PNC Financial’s (PNC) purchase of National City (NCC) is an absolute travesty for National City shareholders and for the banks that chose to forgo a purchase of the Ohio lender. The company’s recent quarterly report was fairly positive in my opinion as it showed a company that was well positioned to survive the current turmoil in the economy and the credit markets. Of all the majors, National City had the highest capital ratio, at 10.98% at the end of the September quarter. While loan losses were and still are a concern, the firm’s relatively strong capital position had caused me to believe that they would likely be one of the banking industry’s survivors and likely one of the new mega-regional banks to come out of the industry’s consolidation.
Unlike Washington Mutual (WM) and Wachovia (WB), National City has not experienced any deposit outflows and is still flush with liquidity, in fact, National City’s deposits actually increased in the most recent quarter when compared to the year ago quarter. When this is coupled with the bank’s relatively strong capital base and the company’s $3.8B in loan loss provisions to non-performing assets of only $3.5B, the choice to sell the bank becomes even more cloudy. Barring a run on the bank, National City could have continued on its own with current loss rates for another two years. However, this would likely be a worst case scenario as loan loss provisions have already begun to decline at many of America’s banks, including National City, which saw loan loss provisions decline 25% from the preceding quarter.
So why did National City sell? Because it’s likely that it believed that it had no choice. The Wall Street Journal does a wonderful job of providing a timeline of the National City sale and does a good job of alluding to the possibility that National City may not have been able to participate in the government’s capital injection program. The Wall Street Journal then alludes to the possibility that this caused the bank’s executives to fear that the company’s stock would collapse along with its deposit base as shareholders and customers scrambled to withdraw cash. Unfortunately, the government’s forced sale of National City succeeds in showing the investment community that it is taking its role as king maker in the banking industry too far. There are many other smaller regional banks in far worse positions that could have been dealt with first, including such abject failures as Downey Financial (DSL), Bank United (BKUNA), Flagstar (FBC), AmTrust Bank (AFSI), Guaranty Financial (GFG) and Colonial BancGroup (CNB). In forcing National City to sell itself, the government has shown the utterly arbitrary fashion by which it will decide who lives and who dies.
Fortunately, for National City and its shareholders, the company was not seized and given that the stock is trading at nearly 20% below PNC Financial’s offering price, management should cancel the deal and attempt to go at it alone. Given the bank’s large reserves and relatively healthy capital position, management would be negligent not to try, given the low offer from PNC Financial. I would personally rather have the bank seized and take a total loss on my holdings then have it sold to PNC Financial at $2 dollars and change. The bank’s large asset base, branch network, geographic concentration, Visa (V) stake, $6.6B in excess capital and $100B in deposits are diamonds in the rough and could if nothing else lead to a sale in several years for a much more significant sum then is currently being offered by PNC Financial.
In not purchasing National City, several banks are missing out on an acquisition that would be of tremendous benefit to their business models and their shareholders. Should management not renege on the merge agreement I would not be surprised to see U.S. Bancorp (USB), Regions Bank (RF), BB&T (BBT), TD Bank (TD) and Bank of the West (BNPQY) seriously look at National City. This will be especially true if the volatility in the financial markets decline in the weeks ahead.
The two most compelling names, of those listed above, are TD Bank (TD) and Bank of the West (BNPQY) as it would provide these two companies with the opportunity for national expansion via the National City name. Both BNP Paribas and Toronto Dominion have been looking at the U.S. for years and they would likely be able to pull off the acquisition without government assistance, which would be a boon for the Treasury Department. Given the incredible attractiveness of National City at these price levels, these two international power houses could offer between $3 & $4 dollars a share in stock and still make their shareholders very happy in the years ahead.
It is clear to me that the government’s botched involvement in National City is a sign of the dangers tied to the government’s bank bailout program. Before mandating future sales, the Treasury and its agencies need to outline and publicly release the key metrics that have caused the government to request the bank’s sale.
For Further Review:
WSJ Timeline of National City's Sale
National City 3rd Quarter Earnings
Disclosure: Long NCC @ 1.40 & Change
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