July 22 (Bloomberg) -- Deutsche Bank AG analyst Mike Mayo said he has become more positive on the prospects for the banking business as banks reported better-than-expected second quarter earnings without raising new capital.

Mayo upgraded Citigroup Inc. to ``hold'' from ``sell'' and reiterated his ``buy'' rating on Wachovia Corp. He's become less ``negative'' as banks report second-quarter results without raising fresh capital, margins better than expected and ``problems have not spread as much as feared,'' he wrote in a note to clients today.

``Real estate problems remain significant, but outside these areas problems have not yet spread in score or severity as much as feared,'' Mayo wrote. ``Bad results are good when expectations are so low.''

Wachovia today reported a record quarterly loss of $8.9 billion, slashed its dividend and announced 6,350 job cuts. Citigroup last week reported a smaller-than-estimated loss on fewer mortgage-bond writedowns, lowering borrowing costs and job cuts.

Wachovia rose $3.61, or 27 percent, to $16.79 at 4:01 p.m. in New York Stock Exchange composite trading. Citigroup climbed $1.20, or 6.1 percent, to $20.89.

``They've got to get rid of assets that are not core,'' Edward Altman, a finance professor at New York University's Stern School of Business, said in a Bloomberg Radio interview. ``Bigness is no longer a panacea for success in anything. It used to be in banking.''

Mayo said that there still ``remain issues'' for the banks. He said banks as a group don't typically perform well until ``problem'' loans peak, likely not until the middle of next year.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: July 22, 2008 17:48 EDT