PNC taps rescue fund to buy National City
The Pittsburgh bank bought the Ohio rival for $5.2 billion in stocks. It was the 10th bank takeover under the bailout.
PNC Financial Services Group Inc.'s purchase of rival National City Corp. yesterday showed the federal bailout at work.
Pittsburgh-based PNC, which has major operations in the Philadelphia area, received approval late Thursday for a $7.7 billion cash infusion by the U.S. Treasury Department.
The next morning, PNC, the 10th bank to get a boost under the $700 billion rescue package, announced its purchase of National City for $5.2 billion in stocks and $384 million in cash - the kind of takeover the bailout was meant to facilitate.
In buying Cleveland-based National City, which PNC had been eyeing for months, PNC joined Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co. as a buyer of weakened institutions and as a key player in the nation's restructured banking sector.
The deal, expected to close this year, will more than double PNC's size, making it the nation's fifth-biggest bank by deposits and the fourth-biggest by number of branches.
"A big thing that we are buying here is a very, very large deposit franchise with a very, very large and loyal customer base," James E. Rohr, PNC's chairman and chief executive, told analysts yesterday on a conference call.
"That's really the most important thing . . . along with 1,000 people that serve those customers," he said.
On the downside, PNC is getting a loan portfolio with losses it projected at more than twice those estimated Tuesday by National City management. PNC said it expected $19.9 billion in losses on National City's $113.4 billion loan book, which has suffered from the high failure rate of loans bought from brokers.
The projected 17.5 percent loss rate alarmed some analysts. "If such marks were extended across the industry, this implies materially greater losses than have already been reported by the major banks," wrote Kathleen Shanley, a bond analyst with Gimme Credit L.L.C.
Rohr said PNC was being conservative in its evaluation of the loans because of economic conditions. "We're going to have an increase in unemployment, and I think it's going to be a difficult environment in 2009."
Michael Mayo, a bank analyst with Deutsche Bank, called the deal a good one for PNC and said he did not think losses on National City loans would be as high as projected. "We believe PNC's results will look superior to peers and show credit losses that remain well below group average," Mayo said in a note to investors.
Another factor might also be at play in the large loan write-downs. Changes in IRS tax policy give extended tax benefits to banks that buy troubled institutions and record large write-offs.
National City is the fourth major bank to be driven into the arms of an acquirer in the last month. The others were Wachovia Corp. (Wells Fargo), Washington Mutual Inc. (JPMorgan Chase), and Sovereign Bancorp Inc. (Banco Santander S.A.).
PNC, whose shares gained $2 yesterday to close at $58.88, agreed to pay 0.0392 shares of PNC common stock for each share of National City, plus $384 million in cash to certain warrant-holders. The deal valued National City at $2.23, a 19 percent discount to its Thursday close of $2.75. National City's shares fell 25 percent yesterday, to $2.07.
Martin D. Weiss, president of Weiss Research Inc., in Jupiter, Fla., said there were many more institutions at risk of failure beyond National City and the others who have found new owners.
"The authorities and the large banks that are involved in these buyouts are underestimating the magnitude of the debt problem in this country. They are trying to plug the dike," Weiss said. "They will be able to buy some time, but I don't think they are solving the overall problem in the banking industry.
"Our country as a whole needs to see a substantial reduction in debts outstanding," Weiss said. "That's a painful process, but it has to happen."