Bank credit quality is on the mend, the two major rating agencies said Wednesday.

In a sharp turnaround from 1991, more bank holding companies were upgraded than downgraded in the first nine months of the year.

Standard & Poor's Corp. said it has upgraded 11 and downgraded seven bank holding companies so far this year, compared to 34 downgradings and four upgradings during all of 1991.

At Moody's Investors Service, 21 bank holding companies were upgraded and only three downgraded. Last year, the agency downgraded 37 and upgraded nine.

Robert Swanton, director of Standard & Poor's, said consolidation in the banking industry has been a big factor in the improved credit ratings.

For example, of the five bank holding companies upgraded in the second quarter, two - Security Pacific Corp. and Merchants National Corp. - had been acquired by stronger institutions.

BankAmerica Corp. bought Security Pacific, and National City Corp. acquired Merchants National.

Christopher Mahoney, associate director at Moody's, said his agency has mainly upgraded lower-rated banks, those whose senior debt ratings had ranged from Baa3 to Baa1.

Prospects for Future Gradings

S&P and Moody's differ on prospects for future upgradings, with Moody's being more bullish. However, overall bank ratings at Moody's are lower than those of S&P.

The average rating by Moody's for bank holding companies is about Baa2; at Standard & Poor's, most bank holding companies are rated a higher BBB-plus to A-minus.

"We anticipate further upgrades of U.S. banks and not many downgrades," Mr. Mahoney said. Banks are being given more time by regulators to work through loan problems, he said, improving the outlook for upgradings.

However, Mr. Swanton of Standard & Poor's said credit quality is stabilizing, not showing major improvement. And the number of upgradings remains small compared to the overall number of rated banks, he said.

In addition, S&P has a stable ratings outlook on 75% of the bank holding companies it follows. It has a negative outlook on 19%, positive on 6%.

Separately, Moody's said Wednesday that it had upgraded the senior debt rating of Midlantic Corp., Edison, N.J., to B1 from B3, citing asset sales and an injection of equity.

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