Large banks well equipped for the Internet are expected to be strong performers in 2000, according to a recent Merrill Lynch & Co. report.

Using the Internet, banks can substantially reduce distribution and servicing costs, improve customer retention, and enhance cross-selling, said Sandra J. Flannigan, a Merrill Lynch analyst.

"We're largely comfortable with the Internet-related initiatives of the banks at this point," she said. "It's the do-nothing strategy that keeps us up at night."

In a Merrill Lynch survey of 50 banks, most described the Internet as being "extremely critical" to their strategies.

The biggest banks have the edge, Merrill implied, because they have invested more than $100 million in the Internet, offer better products, and have far more on-line customers, according to the report.

Banking companies mentioned in the Merrill report as leaders in Internet capabilities include Bank One Corp. of Chicago, Chase Manhattan Corp. of New York, Wells Fargo & Co. of San Francisco, and First Union Corp. of Charlotte, N.C.

In spite of its troubles this year, Bank One's attracted more than 1.7 million customers, the second-largest pool of on-line bank customers. Citigroup has the largest, 2.1 million.

Wells Fargo has 1.3 million on-line customers, and it said customer growth has jumped from 25,000 a month in early 1998 to 100,000 a month currently.

First Union has 1.1 million such customers and is said to be gaining 100,000 a month.

The report also deemed Chase Manhattan a leader because of its numerous joint ventures and alliances with banks or companies that enhance its Internet capabilities. In June, Chase teamed up with Wells Fargo and First Union to create Spectrum, a unit that enables companies to bill and consumers to pay electronically.

Chase has also teamed up with Intuit and with an Internet shopping venue,

Bank One, Chase, Wells, Summit Bancorp of New Jersey, and First Union also ranked high on retail user capacity.

Merrill ranked the companies on their overall set-up, access fees, bill payment, customer service, ease of use, and products. The top five banks got a score of 1, the highest ranking. Five was the lowest score.

The lowest marks went to Cullen/Frost Bankers of San Antonio, which got a 5; Union Planters Corp. of Memphis, 3.2; One Valley Bancorp, Charleston, W.Va., 3.1; and Compass Bancshares of Birmingham, Ala., 3. First Virginia Banks of Falls Church and BB&T Corp. of Winston-Salem, N.C., both got scores of 2.7

Banks that invest in the Internet will encounter risks, Ms. Flannigan said. These include growing price competition, difficulty in keeping current with evolving technologies, and the challenge from nonbank competitors. Also, players on the Internet must take pains to avoid fraud and to assure that they have sufficient capacity to meet consumer needs.

Advest cut Northern Trust Corp. of Chicago to "market perform," from "buy," because of price. Northern Trust shares have appreciated 8% in the last week, reaching their 52-week high of $53.125 on Monday. Advest's target price was $53. The company trades at 27.4 times estimated 2000 earnings, but the average large-cap banking company trades at a 13.4 multiple, wrote Anthony Polini, an analyst at Advest. The company's fundamentals remain excellent, he said, adding that he would consider raising the rating on "price weakness."

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