PNC sticks to knitting, scoops up National City

NEW YORK (Reuters) - PNC Financial Services Group Inc's (PNC.N) takeover of National City Corp NCC.N shows that in banking, boring can be beautiful.

The $5.2 billion purchase will double Pittsburgh-based PNC's size, and create the nation's fifth-largest bank by deposits, with about $180 billion, and fourth-largest branch network, with more than 2,700 banking offices.

Analysts said PNC was able to afford Cleveland-based National City by not diving into risky mortgages and other debt that have caused trouble for so many U.S. lenders.

National City in contrast plowed many chips into the housing boom, once generating two-fifths of its business from mortgages. It also made ill-timed purchases in 2006 and 2007 of two banks in Florida, a state hit hard by the housing slump.

"PNC stuck to its basic knitting," said Matthew Schultheis, a banking analyst at Boenning & Scattergood Inc of West Conshohocken, Pennsylvania. "It gathered loans and deposits, focused on its wealth management unit, and did not go out and try things it wasn't comfortable with. Essentially, it avoided an entire space that much of the industry has come to regret."

Chief Executive James Rohr has run PNC since 2000. Perhaps the bank's most serious crisis under his leadership came early this decade, when in 2003 it settled U.S. Department of Justice charges that a unit fraudulently moved $762 million of bad loans and investments off its balance sheet to inflate profit.

While PNC has been unable to fully escape the carnage afflicting the banking sector, its shares prior to Friday were down only 13 percent this year, roughly one-third the declines in the KBW Bank Index .BKX and Standard & Poor's 500 .SPX.

That period has included the takeovers, government seizures or disappearances of American International Group Inc (AIG.N) Bear Stearns Cos, Countrywide Financial Corp, Fannie Mae (FNM.N), Freddie Mac (FRE.N), IndyMac Bancorp Inc (IDMCQ.PK), Lehman Brothers Holdings Inc (LEHMQ.PK), Merrill Lynch & Co MER.N, Wachovia Corp WB.N and Washington Mutual Inc(WAMUQ.PK).

Pending other banking mergers, the purchase of National City would make PNC the seventh-largest U.S. bank by assets. PNC will take $7.7 billion from the Treasury Department's $250 billion bank capitalization program to help fund the purchase. It also plans a $19.9 billion writeoff on National City loans.

BUYING BEATEN BANKS

PNC has bought troubled banks before.

In 2005, it paid $653 million for Washington, D.C.'s Riggs National Corp, the target of a money-laundering scandal.

And in April 2008, it said it paid about $536 million for Sterling Financial Corp, a Pennsylvania lender hit by an internal scheme to conceal loan losses and fake contracts.

PNC's largest recent merger was its $5.9 billion takeover in March 2007 of Baltimore's Mercantile Bankshares Corp.

In the third quarter, profit at PNC fell 39 percent to $248 million, mirroring lower earnings in most of the banking industry. PNC set aside nearly three times as much for credit losses and net charge-offs more than doubled, but the percentage increases were lower than at most large rivals.

Gerard Cassidy, an RBC Capital Markets analyst, cautioned that while PNC avoided much of the housing crisis, increases in soured commercial real estate, commercial and industrial and construction loans "will be a drag on earnings" in 2009.

He nevertheless called National City "an extremely attractive transaction," given PNC's ability to add deposits and easily write off problem loans.

Also benefiting PNC has been its roughly one-third stake in BlackRock Inc (BLK.N) one of the world's largest asset managers. BlackRock is known as a conservative manager, and has been among the fund industry's best performers. It is also a beneficiary of the credit crisis, winning mandates to mange toxic assets of various companies, including Bear Stearns.

Schultheis, the analyst from Boenning & Scattergood, sees two primary risks from National City: increased exposure to Cleveland and Michigan, where families are struggling with the decline of the U.S. auto industry, and the integration risk from combining the banks.

But he said PNC "has integrated acquisitions very well, and adapts very well to mistakes. For example, it changed the private banking model of Mercantile, which was the old white-shoe, blue-blood bank in Baltimore. Clients were irate, so it went back to the old model."

(Additional reporting by Murali Anantharaman; Editing by Gary Hill)