In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade -- what went wrong, and what happens next.
The suspense is over -- National City Corporation (NYSE: NCC) is the fourth and final Ohio-based regional bank to appear on our list of laggards. Based out of Cleveland, National City appeared to be faring well in the late 1990s. The bank had just completed some key acquisitions, and the stock was locked in a long-term uptrend. However, the next decade would prove considerably more challenging.
What went wrong? At number 6 on our list of SPX underdogs, NCC gave up 87% of its value from June 30, 1998 through June 30, 2008. The stock peaked at $40 in November 2005, and then edged sideways ... until it ran headlong into the subprime tsunami.
The first warning from NCC came in March 2007, when the bank said it would retain $1.6 billion previously set aside for non-conforming loans. In a filing with the Securities and Exchange Commission, NCC said it had recorded $11 million in write-downs through the first two months of the year, and suggested that a further write-down was "likely" before the loans were transferred.
Of course, this warning looks ridiculously optimistic in retrospect, but investors' reaction was somewhat tepid -- the full scale of the mortgage crisis hadn't yet sunk in. The mood was a little more serious last September, when NCC announced it would lay off 1,300 employees and suspend issuing home equity loans through brokers. The bank also said it may have to keep some of its mortgage debt on the books, due to an utter lack of demand among investors, and would most likely swallow a $30-million accounting charge on the loans' diminished value.
Last January, continued fallout in the finance sector prompted NCC to slash an additional 900 mortgage jobs, and cut its dividend by nearly half. The stock's resulting drop would set the pace for the entire first half of 2008.
On April 3, NCC caught a bit of a break when Morgan Stanley raised its rating on the stock from "underweight" to "equal-weight." The analyst justified the upgrade by noting, "We believe the market has largely priced in expectations of accelerated credit deterioration and reserve build in the bank's higher-risk portfolio, with the stock now trading in line with our 12-month price target." Since that research note was released, the stock has lost an additional 52%. NCC cut its dividend again later that same month, dropping it from 21 cents to 1 penny per share.
Most recently, NCC found itself in the hot seat after the failure of IndyMac heightened anxiety levels. The bank denied it was on the verge of collapse, and asserted that it had $12 billion of excess short-term liquidity.
What next? National City shares recently caught a boost from a sector-wide bounce in banking stocks, but multiple layers of resistance hang overhead -- most notably from the stock's 10-week moving average, which looms in the $5 region. Plus, fundamental challenges remain. In its second-quarter earnings report on July 24, NCC confessed to a $1.76-billion loss, much wider than what analysts were expecting. However, Chief Executive Peter Raskind assured investors that the bank is on solid footing, asserting that "We have no intention or plan, or need at this point, to raise additional capital."
Meanwhile, analysts seem fond of the shares. A full 50% of NCC's analyst opinions are of the "buy" or better variety, according to Zacks. Following the second-quarter earnings release, Citigroup analyst Keith Horowitz reiterated his own "buy" opinion, citing the bank's "strong capital position to handle problem assets."
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
7-31-2008 @ 5:16PM
Michael said...
My wife and father worked for their sub-prime mortgage arm First Franklin. The stories I heard...my wife worked in the trenches with the loan people and saw a lot of loan officers doing very shady things. Then my dad had worked for the company for a long time near the corporate office and knew the CEO and many for the VPs. They both told me that things were not going to end well (even when the market was "great").
They closed First Franklin for good in January...must be the 900 mortgage jobs slashed they refer to in this article.
7-31-2008 @ 5:39PM
David Huston said...
It's remarkable that Mr. Raskind, who has overseen the entire mortgage meltdown at NCC, is still running the bank. You or I would have been cashiered long ago, but we're not the bank's President. I started investing in NCC in 1994, so I've been there from the profitable days to the slide to oblivion. And, unfortunately, I've participated in the loss of almost all of my stock's value. I should have fired myself.
10-04-2008 @ 10:48AM
Happy Employee said...
Our economy has taken a hard hit and unfortunately with all the finanical companies crashing, everyone is seeing the jist of it. Speculation after speculation seems to be thrown our way but were still standing, our stock has been hit hard due to all the here say, I do not believe were going anywhere, sure or mortgage and loan side has been slaughtered, but it is not just National City, it's everywhere, National City has just been in the spotlight, either way you look at it were going to have the banking/retail side.