National City Corporation Courted By Suitors KeyCorp & Fifth Third BanCorp

Implications: National City Corporation (NCC) share price was up 6% on 4.3.08 on news that crosstown rival KeyCorp and cross-state Fifth Third BanCorp may be courting NCC for a possible merger and/or acquisition, however, this could be a bad time to sell due to current market conditions. NCC may need to do some additional house cleaning before considering a possible sale. NCC earned only $314 million in 2007, which is a sharp decline from the $2.3 billion it pulled in during 2006. The weak position of NCC and its suitors KeyCorp and Fifth Third BanCorp may not result in the best price for NCC's shareholders. NCC's suitors have been mulling over NCC's books for weeks and either potential buyer would need to be comfortable with NCC's residential real estate portfolio and would also be willing to pay a fair price, without months and months of due diligence. NCC is scheduled to report its 1Q08 earnings soon and could be interested in inking a deal before reporting earnings for 1Q08.

Analysis: NCC is the fifth largest bank in terms of deposits and holds 7.2% in deposits. However, National City Corporation (NCC) may be running out of options and may only have two options; seek a merger or sale and/or raise capital to strengthen its balance sheet. Approximately $21 billion of NCC's total loan portfolio includes subprime mortgages, home equity loans and residential construction loans. NCC's mortgage related losses prompted the bank to scale back its mortgage business, reduce its dividend and lay off numerous employees.

1.  Combining NCC & KeyCorp would include $150 billion in total assets from NCC, 1,400 branches in Ohio, Florida, Illinois, Kentucky, Michigan, Missouri, Pennsylvania and Wisconsin and KeyCorp's total assets are $100 billion, over 985 branches in 14 states and KeyCorp was initially viewed as an acquisition target by NCC, however, the smaller KeyCorp is better capitalized and may be the suitor to acquire NCC with the backing of KKR

2.  NCC and Fifth Third BanCorp would combine $150 billion in total assets from NCC and approximately $111 billion in total assets from Fifth Third BanCorp. Fifth Third BanCorp operates over 1,227 branches and over 2,200 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri and Georgia. Fifth Third BanCorp's 2007 full year revenue was $5.7 billion, an increase of 12.5% over 2006. This potential merger and/or acquisition would expand NCC's market share in Tennessee, West Virginia and Georgia

Takeaway:  If a merger or sale of NCC takes place, it would be another indication of how much pressure regional banks are under due to the effects of the mortgage meltdown, subsequent credit crunch and slowdown of the U.S. economy. However, on the flip side, if NCC is bought, the buyer would acquire NCC at a cheap price and take on a regional bank with the potential for growth and a turnaround. Either scenario could result in synergies, reduction in expenses and duplicity and capital to shore up balance sheets. We'll have to wait and see if NCC will join forces with its crosstown rival KeyCorp or cross-state bank Fifth Third Bank or if another "strategic alternative" will present itself to NCC.