Gary Townsend is way too tough on National City’s (NCC) top management and the capital allocation decisions it made last year, in my view. Oh, sure, if the company knew then what it knows now, it wouldn’t have done a big share buyback in early 2007.
But it turns out—surprise!—the company isn’t clairvoyant. Rather, it relied on the best information it had at the time. One such piece of information, about which there was universal agreement back then, was that the company was overcapitalized following the $1.3 billion sale of its First Franklin subprime lending unit in late 2006. After the deal closed, National City saw it had an above-average capital ratio but only modest prospects for loan growth. It was widely applauded, then, when it responded to its dilemma by announcing $2.9 billion share repurchase via Dutch auction.
The argument that this was a bad management decision depends on an almost willful amnesia. There simply was no controversy over the buybacks at the time. Gary certainly didn’t criticize them. (In fact, if I remember correctly, he upgraded National City’s stock after the details of its Dutch auction were announced.)
What’s more, the company’s operating performance in 2006 was strong. For the full year, National City earned $2.3 billion in net income and generated an ROE of 18%. Its year-end capital-to-assets ratio rose to 10.4% from 8.9% the prior year.
To say now that the company shouldn’t have bought back stock because it was about to be engulfed by a credit crunch of historic proportions, that basically no one saw coming, is not very convincing, to say the least.
I also don’t agree with Gary’s criticism of management’s decision to raise the common stock dividend in 2007. The company wouldn’t make the same decision now, sure. Even so, common dividends paid in 2007 came to $970 million, just $50 million more than the company paid out in 2006. Given that National City’s capital base is $13.4 billion, I don’t think the $50 million in higher dividends paid in 2007is a real factor in the company’s currently stressed condition.
National City is by no means the only company that’s been turned upside down by the meltdown in the subprime mortgage market. If anything, it prepared for the collapse much better than most lenders did. (For one thing, the company was able to sell its subprime business for a meaningful amount of money; most of its competitors either had to shutter their lending units, or went bankrupt.) To single out National City for mismanaging problems that beset the entire industry strikes me as a serious mis-remembering of the record.
Tom Brown is head of BankStocks.com.