PNC and National City

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It is easier to couple up when the liquor is flowing freely. For US regional banks, the government is holding a $125bn bottle, ready to pour in liquidity to ease potential partnerships. First up for a shot was PNC, the Pennsylvania-based bank, which on Friday agreed to buy Ohio’s National City for $5.2bn in stock, plus a spattering of cash for warrant holders. The Treasury is stumping up $7.7bn in preferred stock and warrants while the tax benefit from National City’s losses boosts the deal’s return.

PNC, then, had beer goggles on. Its aggressive marks suggest National City’s loans will result in almost $20bn in future losses, a further 17.5 per cent haircut from the end of August. Compared with National City’s outlook of just earlier in the week, PNC has roughly doubled the losses expected in National City’s portfolio of troubled loans and added $3.5bn in residential construction exposure to the pile of unappealing business.

Still, the government’s capital cocktail will boost the combined businesses’ tier one to 10 per cent against PNC’s ratio of 8.2 per cent. And the pairing of the so-called “super-regionals” forms the fifth largest US bank by deposits, sprawled across the Midwest and the north-east. Granted, states such as Michigan will not offer the most tantalising growth prospects in the near term. But PNC has experience of ekeing growth from sluggish markets, while overlaps will help find $1.2bn in cost savings. Longer term, PNC will need to rebuild share of combined revenues coming from fees rather than spread lending.

With the government whipping up deals for the sector’s weakest, those who pumped $7bn into National City in April, led by Corsair Capital, are fortunate to get out even at this price. Those banks lucky enough to get served next with cheap liquidity should remember: merrily taking home one of the less attractive types on the dancefloor can exacerbate tomorrow’s hangover.

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