The credit ratings of banks continued to rise last quarter, and analysts see more of the same for the rest of the year.

Moody's Investors Service Inc. and Standard & Poor's Corp., the two major rating agencies, issued 13 upgrades in the third quarter, including higher ratings to recovering money-center banks Citicorp and Chase Manhattan.

Only two banks were downgraded. The number of upgrades and downgrades is in line with previous quarters.

"The pace of upgrades isn't slowing," said Christopher T. Mahoney, an analyst with Moody's.

Moody's, for example, is reviewing the ratings of five banking companies, with an eye to upgrading them. Most notable is Banc One Corp., which is rated A1.

Rare Rating for a Bank

If upgraded, the bank's rating would be Aa. Neither rating agency has upgraded a banking company to double-A for years.

Other banks that Moody's may upgraded include Bay-Banks Inc., First Bank System Inc.. Shawmut National Corp., and Integra Financial Corp.

S&P has six banks in line for a possible upgrade, including Bank of Boston Corp. and Zions Bancorp.

The rating agencies have been upgrading bank stocks for the past two years, as the industry digs out from its pile of bad loans.

Banks have benefited from wider net interest margins, lower overhead, declining levels of problem assets, record profitability, and strong capital levels, said the rating agencies.

At least for now the outlook is nothing but positive. "We can't identify what the next major problem for the industry is," said Mr. Mahoney.

The business environment for banks has improved as well. Mergers and the partial liquidation of the thrift industry have reduced competition.

"In some cases, the winners in the consolidation trend will enjoy long-term benefits that the others do not," said Tanya Azarchs, an analyst with S&P.

Leeway on Pricing

Ms. Azarchs said banks with fewer competitors can price their products to earn more profit. Many failed thrifts, for example, sealed their fate by paying outlandishly high deposit rates, and forced banks to follow. And fewer competitors in a market can lead to less competitive loan pricing as well.

Those banks that have been active acquirers have bought themselves a measure of geographic diversification, which the ratings agencies like.

S&P, for example, upgraded First Union Corp. last quarter and NationsBank Corp. earlier in the year, partly on the strength of their mergers.

After slashing bank ratings between 1988 and 1991, the agencies have been boosting ratings since. But even with those upgrades, many banks have not reached their mid-1980 credit levels.

"Many of the upgrades have been a recovery of depressed ratings," said Ms. Azarchs.

Many of the upgraded banks, she said, were either below investment grade or of a low investment grade.

"We have a lot of ground to retrace before we get back to 1985, when the money-centers were rated double-A," said Mr. Mahoney.Possible Upgrades Banks that Moody's or S&P is considering for upgrade Bank Rating Agency Long-term rating Banc One Moody's A1Bank of Boston S&P BBBBayBanks Moody's Ba1Commonwealth Bank S&P BBB(1)First Bank System Moody's A3First Eastern Bank Moody's Baa(3)Fortune Bank S&P B(2)Integra Financial Moody's Baa(3)MNC Financial S&P B+Shawmut Financial Moody's Baa3(4)Valley Bancorp S&P A2(3)Zions Bancorp S&P BB+(2)(1) Certificate of deposit rating(2) Subordinated debt rating.(3) Commercial paper rating.(4) Rating of shelf filingSources: Standard & Poors, Moodys

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