When National City Corp. posts its third-quarter results today, results widely expected to be in the red for the fifth straight quarter, investors will be looking for signs that the Cleveland company can make it alone. In particular, analysts will be listening for detail on deposit trends, loan quality, and whether ongoing cost cuts are falling to the bottom line.
It is unclear whether Nat City will provide an update on deposit flow for October — as it did for July, when it reported second-quarter results in the wake of the IndyMac Bancorp failure that deepened concerns about deposit runs.
"We'd really like to get a look at what deposit outflows look like," David Hendler, a CreditSights Inc. analyst, said in an interview Monday.
Terry McEvoy of Oppenheimer & Co. Inc. said that if there is no update, investors might take that as a bad sign, especially if deposit levels fell during the third quarter.
"Given the share price of National City right now" — it closed at $2.92 Monday, down 81% this year — "people will be ultrasensitive about any exodus of deposits," Mr. McEvoy said Monday. "If the market's view of the company doesn't change, the board will have to look again at every option to strengthen shareholder value, and that includes a possible sale to a stronger player."
Despite persistent rumors that it may be forced to sell, Nat City's chief executive, Peter Raskind, has adamantly argued that its strong capital position will allow it to remain independent.
At a conference last week in Cleveland, according to a published report, Mr. Raskind acknowledged that his company's mortgage lending strategy, particularly an ill-timed expansion into Florida, has had a crippling effect on earnings this year and could haunt it well into next year.
He confirmed at the conference that Nat City's board had considered selling the company last spring but changed course when an investor group led by Corsair Capital LLC of New York agreed to invest $7 billion in April, bumping Nat City's Tier 1 capital ratio above 11% and giving it a cushion that Mr. Raskind said is more than ample to weather the credit crisis.
It came at a crucial time: Nat City lost $333 million in fourth quarter 2007 and $171 million in the first quarter.
But Mr. Raskind also acknowledged the powerful downward pull of the markets and said Nat City might accept a federal investment to further prop up capital. A report last week in The Plain Dealer of Cleveland quoted him as saying at the conference: "We're closely studying the potential implications, you bet we are. "We're deeply engaged in that process, that analysis. We're going to take a little more time than that."
On Monday, Nat City said it would not discuss its third-quarter performance before releasing results for the period.
The Treasury Department, which would buy shares in participating banks under the federal plan, on Monday set a Nov. 14 deadline for companies to decide if they want to participate. (See related
Mr. Raskind did not rule out an eventual sale of National City. "The board fully understands its obligations and duties to the shareholders," he said in the Plain Dealer story. "If the time ever came where that was appropriate … the board would fulfill its obligations."
Mr. McEvoy and other analysts say they would be listening closely for any further hints on would-be buyers.
"We're hoping they provide an update for October and give some confidence that things are improving," he added.
Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, noted that in July, Mr. Raskind touted that he cut the company's head count by 11% from late 2007 and that he vowed to continue a "rigorous" review of its cost structure that could lead to more cost cuts. Mr. Marquardt said it is "important to get new detail" on precisely how much the costs cuts will save Nat City over the next two years.
As they have all year, analysts also will continue to look for insights on asset quality.
After the $154 billion-asset Nat City reported a record second-quarter loss of $1.76 billion and a 14% increase in nonperforming assets, to $3.1 billion, primarily because of soured real estate loans in Florida, Michigan, and California, Mr. Raskind said he expected a "leveling off of stressed assets" for the rest of 2008.
He said loan losses were "contained" primarily to troubled real estate loans and he said Nat City shrank its mortgage business significantly this year to reduce risky exposure.
However, Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, noted that Mr. Raskind offered the "leveling off" assessment before it was widely accepted by most mainstream economists that the U.S. was in recession.
As the economy faltered this in the third quarter, it likely put pressure on much more than housing-related loans — from credit cards to corporate loans, Mr. Cassidy said.
For a company that posted a second-quarter loan-loss provision of $1.6 billion and net chargeoffs $740 million, severe deterioration in any one credit category would raise concerns that Nat City might be forced to eat into its capital cushion.
"So we'll be looking broadly at quality," Mr. Cassidy said Monday. "People know the bottom line won't be good; what's more important are any new trends."
