Sunday, October 26, 2008

This Weekend’s Contemplation – The Changing Face of the Banking Business

It should be clear at this point that the Bail-Out Plan, which was originally thought to buy the “toxic” mortgages of the financial industry is now largely being used to selectively re-capitalize the banks. There was the capital injections into 9 financial institutions a couple of weeks ago, which is being followed by injections into about 20 regional banks. This will begin to indicate the clear winners and losers in the credit crisis. The most recent loser is National City, which is being purchased by PNC. Text in bold is my emphasis. From Yahoo News:

The U.S. government took further steps to prop up the U.S. banking system on Friday, starting to inject capital into a new group of banks, and helping to finance a $5.2 billion takeover of National City Corp by PNC Financial Services Group Inc.

The Treasury Department plans to provide funds for 20 to 22 additional lenders as part of its next round of a $250 billion bank recapitalization program. It has already committed half that amount to nine of the nation's largest banks in exchange for preferred shares.

Treasury plans to let banks announce the infusions on their own, rather than release a list of recipients all at once and risk scaring investors who might think banks left off failed to qualify for help, a person familiar with Treasury thinking said.

PNC, First Horizon National Corp, Regions Financial Corp, and Valley National Bancorp said on Friday they will obtain infusions. Capital One Financial Corp and SunTrust Banks Inc were also among banks on the Treasury list, the Wall Street Journal said, citing people familiar with the matter.

Treasury also is examining how to give help to insurers under its $700 billion Troubled Asset Relief Program, two people familiar with the deliberations said. . . . .

. . . . . "Credit quality will continue to deteriorate -- mortgage loans, credit card loans, auto loans, student loans, across the board," said Keith Davis, an analyst at Farr, Miller & Washington in Washington, D.C. "Many of these banks are going to be reporting losses for several quarters."

Banks worldwide are trying to reduce their balance sheet risk after taking on too many mortgages and complex debt, which no longer have buyers.

Credit losses at most major U.S. lenders are soaring, often to three times or more than year-ago levels. The losses are likely to rise if housing prices fall further, unemployment rises, and the economy deteriorates, causing more retail and business customers to have trouble paying their bills.

National City, a Cleveland-based bank battered by soured mortgage and construction loans in the U.S. Midwest and Florida, agreed to be acquired by PNC in a transaction valuing it at just $2.23 per share, 19 percent below where it closed on Thursday and 94 percent below where it traded in March 2007.

"This is a difficult environment," James Rohr, chief executive of Pittsburgh-based PNC, said on a conference call. "The economy has been deteriorating quarter by quarter."

National City had lost money in five straight quarters. It joins Bear Stearns Cos, Merrill Lynch & Co, Sovereign Bancorp Inc, Wachovia Corp and Washington Mutual Inc among financial companies that were swallowed up this year by lenders considered healthier.

PNC said the purchase would make it the fifth-largest U.S. bank by deposits. The acquisition roughly doubles PNC's size. . . . .

. . . . . The selling is "part and parcel of the eventual cleanout" of leverage in the financial system, said Marshall Front, chairman of Front Barnett Associates LLC in Chicago.

"We are aware of hedge funds that are being forced to sell, and banks are forcing customers to bring margins up. Mutual funds are getting large redemptions, and exchange traders are under extreme pressure," he added.

Meanwhile, shares of some regional banks that analysts consider relatively healthy, and potential acquirers of weaker rivals, rose. BB&T Corp rose 6.8 percent to $32.25, while U.S. Bancorp gained 2.7 percent to $29.45.

Minneapolis-based U.S. Bancorp had looked into buying National City, people familiar with the matter said on Friday.

One of Friday's biggest decliners was Fifth Third Bancorp, whose shares slid 28.7 percent to $8.07.

The Cincinnati lender also has seen loan losses mount, and been thought to be a takeover target, perhaps for PNC. Goldman Sachs & Co analysts downgraded Fifth Third to "sell" from "neutral," and Fitch Ratings lowered the bank's credit rating.

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