National City Corp. is bullish on bank stocks.

The Cleveland-based bank has built a $700 million portfolio over the past six years, which has grown at a 40% average annual rate.

The returns have been almost twice that of the Standard & Poor's 500 index, say National City officials. The S and P 500 has returned an average of 23% yearly over that time.

The investments are in 65 banks-not in any that National City plans to buy, but banks across the country it thinks other companies will buy.

"We play the consolidation game," National City chief financial officer Robert G. Siefers said in a recent interview. "We've kind of figured out who might be around, and who might not."

The strategy seems to have worked.

Some of the institutions National City has invested in, before buyouts, include: Ameritrust Corp., Michigan National Corp., Midlantic Corp., Bank South Corp., BayBanks Inc., Meridian Bancorp, Dauphin Deposit Corp., U.S. Bancorp, and Great Western Financial Corp.

National City had gains of at least $1 million on each investment, but in most cases much more.

The $50.4 billion-asset banking company almost always takes less than a 5% stake in companies, Mr. Siefers said. The company invested $20 million each in California Federal Bank and Great Western about three years ago, he said.

"We bought them (the stocks) before they were cool," he said. And National City has similar-sized stakes in three other California thrifts.

Once it buys a stock, National City rarely sells it. "We place a sizable bet, and we don't sell on a price basis," Mr. Siefers said. "We wait until it's bought out."

While the bank is making money in the market, the income is used to offset costs, such as those incurred through National City's own acquisitions. The strategy has kept a steady flow of earnings coming in without disruption.

For instance, the bank stock fund grossed about $75 million last year, but that was offset by a $75 million charge taken for National City's May 1996 acquisition of Integra Financial Corp. of Pittsburgh.

The Integra acquisition actually doubled the size of the bank stock fund since the Pittsburgh company had a similar portfolio.

Banks' buying other banks' stocks is not new, but National City has one of the most sizable such portfolios. They are difficult to rank, however, because Bank of New York Co., another active investor in bank stocks, won't disclose the size of its portfolio. Unlike National City, Bank of New York tends to invest in companies it plans to buy.

James Schutz, an analyst with ABN Amro Chicago Corp., said the investments make sense because bankers typically know quite a bit about their own industry. "The argument is, 'I'm a bank and I know who's going to get bought out. And I know what makes good returns,' " Mr. Schutz said.

Of course, there are risks, particularly after a five-year bull market for bank stocks.

"You're in an equity market, and you've had the wind to your back since 1992," Mr. Schutz said.

Mr. Siefers said he recognizes the risks, and National City has derivatives for hedging the stock positions. If the market turns bearish on banks, it will only hasten the consolidation spree, he said. "We would expect consolidation to pick up steam." u

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