UPDATE 1-RESEARCH ALERT-Punk Ziegel raises UnionBanCal to buy

(Adds analyst's comments and background)

March 13 (Reuters) - Punk Ziegel upgraded UnionBanCal Corp UB.N to "buy" from "market perform," saying the bank's commercial and industry lending was better than generally thought, and that it appeared to be fully reserved against potential builder losses.

UnionBanCal, the parent of Union Bank of California, does not believe that California is in a recession, despite fears that the bank's position in the state could result in high loan losses, said Bove, who raised his price target by $3 to $54.

The California real estate market has plunged in recent months, given the increase in delinquencies and defaults.

The analyst, however, said there is a need for more mortgage lending and a limited number of lenders, as California's population continues to grow while many of the small banks and thrifts in the state remain troubled.

"As a result of these forces, UnionBanCal is now receiving more applications than it can handle. It is backlogged with new business in this sector," Bove wrote in a note to clients.

"Even before this shift in competitive advantage, the company was increasing its share of this market. Now it is literally having trouble meeting the demand."

UnionBanCal, a unit of Japan's largest bank Mitsubishi UFJ Financial Group Inc (8306.T), has set aside $100 million in reserves against its $850 million builder loan portfolio, Bove said.

He expects loan losses to rise but said write-offs would be covered by the higher unit volume at higher margins.

UnionBanCal on Thursday posted a 27 percent fall in fourth-quarter net income and forecast 2008 earnings of $4.05 to $4.30 a share, including a total provision for credit losses of $80 million to $90 million.

Bove raised his 2008 earnings view to $4.05 a share from $3.87 a share, and noted that the bank's 2008 estimates were "somewhat higher" than his own.

Shares of the bank closed at $46.16 Thursday on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Amitha Rajan)