US bank eyes $7bn cash injection

The market is still declining despite government efforts to support it

US bank National City Corporation is seeking to raise $7bn (£3.5bn) from investors to shore up its finances after bad home-loan losses mounted.

The firm has set aside another $1.4bn to cover the cost of mortgage loans unlikely to be repaid as conditions in the troubled housing market worsen.

To raise funds, National is selling a stake to private equity firm Corsair and issuing shares to other investors.

It is the latest in a long line of US banks forced to raise fresh finance.

Share plunge

But analysts were unimpressed with the proposal, which would see 126 million new shares issued at a vastly discounted price, and National's shares fell 28% in Monday trading.

The US housing and mortgage environment deteriorated significantly over the course of the first quarter, Peter Raskind, National City chairman

A host of leading financial institutions have been forced to inject fresh capital into their balance sheets to compensate for multi-billion dollar losses suffered in failed home loans and high-risk mortgage-backed investments.

Those worst affected by the slump in the housing market and the subsequent turmoil in credit markets have included Merrill Lynch, Citigroup and Wachovia.

National suffered its third successive quarterly loss in the first three months of the year, losing $171m during the period.

It blamed the setback on the brittle state of the housing market in its home state of Ohio as well as in Florida and Illinois.

'Prudent move'

Although the loss was less than the $333m reverse it suffered in the final quarter of last year, the firm warned that the home loan market remained "difficult" and announced that it was cutting its dividend payout to shareholders.

"The US housing and mortgage environment deteriorated significantly over the course of the first quarter," said chairman Peter Raskind.

"While we are clearly disappointed by the quarter's weak profitability, we feel that it is both necessary and prudent to build reserves in anticipation of a continued difficult environment for housing-related loans."

Corsair will spend $985m on buying shares in National, a move which Mr Raskind said was a vote of confidence in the firm's long-term prospects.

The wider share issue is subject to the approval of the firm's shareholders.

National is one of the Midwest's largest banks, employing about 32,000 staff.