(Changes source, recasts, adds details)
July 9 (Reuters) - Merrill Lynch raised its rating on Wachovia Corp WB.N to "neutral" from "underperform," saying any further deterioration in credit quality was already priced in and added the banks' stock price outlook depended on whether it remained independent or not.
Merrill analyst Edward Najarian, in a note to clients, said a sale of the bank could drive the shares materially higher but noted that a potential buyer like J.P. Morgan Chase (JPM.N) would not be willing to pay $16 to $20 a share, a price which the analyst called "fair."
Wachovia shares rose as much as 4 percent in early trade after the rating upgrade, but later gave up most of its gains.
If Wachovia was to remain independent, it might have to cut its dividend again and raise up to $10 billion of equity capital, diluting existing shareholders, Najarian said.
Merrill also said Wachovia may have to incur a $14.9 billion goodwill impairment charge related to its Golden West Financial acquisition.
"We now believe Wachovia's stock price outlook has become relatively binary, driven by whether the company remains independent or is acquired," analyst Edward Najarian wrote in a note to clients.
In a separate note, another Merrill analyst Guy Moszkowski, said that JP Morgan would be careful not to overpay for Wachovia.
"We would expect an all-stock deal as in the current market we would not expect JPM to want to compromise its 'fortress' balance sheet," Moszkowski wrote in his note.
Wachovia shares were up 13 cents at $15.77 in early trade on the New York Stock Exchange. (Reporting by Sweta Singh in Bangalore; Editing by Jarshad Kakkrakandy)