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Bad day for banks

What timing. Hot on the heels of Wilbur Ross' recent comments on expected difficulties for regional banks, came Monday's news of further trouble for US banking sector.

Bank of America and National City figured prominently in Monday's news, as losses from bad loans hurt BoA's first-quarter earnings, and National City sought funds from private equity investors after reporting a first-quarter net loss of $171 million.

More from Bloomberg:

"U.S. stocks fell for the first time in five days after worsening credit losses at Bank of America Corp. and National City Corp. undermined confidence that banks are overcoming the subprime mortgage market's collapse.

Bank of America, the second-largest U.S. bank by assets, retreated after bad loans caused first-quarter profit to trail analysts' estimates. National City tumbled to a 17-year low as Ohio's biggest lender was forced to cut its dividend and sell stock at a 40 percent discount to last week's closing price..."

As we reported in last Friday's "Features" post, opinions on the credit crisis seem to be split between two camps: those who feel the worst is over, and those who see more bad news to come.

Bloomberg's story also highlights this divergence of opinion:

"...The profit reports from Bank of America and National City increased concern that Wall Street executives may be too optimistic about credit-market conditions. JPMorgan Chief Executive Officer Jamie Dimon, Goldman Sachs Group Inc. CEO Lloyd Blankfein, Lehman Brothers Holdings Inc.'s Richard Fuld and Morgan Stanley CEO John Mack all said this month that the worst of the credit crisis may have passed.

``Every quarter they predict the worst is behind us, we've taken the writeoffs, it's all rosy from here,'' Whitney Tilson, founder of New York-based hedge fund manager T2 Partners LLC, which oversees about $100 million, said in a Bloomberg Television interview. ``Every quarter they've been wrong. I think they are again here.'' "

National City shares have taken a sizable hit in Monday's trading, and Bloomberg notes other regional banks declined in sympathy.

"Regional Banks Fall

National City fell $2.15, or 26 percent, to $6.18 for the biggest drop in the S&P 500. The lender said a group of investors led by Corsair Capital LLC will buy shares for $5 each, about 40 percent less than the closing price on April 18. National City plans to slash its dividend to 1 cent a share from 21 cents, the second cut this year. The company posted a first-quarter net loss of 27 cents a share.

Other regional banks also declined. First Horizon National Corp., based in Memphis, Tennessee, lost 95 cents to $12.11. Cleveland-based KeyCorp dropped $1.13 to $23.55. Sovereign Bancorp Inc., based in Philadelphia, retreated 68 cents to $8.61."

Meanwhile, is discussing National City's plan to sell up to an $8 billion stake in the company to an investor group led by private-equity firm, Corsair Capital. But the deal to recapitalize this regional lender will differ from the deals that bigger private equity firms have done in the past.

"The Corsair-led group clinched the deal involving the ailing bank after many of the largest private equity firms, including Blackstone Group and Kohlberg Kravis Roberts, dropped out early in the process.

The winning group has little of the safeguards and governance rights that private equity firms usually require.

It is buying common stock, has the right to put only one director on the board and has no control, these people add.

"These are investment trades, not control trades," says the co-founder of one leading private equity firm that looked briefly at the deal very early in the process. "And because they don't have control, they don't have to pay a premium."

The National City deal comes weeks after TPG led a $7bn capital infusion into Washington Mutual, the largest savings and loan association in the US and shortly after Wachovia announced plans to raise $7bn from existing shareholders. Once TPG developed a template, it became easier for other deals to be done and bankers expect that more arrangements will follow. Other Ohio banks may be in that group."

So it seems that Wilbur Ross was right to expect continuing troubles for the regional banks. Can we expect more National City-type deals to follow?

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