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National City Corp. (NCC) Sale More Likely

National City Corporation (NYSE: NCC), a regional banking power based in Cleveland, Ohio, with most of its business in the Midwest, may soon be for sale according to reports from the Cleveland Plain Dealer and the Wall Street Journal. As we indicated in an earlier report (“One Regional Bank Stock’s Woes,” January 29, 2008), the bank had been facing difficulty due to losses in the subprime mortgage market and a resultant deteriorating balance sheet. It cut its dividend nearly in half, from 41 cents per quarter to 21 cents, and has seen its stock price fall from a twelve-month high of over $38 to slightly under $10 a share. Its last quarter losses of $333 million and its full year total of $500 million in losses have placed the bank in a vulnerable financial condition. Earnings projections for the coming year 2008 were slashed recently by JP Morgan Chase (NYSE: JPM) from $1.45 to only 30 cents per share.

National City’s loan portfolio has included $21 billion in subprime mortgage, construction and home equity loans, many of which are products held on loans outside its main geographical area of business operations. The $21 billion in subprime loans constitutes approximately 20 per cent of National City’s total loan portfolio. And while National City has not engaged in the massive serial write downs that some other banks and financial institutions have, there is concern over the company’s reserve capital. Its Tier 1 capital, an important measure of capital reserve, has reportedly been down around the 6.5 percent area, with the minimum required by regulators at 6 percent.

The bank, which has a market cap of over $6 billion and assets of $140 billion, has indicated that it is exploring a number of alternatives. These may range from seeking capital partners or some sort of strategic alliance, including restructuring or a merger, to a sale–though most Wall Street observers now feel the bank will be sold. The bank is due to receive $530 million from the sale of Visa, Inc. (NYSE: V) stock, proceeds from one-third of its investment in the credit card company that had its public offering last month. Further Visa stock, however, is tied up in National City with restrictions on sales; consequently, they won’t get immediate benefit from that.

Should National City be sold, potential buyers mentioned include JP Morgan Chase, or perhaps National City’s Cleveland rival, Key Corp. (NYSE: KEY), which once was smaller with its $9 billion market capitalization, but is now larger than National City due to the shrinkage in National City’s stock value. Wells Fargo, (NYSE: WFC), the financially healthy west coast powerhouse bank that has done well with other troubled banking companies, was also mentioned in speculation. Foreign banks loom on the horizon for a possible takeover of National City as well, chiefly mentioned were HSBC, Hong Kong (NYSE: HBC), Royal Bank of Canada (NYSE: RY), a conservative bank with a strong balance sheet, Industrial and Commercial Bank of China (OTC:ICBAF), with its mega-market cap of over $250 billion, and even a sovereign fund, the United Arab Emirates Fund from Dubai, with its enormous assets.

National City grew from a local Cleveland area bank over the years to become a stable regional financial stronghold, as it acquired banks in Ohio, Indiana, Kentucky, Michigan and other nearby areas, and successfully grew a diversified base throughout the region. With the housing market downturn of the last year continuing and expected to go on for a while, coupled with the amount of risky loans on National City’s books, analysts feel the prospects for near-term recovery by the bank are not good. Though it is not in the weakened state of some of the worst financials, it clearly needs more capital going forward. The consensus of the investment community has been that National City will have to pursue other actions, with the now growing feeling that the sale of the bank is the most likely. The bank has retained Goldman Sachs (NYSE: GS) to advise it, and the bulk of this latest information was revealed after a JP Morgan Chase report.

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