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National City Corp., the Ohio bank whose market value fell 70 percent this year on investor concern that capital may 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 filing by Cleveland-based National City. The stake is probably worth about $1 billion and is carried at zero 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 in an interview. "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 the KBW Bank Index through yesterday, 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 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.
Classes
National City owns Class B Visa shares, each currently equal to 71 percent of Class A shares, which closed at $74.38 on the New York Stock Exchange. 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 IPO 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.
Holders
Wells Fargo & Co., Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and U.S. Bancorp are among banks that may have held Class B shares after the IPO. Wells Fargo spokeswoman Julia Tunis Bernard said the lender carries Visa shares at a "nominal amount." The San Francisco-based bank said in a first-quarter filing it gained $334 million from the IPO by redeeming 39 percent of its stake.
Bank of America's Scott Silvestri and Citigroup's Shannon Bell declined to comment. JPMorgan's Tanya Madison said the bank holds Class B shares and wouldn't elaborate.
U.S. Bancorp's Steve Dale said the lender holds a Visa stake "at a zero-cost basis." The bank's quarterly filing didn't say how many shares are still held.
Viability
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. The lender's $700 million of 6.875 percent notes due in 2019 traded last week at 61 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They yielded 14 percent, a level 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."
Stock Price
National City gained 2 cents to $4.90 as of 4:15 p.m. in New York trading. The shares sold for 56 percent of tangible book value on Aug. 18, 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 rate it "buy," 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.
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