminishing investor concerns over asset quality and rising interest rates, he said.

Analyst Michael Mayo of Lehman Brothers Inc. pointed out that banks were the best performing stock market sector in July - a status he sees persisting in the next few months.

"On Friday several banks set new highs, and we expect more to follow," he said.

He recommends NationsBank Corp., whose stock price broke its 12-month high during intraday trading Friday, and Boatmen's Bancshares, whose stock price climbed almost three points that day.

NationsBank shares fell 37.5 cents, to $88.125, while Boatmen's stock was up 87.5 cents, to $43.875.

J.P. Morgan & Co.'s shares also climbed after an upgrading Monday by Bear, Stearns & Co. Analyst Lawrence Vitale upgraded the holding company, which operates like an investment bank, to "attractive" from "neutral," based on its robust second-quarter earnings and a favorable interest rate climate.

"As we have said in the past," wrote Mr. Vitale, "J.P. Morgan's business is the markets, and the shares tend to do better when market conditions are favorable."

His earnings estimates of $8.15 a share for 1996 and $7.75 for 1997 were unchanged. His 12-month price target is $103 to $108 per share. Morgan's shares closed at $89.375 up 25 cents.

Mr. Vitale also upgraded First Bank System Inc. to "attractive," from "neutral," because of its aggressive stock buyback program, its use of cash-flow analysis to report earnings, and its improving efficiency ratio. First Bank's stock fell $1, to $62.125.

Mr. Vitale's 12-month price target for the stock is $72-$74. He reaffirmed his earnings estimates - $4.80 a share for 1996 and $5.50 for 1997.

PaineWebber Inc. downrated thrifts H.F. Ahmanson & Co. and Great Western Financial Corp. and finance company Imperial Credit Industries to "neutral," from "attractive."

Analyst Gary Gordon downgraded the thrifts because both are close to his price target, which is $28 for each; he reduced the rating for Imperial Credit because it had achieved its price target of $32.

H.F. Ahmanson was unchanged, at $25.375, while Great Western closed at $24.375, down 37.5 cents. Imperial Credit closed at $29.875, down $2.125.

Mr. Gordon also noted that last week's stock market rally was merely "an avoidance of bad news," since credit quality continues to deteriorate.

Smith Barney reduced its rating of BankAmerica Corp. to "outperfrom" from "buy" and removed it from the approved list.

"It currently sells at 9.4 times our 1997" earnings estimate of $9 per share, "which is considerably higher than" the Wall Street consensus of $8.15, Smith Barney analyst Alison Deans wrote.

After the removal of BankAmerica only four banks remain on the firm's approved list of nearly 80 stocks. BankAmerica shares fell $1.75, to $82.50.

Montgomery Securities downgraded Wachovia Corp. and Citicorp to "hold" from "buy," based on price valuation.

Wachovia's shares dropped 62.5 cents, to $45.25, while Citicorp's shares fell $1.50, to $85.625.

First Union Corp.'s stock declined 1.69% after the company told analysts it expected chargeoffs of credit card loans to remain at current levels the rest of the year. Chargeoffs had been expected to decline from the 5.85% reported in the second quarter. First Union shares fell $1.125, to $65.375.

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