National City Corporation Shopping for a Buyer

Regional bank National City Corporation (NCC) appears to be in discussions to either sell all or a portion of itself, and the most likely suitor is NCC’s cross-town (Cleveland) rival KeyCorp (KEY). Other potential buyers include larger banks Wells Fargo (WFC), JP Morgan/Chase (JPM) or PNC (PNC).

NCC has been in a tailspin of late, losing more than 70% in the last year. Much of this loss is because of NCC’s mortgage industry exposure. Mortgage losses were a key contributor to NCC’s very disappointing results for the fourth quarter--net income was only 6 cents per share compared to 36 cents the year before. NCC’s exposure to bad debt makes this acquisition far from certain, but the bank does have substantial assets and could be an attractively-priced growth opportunity for KeyCorp.

In January, National City slashed its dividend almost in half from 41 cents to 21 in an effort to deal with its burgeoning credit troubles. In addition to cutting the dividend, NCC raised $1.6b in capital through the issuance of debt and preferred stock as a means to shore up the balance sheet after incurring subprime mortgage losses of $333 million in the 4^th quarter. Further contributing to its problems is the fact that NCC is primarily located in the struggling economic regions of Ohio and Michigan.

Even so, there may be enough appeal for regional banks such as NCC to attract attention from either rival banks or private equity firms because of the stock’s greatly depressed valuation. National City is a relatively large bank and its $2.7b deposit base is a compelling asset. NCC also has a $1b stake in Visa (V), which is an attractive asset that also comes with a catch, as NCC is not yet able to sell those shares in the secondary market.

A possible merger with smaller KeyCorp would allow massive cost savings, as the combined entity would likely cut many redundant jobs and be able to reduce overhead at its Cleveland headquarters. KeyCorp covets NCC’s local deposit base, which is three times the size of its own. Clearly, the sell-off in NCC shares over the last year has them priced attractively based on historical norms. For example, price-to-cash flow is 57% below NCC’s historical average, and price-to-sales is 76% below the average. Assuming normalized valuations, we would rationally expect NCC to trade between $16.60 and $22.60 a share.

So, the question for KeyCorp is: has the market adequately priced in the extent of the dangers related to NCC? If KeyCorp and their strategic advisors at Goldman Sachs (GS) believe the market has, then this would be a very opportune chance to acquire a rival.

However, KeyCorp has until this point steered clear of the mortgage crisis, and that could be a deal breaker because National City continues to have mortgage related problems. At least NCC has taken some initiative to strengthen its balance sheet, which is certainly not the case for all regional banks with credit problems. Regional banks are about to start feeling squeezed in the next quarter or two. Look for more of these types of “shot-gun marriages” between struggling regional banks in coming quarters.

Disclosure: No position.

Comments

[Voice of Reason]

As so often happens NCC has been beaten down by the street far below it's true value. This is (was) the country's 9th largest bank with roughly 140 billion in assets. Oh wait a minutue, that subprime mortgage "problem" we keep hearing about.

Well it is really as bad as the fearmongers want Joe Average to believe?

The FACT is it seems to be the chicken little crowd getting their feathers all ruffled up over much of nothing again. NCC reports it big "bad" subprime mortgage holdings that are not performing at 4.4%. Well that mean 95% is STILL above water! Also factor in that banks including NCC have been stupidity and foolishly writing down book value of this paper probably far in excess of real value.

Get it? Sure the subprime mess isn't good, and NCC was damn stupid to get into subprime in the first place, but no way this is that bad a problem either. Better, with NCC one of the largest holders of the new Visa IPO it has/will rake in about 500 million from that which is a much needed shot in the arm.

Over the last week to 10 days the morons... oops I mean those next to useless moronic analysis crowd that can't find their rear ends with both hands behind their back have been upgrading NCC from underperform and hold to buy. That plus merger talk and much if not all the bad news already discounted and factored into the stock price and book value way higher than the current stock price, I'm holding. I'm long several so-called distressed bank stocks.

Disclosurer:

I got into NCC via backdoor being a very long term holder of MAFB which NCC bought last summer. Why didn't I sell? Oh, maybe because I have a cost basis of a little over a dollar. So, still sitting pretty all things considered.