Shares of San Francisco-based Union Bank retreated again Tuesday after tumbling to a 52-week low Monday when a Merrill Lynch analyst reduced her intermediate-term rating on the bank to "neutral," from "above average."

In heavy Monday trading, the shares dropped $1.125, or about 4%, to close at $24.50. During the seesaw session, which showed some flashes of afternoon strength, Union Bank traded as low as $24.

Tuesday, the stock was weak from the outset, slipping quickly to $23.50 in brisk morning activity before closing at $23.875, off 62.5 cents.

Wendy Gleichmann of Merrill Lynch & Co. said Monday that she had downgraded Union Bank because of the lagging economic recovery in California and higher credit costs.

|Above Average' for Long Term

Despite the intermediate-term downgrading, she said, she is maintaining her "above average" rating on the stock for the long term.

Union, the Golden State's fourth-largest commercial bank, is extremely dependent on the local economy. "It's still seeing high credit costs while the recovery in California continues to lag," the Merrill Lynch analyst said.

Union Bank continues to take a longer-term view of its operations. "Union has tremendous operating leverage," Ms. Gleichmann said, "and it should do well after the difficult economic environment in California improves."

Rebound Predicted

The analyst said she foresees such an improvement by 1995, although she has reduced earnings estimates for the bank in both 1993 and 1994.

"We've had a |hold' rating on the stock all along," said James M. Rosenberg, who follows Union for Lehman Brothers Inc.

Lehman reduced its earnings estimate for the stock last week to 34 cents a share, from 41 cents, for the fourth quarter of 1993. It also cut its full-year 1993 estimate to $2.18 a share, from $2.25, and its 1994 estimate to $1.90 a share, from $2.60.

"They're having no growth; margins are narrowing; and credit costs remain high and will continue to remain high next year," Mr. Rosenberg said.

Investors' Patience Noted

Jack Rice, Union Bank's manager of investor relations, said: "Investors have been pretty patient considering our significant burden of nonperforming assets and the associated credit costs."

Mr. Rice agreed with the consensus view that little optimism exists on the California economy. on the California economy.

"There are some expectations for a squeeze on our earnings going into 1994," Mr. Rice said. He was quick to add, however, that Union Bank was taking a long-term look at its operations and that it was "not contemplating a |clearing-the-decks' approach in dealing with its nonperforming assets."

Expanding in Mutual Funds

Union Bank, which is 70%-owned by Bank of Tokyo Ltd., offers a wide range of financial services, primarily to California consumers, small businesses, middle-market companies, and major corporations.

With 200 retail branches in California, it has $16 billion of assets.

Last week, the bank announced that it was introducing four mutual funds - bringing its product line to 13 portfolios, according to Fund Decoder, an industry newsletter.

Union Bank had $1.2 billion in mutual fund assets under management at Sept. 30, according to Lipper Analytical Services, Summit, N.J.

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