Mellon Bank Corp. replaced First Fidelity Bancorp. on Lehman Brothers' recommended list Thursday after analyst James M. Rosenberg downgraded First Fidelity to "outperform" from "buy."

The firm rates Mellon among the most likely takeover targets, and argues that the market has not yet recognized the value of its acquisition of Dreyfus Corp.

Mr. Rosenberg said Fidelity remains a strong institution but noted that its stock is trading at eight times estimated 1995 earnings, while its peers are trading at 7.6 times earnings.

"It's reached the point where it will no longer outperform the group by a significant margin," said Mr. Rosenberg. "It should have a rating that's more in line with our overall group rating."

It was Mr. Rosenberg's first downgrade of First Fidelity in more than three years.

First Fidelity is one bank that has broken away from the pack, at a time when analysts are decrying the market's inability to differentiate within the sector.

Mr. Rosenberg pointed out that the bank had been a regional bank leader, but that the current price might be a case of undue optimism.

First Fidelity had been one of the star performers in the last few years. Its stock declined by only 1.4% last year, significantly better than the average regional bank stock, which was down an average of 8.2%.

Analysts said the deposit base is large relative to the bank loan portfolio, presenting a tremendous opportunity to build assets before it becomes necessary to tap more expensive funding.

Several of the forces that made Fidelity one of Lehman Brothers' top picks, however, have abated. The gains from a dramatic improvement in credit quality, a reduction in expenses, and a series of acquisitions have largely played themselves out, said Mr. Rosenberg.

Also, margin pressure compelled Mr. Rosenberg to reduce his earnings- per-share estimate to $5.65 from $5.70. The current 1995 earnings per share for First Fidelity range from $5.50 to $5.75.

Lehman Brothers released a bank franchise value model Thursday that corroborates Mr. Rosenberg's downgrade.

"On a price-to-franchise-value ratio, it's expensive," said Mike Mayo, a vice president at Lehman Brothers. Mr. Mayo stresses that Fidelity's downgrade was made because of overvaluation, and not because of the bank franchise value.

Mr. Mayo compiles the franchise model to account for credit cards, overfunded pensions, money management, and other off-balance-sheet items in a bank's stock price. His model also includes unrealized losses from such financial instruments as derivatives and securities.

Takeover targets can be determined by the discrepancy between a bank's book value and its franchise value.

The top three takeover targets in the early part of this year are Mellon, First Chicago, and First Commerce, according to this model.

Mellon had the largest discrepancy because of its off-balance-sheet money managing operation.

Lehman's bank franchise value for Mellon is $8.3 billion, while its current market capitalization is $4.8 billion. "The wide discrepancy between these two make it a takeover target, so long as the stock remains at the current level," said Mr. Mayo.

Mellon's franchise value is so large because it is the second-biggest money manager in the United States, a result of its purchase of Dreyfus last year. "The value related to this operation is not reflected in book value, which is a major accounting shortfall," said Mr. Mayo.

Other analysts agree that Dreyfus has upside potential, though they do not think the purchase has had an immediate benefit.

"They bought Dreyfus at the wrong time," said Ron Mandle, an analyst at Sanford C. Bernstein & Co. "The asset has become less valuable since the deal was announced." Mr. Mandle has a current rating of market "perform" on Mellon.

Mr. Mandle said, however, that the shareholder's outlook on the Dreyfus acquisition should improve when interest rates come back down.

"We view a whole series of things (such as underperformance of Dreyfus) as disappointing bumps in the road," said Anthony R. Davis, an analyst at Dean Witter Reynolds. "We're still believers in the ability of the bank to integrate investment management with activities at the bank."

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