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National City has attracted interest from two serious bidders, but a deal is unlikely until buyers become more comfortable with the bank’s residential real estate portfolio, a source close to National City told dealReporter.
The source said the problem for National City is not finding a buyer, but finding a buyer willing to pay a fair price who does not demand months of due diligence.
He added a complete sale of the bank is not the only option, with other possibilities including a sale of National City’s asset management business or a sale of the bank’s stake in Visa. Prior to Visa’s public offering, National City held approximately an 8% equity stake. Last week it redeemed 33% of its ownership interest for a pre-tax gain of USD 450m.
The actions recently taken by the Federal Reserve Board mean National City does not face emergency funding issues and has the ability to survive as an independent institution for the next year, the source said.
Still, National City has suffered significant losses in its core mortgage banking division, where it reported a USD 540m loss in 2007. Comparatively, the asset management business reported similar numbers to 2006, around USD 100m in net income, however, as a percentage of total income the business rose to 32% from 4.3% the previous year, owing to weakness in other divisions.
Industry bankers expressed skepticism about the prospects of a sale in the near term. A banker familiar with National City characterized the possible sale of the asset management business as ”trying to fix the Hoover Dam with a band-aid”. Another senior industry banker said he doubted National City would be able to find a buyer for the entire bank.
Since it was reported two weeks ago that the embattled Cleveland, Ohio-based bank was looking for a buyer, market and media speculation has focussed on National City’s cross-town rival, KeyCorp, and Wells Fargo as the most logical bidders.
KeyCorp’s CEO has said in the past he is interested in in-market consolidation and Wells Fargo’s CEO recently indicated the California bank plans to continue acquiring in the next few months.
The industry banker familiar with National City said despite several advantages, a merger of equals with KeyCorp poses many problems.
”The cost savings would be astronomical and you could consolidate a leading position in a couple of markets that are large,” the banker said. But he pointed out that in the past National City was seen as a more likely buyer of KeyCorp and questions remain if KeyCorp’s management has the experience to resolve issues with National City’s troubled home equity portfolio.
At the end of 2007, National City had nearly 50% more assets than KeyCorp, USD 150bn, but in recent trading around a USD 2bn lower market cap, USD 7.25bn. It reported a USD 18bn home equity line of credit and USD 30bn in residential real estate loans.
Thirty-two percent of National City’s loans are comprised of non-prime real estate, home equity, credit cards and unsecured lines of credit. According to FDIC records, 4.45% of National City’s total real estate loans are non-current.
Along with financial and managerial concerns, a merger could also attract criticism from Cleveland community leaders upset over job losses the cost savings would bring and changes in the city’s culture, the banker said.
Congresswoman Stephanie Jones, who represents Cleveland’s eastern neighborhoods, said there have been conversations in Cleveland for several years about the possibility of consolidation and said the ground work has already been laid. While there is worry about job losses, Jones said an out-of-state bidder may attract more scrutiny from the Cleveland community.
”The key benefit of the consolidation of KeyCorp and National City is that we will still have influence, compared to a bank coming from outside our area,” she said.
Two logical out-of-state bidders are Wells Fargo and US Bancorp. The industry banker said if Wells Fargo makes an offer it is unlikely to pay full price. Minnesota-based US Bancorp could take advantage of extensive overlap to rationalize the combined bank’s retail presence, but has said it is uninterested in large acquisitions, the banker noted.
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