The bank stock bears at Merrill Lynch came out of hibernation early, downgrading several regionals and hinting that more downgrades are in the offing.

In a joint report titled "Pulling the Plug," analysts Sandra J. Flannigan, Livia S. Asher, and Judah S. Kraushaar on Tuesday downgraded Amsouth Bancorp. to "near-term below average" from "neutral," Cullen/Frost Bankers Inc. and U.S. Bancorp to "long-term neutral" from "market outperformer," and Huntington Bancshares to "near-term below average" from "neutral."

"The easy money has been made in regional bank stock investing. The time has come to be very choosy," the analysts wrote.

They said that the stock prices of those banks may be too high and that the industry faces a deteriorating economic environment.

Despite a broad rally in the stock market on Tuesday, bank stocks were mixed. San Antonio-based Cullen/Frost dropped $1 to $49, with Amsouth of Birmingham, Ala., falling 87.5 cents to $39.50, Huntington of Columbus, Ohio, losing 18.7 cents to $23.81, and Portland, Ore.-based U.S. Bancorp down 37.5 cents to $33.25.

While disasters are not looming, underlying fundamental trends are no longer improving, said the Merrill analysts, who predicted slower loan growth, eroding margins, and higher loan losses.

"When they look at all these factors, investors will ask why they have to be invested until the last nickel," said Ms. Asher.

She said the analysts downgraded those four bank stocks in particular because they had the largest gap between expectations and trading value. "The group of four banks was roughly 10% to 15% overvalued," she said.

The Merrill Lynch analysts said the factors that have lifted the regional banks over the past few years no longer exist.

"The best of credit quality news is clearly behind; FDIC insurance premium cuts are already factored in; we've probably seen the cyclical peak in loan demand; and takeout potential is already fully - or largely - factored into most candidates' current valuations," they said in the report.

"If you assume some of these stocks may be takeover candidates, there is little left on the table," Ms. Asher. "Huntington is trading at 220% of book value. Even in a takeover, how much more of a premium can one pay?"

Additionally, the group said history was working against regional banks.

"Following the greatest flattening of the yield curve, regional bank stocks have tended to underperform in five of six major cycles - going back 35 years," said the group's report.

Merrill Lynch continues to recommend some regional bank stocks, including Fleet Financial Group, Mellon Bank Corp., NationsBank Corp., Northern Trust Corp., and Norwest Corp. These banks are either financially disciplined restructurers or superior generators of revenue, said the Merrill team.

To be sure, other analysts remained more positive about the prospects for regional banks.

Citing both high capital levels and reserves, and low levels of nonperformers, as well as the elimination of Federal Deposit Insurance Corp. premiums, Stifel, Nicolaus & Co. analyst Joseph A. Stieven said that 85% of the regional banks he covers will have record earnings in 1996.

Nonetheless, Mr. Stieven said that he gives "buy" ratings to only two companies - Union Planters Corp. and Oklahoma's Southwest Bancorp - because takeover speculation has pushed the share prices of his other favorites above their natural valuations.

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