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National City's Nasty Quarter

By Tom Hutchinson – Updated Apr 5, 2017 at 8:36PM

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Dividend cuts, disappointing earnings, and massive capital infusions beset the bank.

Economists predicted an ugly quarter. They said banks would be forced to shore up their reserves. They foresaw more write-offs, dividend cuts, and efforts to raise capital on the way.

They were right.

For all the banks that have exceeded Wall Street's dismal expectations, it seems a roughly equal number have disappointed. Yesterday, National City (NYSE: NCC) joined the negative crowd.

How bad was it?
On Monday, the nation's 10th-largest bank posted first-quarter earnings that lagged expectations. National City reported a $171 million quarterly loss, or $0.27 per share. This was down from a profit of $0.50 per share for the year-ago quarter and well below analysts' average estimate of a $0.30-per-share profit, according to Reuters.

National City also announced a capital infusion of $7 billion. The capital will be raised primarily through a discounted stock offering (both convertible preferred and common). And yes, the offering will dilute existing shareholdings. In addition, the bank slashed its quarterly dividend from $0.21 per share to a mere penny. As a result, the stock tumbled 28%, landing at its lowest point in about 17 years.

Where does National City fit in?
The newly raised capital ended weeks of speculation that the bank was looking for a buyer. National City joined the ranks of Citigroup (NYSE: C), Wachovia (NYSE: WB), and Washington Mutual (NYSE: WM) in raising billions in capital and cutting dividends in order to shore up their balance sheets.

National City's dismal quarter, along with those of Merrill Lynch (NYSE: MER), Citigroup, and Wachovia last week, shows that many of the county's largest banks may ultimately struggle just to ensure solvency, if their fundamentals continue to deteriorate. Unfortunately, these and other large banks are likely to increase layoffs and scale back on lending activity. Neither move will be too good for the economy.

What does all this mean?
True, many banks are motivated to report all the bad news they can, since this quarter will likely be ugly anyway. And earnings don't yet indicate that the subprime crisis will cause a complete catastrophe for our financial system. However, news like National City's does suggest that we're still in for a long and painful haul.

Related Foolishness:

National City is an Income Investor recommendation, and Washington Mutual is a former recommendation. Discover our full list of dynamic dividend stocks with a free 30-day trial subscription.

Fool contributor Tom Hutchinson holds no financial position in any companies mentioned. The Motley Fool has a disclosure policy.

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