Short interest in shares of U.S. Bancorp. shot up 137% in the month ended May 15, after its agreement to buy West One Bancorp.

The gain in short interest probably reflects acquisition-related arbitrage activity, but the deal has also come under heavy fire from analyst Thomas K. Brown of Donaldson Lufkin & Jenrette Securities Corp.

Shorting a stock involves selling borrowed shares on the prospect the shares can later be replaced profitably with cheaper ones. The aggregate shares of a company sold short is its short interest.

Beyond hedging and arbitrage, short selling is customarily based on a negative view of a company and its stock.

Mr. Brown does not represent short sellers, but he has cut his investment rating on U.S. Bancorp to "underperform" from "market performer."

He feels the company, whose management he otherwise admires, based its deal for West One on an rosy scenario and is paying too high a price at $1.6 billion, or twice the Idaho bank's book value.

"There's very little upside potential in this deal," Mr. Brown said. "If everything goes according to management projections, which I don't think it will, the deal adds about a nickel (per share) to 1997 earnings."

"Given the risks being assumed, I just don't think that makes sense for the shareholders," said the analyst, who "feels strongly" that West One's current high level of profitability is unsustainable.

"Their (loan loss) provision is not going to stay down where it is, and their margin, like most other banks, will be coming under pressure from here on," he said.

Total short sales in U.S. Bancorp., headquartered in Portland, Ore., rose to 1.57 million shares. It was the largest jump among Nasdaq-traded bank stocks, according to data from the National Association of Securities Dealers. (See tables above and on page 22)

Short activity in West One, based in Boise, Idaho, fell 11.2% to 1.93 million shares. But it has the largest short position among Nasdaq banks because of ongoing hedging activity related to its $50 million of 7.75% convertible notes.

Meanwhile, short interest in First Security Corp. stock declined 91.8%, in another reflection of the impact of the West One sale. Investors now expect the stock of the Salt Lake City-based company will rise now that it is the only major target left in the region.

Overall, short interest in major Nasdaq bank stocks rose 5% from mid- April to mid-May.

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Bank of New York Co. shares were downgraded to "neutral" from "buy" Thursday by Lawrence W. Cohn of PaineWebber Inc., based on their recent rise in value.

"Our price target has been mid-40s and at $41 they've come within 10% of it," said Mr. Cohn. The stock has been strong in the wake of the bank's deal to buy the global custody business of J.P. Morgan & Co.

"Bank of New York continues to have excellent fundamentals, and the Morgan deal is going to add to earnings," he said. "But you have to ask how much it is worth. We figure $45 a share."

The move leaves Mr. Cohn, currently a skeptic about prospects for bank stocks, with only three "buy" recommendations: Morgan, Bankers Trust New York Corp. and Bank of Boston Corp.

Of the recent rally in banks, he said: "There's no question the group has benefited from the performance of the bond market, which is strong because the economy is slowing.

"Our genuine conviction is that at some point the market will decide a slowing economy may be good for the banks' (net interest) margins, but it could be bad for their asset quality.

"I don't know how long it is going to take for the market to start asking that question, but when it does there will be problems for large numbers of banks."

"If the bond market is right" in telegraphing a significant economic slowdown or even recession, Mr. Cohn said, "then the bank stock market is wrong."

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