Gravity may finally be slowing the ascent of State Street Boston's stock, which has gained more than 50% since early April.

Merrill Lynch analyst Livia S. Asher downgraded the Boston company Tuesday to "hold" from "buy," and suggested investors switch to Northern Trust because of the Chicago-based company's stronger earnings prospects and broader business mix.

She was among several analysts to conclude State Street is fairly valued in the mid-$40 range.

"State Street had substantially outperformed the market since the spring," said Ronald I. Mandle of Sanford C. Bernstein & Co., who lowered his rating on the company to "neutral" from "buy" on Monday. "It was compelling at that point, but now it's fundamentally stable."

State Street Boston's stock fell 25 cents Tuesday to close at $44.75, while Northern Trust's stock rose 68 cents to $54.875

Ms. Asher stressed that her downgrade reflects pricing considerations, and she does not forecast a change in the bank's fundamentals. She said that State Street lacks the personal trust business to drive earnings.

The bank has tremendous assets, but most are in its mutual funds processing business and custody, where fees are expressed in single-basis- point terms, said Ms. Asher.

Northern Trust has greater earnings growth prospects, Ms. Asher said.

Northern Trust derives half its earnings from the personal side of the business, which gives it higher earnings in a business it's looking to expand, she said.

As a result, Ms. Asher upgraded the Chicago-based bank to "near-term above average" from "neutral."

She cited the new technology, success with cost cutting, well-balanced revenue sources, and more aggressive capital management in her upgrade.

After a recent meeting with Northern Trust's management, Ms. Asher said she had greater conviction that the bank could deliver on its goals of 18% return on assets and 10% earnings per share gains.

Ms. Asher estimated that the bank was 20% undervalued based on an 80/20 mix of nonbanking and banking earnings.

As a result of these positives, Ms. Asher raised her 1996 earnings estimate to $4.20 from $4.10.

"We base this increase on assumptions that are actually more conservative than management's, including lower expenses (3% to 4% increase), moderate revenue growth (7%), higher provisions to cover loan increases (not losses), and a lower share count," she said in a report to clients.

Tom Maier, a bank analyst for Everen Securities, said that Northern Trust has some real growth opportunities going forward.

"If we do experience some economic weakness, Northern's a great place to be in a recessionary environment" because there is a low dependency on loans, Mr. Maier said.

Mr. Maier currently rates the bank "market perform."


Bank stocks continued to fall Tuesday, with the bank stock index dropping 0.72%, while the overall Standard & Poor's index fell 0.12%.

Citicorp continued to slide, falling another $2 to $65.75. The bank's stock has dropped 6.1% since it announced the departure of Christopher Steffen.

Boatmen's Bancshares was also off, dropping $1.375 to $40.75.

Fifth Third Bancorp was one of the few notable gainers, rising $2.25 to close at $74.75.

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