The worst appears to be over for domestic letter-of-credit providers, even as trouble for their Japanese counterparts persists.

"U.S. banks have recovered substantially since the dark days of 1991," said Nicholas Krasno, senior analyst at Moody's Investors Service. "In general, they are performing much better because overall profitability is high --and has been high for some time -- and asset quality has improved."

Several rating upgrades and reviews for possible upgrades have occurred in recent weeks, although the shock of severe downgrades in past years has many public finance bankers leery of optimism.

Moody's announced recently it raised ratings for Chemical Bank and Chase Manhattan Bank N.A., while Barnett Banks Inc. was placed under review for a possible upgrade.

And last month, Standard & Poor's Corp. upgraded Bank of New York and Midlantic National Bank.

Over the past few months, there has been a marked increase in U.S. banks' participation in the letter-of-credit market, according to public finance bankers from several overseas firms. Trade groups like the Bond Investors Association are taking notice as well.

"We expect to see more such rises [in bank LOC ratings] and, in fact, would advise investors to examine the purchase of such bonds on the possibility of appreciation arising from credit rating upgrades," the group said in its July newsletter.

At the same time, the problems experienced by the banks' Japanese counterparts are likely to continue, according to a report issued late last week by Standard & Poor's.

The situations that have plagued the Japanese banks for the past year, "asset quality problems, combined with pressure on profitability and capital adequacy measures, [are] not likely to improve in the short run, particularly if the current economic slump in Japan is prolonged or real estate values deteriorate further," the rating agency's report says.

Twelve Banks Cut

During the first half of 1993, Standard & Poor's lowered ratings on 12 Japanese financial institutions, and all the rated long-term debt of Japanese banks have negative outlooks. The average Japanese bank rating is single-A, compared with double-A two years ago, the report says.

The continuing economic downturn in Japan has exacerbated the number of problem loans throughout the nation's banking system, estimated by the Ministry of Finance at $118.3 billion as of March 31. The ministry's figure is understated because it includes only loans that were six months past due or had defaulted, according to Standard & Poor's.

The banks' asset quality problems are unlikely to be resolved in the near term because the restructuring of problem loans is expected to take several years, the report says.

Standard & Poor's also said that "a significant number" of restructurings already under way will "undoubtedly be unsuccessful."

The credit quality of the Japanese banking system is further pressured because direct government assistance has not materialized as expected, the ratings agency said.

On the positive side, Standard & Poor's said the Japanese bank ratings are not out of line with other international banking systems. In addition, the stock market's rebound and the yen's strong performance against the dollar have improved the banks' operating flexibility, the report says.

But things are looking up on this side of the Pacific.

On July 2, Moody's raised its ratings on long-term debt backed by Chemical Bank and Chemical Bank Delaware LOCs to A1 from A2. The banks' Prime-1 short-term LOC ratings were confirmed. On the same day, Chase Manhattan Bank N.A.'s long-term LOC-backed issues were raised, to A2 from Baal, and its short-term LOC rating was upgraded, to Prime- 1 from Prime-2.

Last week, the A2 long-term LOC ratings of Barnett Banks' banking subsidiaries were placed under review for a possible upgrade. The banks' Prime-1 short-term ratings were confirmed.

The Standard & Poor's upgrades took Bank of New York's long-term LOC ratings to single-A-plus from single-A, while Midlantic National Bank's long-term LOC ratings were put at the edge of investment grade, raised to double-B-plus from single-B-plus.

Chemical's upgrade from Moody's was due to an improvement in the future earning trends of its holding company, Chemical Banking Corp., the rating agency said.

~Impaired Loans'

Chemical's progress in reducing its "substantial portfolio of impaired loans" was also a factor in the upgrade, Moody's said in a press release.

Moody's further cited the bank's improved core earnings, but warned that Chemical's capital ratios "are still somewhat low compared with other U.S. bank holding companies."

With assets of $147 billion as of March 31, Chemical Banking Corp. was the third largest bank holding company in the United States.

The upgrade of Chase Manhattan Corp. and its banking subsidiaries reflects "the improvement in Chase's capital measures following its recent $750 million equity offering as well as from future earnings retention," Moody's said.

However, Chase's capital ratios are also low compared to other U.S. bank holding companies, and asset quality is still "somewhat impaired" and includes a "major weighting" in commercial real estate transactions.

But provisions have built up an "increasingly adequate" reserve coverage for non-performing assets, further bolstering the ratings, Moody's said.

Chase Manhattan is the nation's sixth largest bank holding company, with assets of $94 billion as of March 31.

The review of Barnett Banks and its subsidiaries was prompted by the company's "strengthening capital" and improved asset quality, the Moody's release says. The review will also focus on the impact of the bank's recent in-market acquisition of First Florida Bank.

Barnett Banks Inc. is a multibank holding company with $38 billion of total assets.

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