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Troubled Cleveland bank receives little credit for $1 billion share hidden from balance sheet
By Linda Shen
Bloomberg News
Published on Friday, Aug 22, 2008
National City Corp., the Cleveland bank whose market value fell 70 percent this year on investor concern that capital might run short, has a $1 billion stake in Visa Inc. that doesn't get counted on its balance sheet.
National City gained $532 million by selling Visa stock when the credit-card company went public in March and still holds 19.7 million Class B shares, according to an August SEC filing.
The stake is probably worth about $1 billion and is carried at zero in accounting because sales are restricted, Treasurer Thomas Richlovsky said.
''If you have something of economic value, there's always some way to realize that value,'' Richlovsky said. ''Wall Street firms make a living coming up with structures or processes. If we had a need or a desire to instantly raise cash or capital, there are things we can do.''
National City, this year's worst performer in what is called the KBW Bank Index, had to assure investors in July it has enough resources to survive after a run by depositors caused IndyMac Bancorp of California to fail.
National City reported it had what is called ''Tier 1 capital'' of 11.1 percent, almost twice the amount deemed ''well-capitalized'' by regulators. The Visa stake adds to $7 billion raised in April from a group led by Corsair Capital LLC.
''There's value there that's not being reflected,'' said Charles Mulford, an accounting professor and director of Georgia Institute of Technology's Financial Reporting and Analysis Lab. The bank's stake in San Francisco- based Visa, the world's biggest card network, is ''certainly worth more than zero,'' and National City could sidestep the sale restrictions by using the shares as collateral to obtain financing, he said.
National City owns Class B Visa shares, each currently equal to 71 percent of Class A shares.
The unlisted Class B shares are held by about 1,790 ''member'' banks that owned Visa before it became public, according to Visa's regulatory filings.
The banks must hold Class B shares for three years from the initial public offering or until settlement of remaining Visa litigation in which the banks may be liable, whichever is longer.
Exceptions include sales to another Class B holder, Visa's filing said. BB&T Corp., North Carolina's third-largest bank, posted a $47 million second- quarter pretax gain from selling Class B shares to an unnamed member bank, Chief Executive Officer John Allison said in a July conference call.
Until the limits lapse, it's ''reasonable'' for investors not to
count Visa shares as a potential source of capital, said Lynn Turner, ex-chief accounting officer at the U.S. Securities and Exchange Commission.
''Our hands are tied'' by accounting rules, Richlovsky said.
National City, once one of the largest subprime lenders, lost $2.3 billion over the past four quarters as U.S. housing markets slumped, and analysts predict losses through 2009, according to data compiled by Bloomberg News. The lender has $700 million of notes due in 2019 that are trading with a yield that typically signals investor concern about default.
The bank faces ''few legitimate questions about survivability,'' said Sandler O'Neill & Partners LP analyst Scott Siefers, adding the company has resisted ''quick-fix'' solutions that would deplete capital, such as selling assets at deep discounts.
''There are questions about earnings momentum,'' said Siefers, who rates the stock ''buy.''
National City shares have been trading for about 56 percent of tangible book value, excluding the Visa stake, according to data from KBW Inc. analyst Melissa Roberts. Stocks in the 24-company KBW Bank Index average twice tangible book value, she said.
Visa's stock has gained 69 percent since going public. Fourteen analysts rated it ''buy'' as of Wednesday, 11 said ''hold'' and none had ''sell'' ratings.
The Visa stake isn't something analysts and investors ''give too much credit for,'' said Standard & Poor's analyst Jack Bartko. ''Even without the restriction, the value of the stock might save one or two bad quarters, but doesn't provide long-term financial flexibility.''
Still, National City isn't close to failure, according to Bartko, who said he's ''hard-pressed to see them chewing through'' all the new capital.
National City Corp., the Cleveland bank whose market value fell 70 percent this year on investor concern that capital might run short, has a $1 billion stake in Visa Inc. that doesn't get counted on its balance sheet.
Get the full article here.
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