National City's (NCC) 1Q08 net loss of $0.27 per diluted share was substantially worse than the estimates, primarily due to higher loss provisions and mark-to-market losses on the mortgage loans held for sale. During the quarter, credit metrics deteriorated significantly and net-interest income fell short of expectations.
The company raised $7.0 billion in capital and also reduced its quarterly dividend to $0.01 per share, to strengthen its capital position. These actions have resulted in significant dilution to the existing shareholders. Further, though NCC has taken several initiatives to restructure its mortgage operations, we continue to see elevated risks in NCC's mortgage and residential development loan portfolio and expect higher losses in the coming quarters.
We are maintaining our Sell rating and our six-month target price of $5.25 per share for NCC. We also noted that during 1Q08, as the net charge-offs increased to 1.88% from 0.96% of average portfolio loans, the loan loss allowance fell to 119% from 162% of net charge-offs, and thus suspect that the company will have to make significantly higher provisions in the coming quarters.
Based on the 1Q08 results, we have adjusted our FY08 and FY09 earnings estimate to a negative $0.46 per share and $0.29 per share. On a price-to-book basis, the shares currently trade at a 77% discount to the peer group median (versus a 42% discount previously) which looks somewhat stretched given a ROE 81% below median (the ROE-adjusted P/B is now 12% above median).
Read the full analyst report on NCC.
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