Back to Basics at National City

The bank is looking to refocus on core businesses, but will that be enough?

Ryan Fuhrmann, CFA
Ryan Fuhrmann, CFA
May 1, 2007 at 12:00AM

Recent results at Cleveland-based bank National City (NYSE:NCC) have included many moving parts because of a couple of recent acquisitions and a key divestiture. National City, an Income Investor recommendation, will be able to return its focus to key businesses soon, but will this be enough for Fools to consider placing some chips on the table?

Our Fool by Numbers companion piece contains all the vitals of National City's first-quarter earnings results released yesterday. Right now, revenue and earnings results are in flux, as the company is in the process of unwinding the First Franklin non-prime-mortgage business, a divestiture that's leading to restructuring charges and write-offs of loans retained on the balance sheet.

The integration of two Florida banks, meanwhile, is making prior quarter comparisons more difficult. It's helping key banking metric figures such as reported loan and deposit growth, but the purchase of Fidelity Bankshares increased the nonperforming-asset balance to nearly 5%. In addition, compared with last year's first quarter, net interest margin fell, as did return on equity and diluted earnings. Yet charge-offs, credit losses, and nonperforming asset balances all increased.

Going forward, National City has proclaimed a return to its core retail, commercial, and asset-management roots. Management plans to fill out exposure to key Midwestern markets such as St. Louis, and the added exposure to Florida could help.

As it stands currently, shares of National City are trading at just past 13 times earnings projections for the coming year. Management continues to repurchase shares, and the stock now sports a 4.1% dividend yield. As appealing as that sounds, larger, better-diversified money-center banks such as Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wachovia (NYSE:WB) sport lower forward P/E ratios and similar dividend levels. To date, their geographic and product breadth has allowed them the ability to withstand subprime-mortgage woes much better than National City and other smaller, regional players have.       

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.