Two weeks ago, with the market focused on the risks associated with Fannie Mae (NYSE: FNM ) and Freddie Mac (NYSE: FRE ) , bank stocks cratered, creating an extreme buying opportunity. Since then, second-quarter earnings at high-profile institutions such as Bank of America (NYSE: BAC ) , Wells Fargo (NYSE: WFC ) and JPMorgan Chase (NYSE: JPM ) have proved better than expected, fueling a massive rally -- the KBW Bank Index is up 47% from its intraday low on July 15.
The worst-performing stock in the KBW Bank Index
In that context, National City (NYSE: NCC ) -- the worst performing stock in said index -- had an opportunity to make a good impression today with its results. The upshot: the numbers weren't exactly pretty (it's still a bank, after all), but judging from the market's reaction, it looks like management pulled it off.
National City is paying a heavy price for its ill-timed foray into the Florida market (one of the four horsemen of the housing apocalypse, along with California, Arizona, and Nevada). The second-quarter provision for loan losses was $1.6 billion, up from $1.4 billion in the first quarter. Nearly two-thirds of the provision is attributable to the bank's liquidating portfolio, which contains loans from activities that the bank is no longer pursuing (broker-sourced subprime and home equity loans, for example).
There's a ray of sunshine in there -- really
Net charge-offs also increased to $740 million, over 70% of which are from the liquidating portfolio. Net charge-offs were $538 million in the first quarter. There is some good news, however: With a $7 billion equity capital infusion completed in May, the bank's capital ratios look very healthy -- tier 1 capital is 11.1%, up from 6.7%, well above the 6% floor regulators have established for a "well-capitalized" institution. Deposits are also increasing.
Management is taking the hard steps to extract itself from a very bad position. On top of the capital raise, CFO Jeffrey Kelley will step down in September and the businesses that were under him have been realigned. Given the amount of pessimism that appears to be priced into the stock, National City may be an interesting turnaround play. However, with the housing market remaining a major unknown, my preference is to focus on the highest-quality banks exclusively.
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