DBRS Places PNC’s Long-Term Ratings Under Review – Negative and Short-Term Ratings Under Review – Developing

DBRS has today placed the long-term debt ratings of PNC Financial Services Group, Inc. (PNC or the Company) and its subsidiaries, including the Company’s Issuer & Senior Debt rating of A (high) and the Deposits & Senior Debt rating of PNC Bank, N.A. of AA (low), Under Review with Negative Implications. Concurrently, the short-term ratings of PNC and its subsidiaries have been placed Under Review with Developing Implications.

The rating action follows the announcement by PNC of its intent to acquire National City Corporation (NatCity; Issuer & Senior Debt – A (high) Under Review – Negative) in a stock transaction valued at approximately $5.6 billion ($2.23 per share), including a $384 million cash payment to certain warrant holders. Subject to regulatory and shareholder approvals, the transaction is expected to close by December 31, 2008.

DBRS sees risks for the Company given the large scale of the integration with NatCity’s asset base, which is roughly equal to PNC’s, and the stressed real estate assets it is acquiring, especially in the difficult current operating environment. The DBRS review will focus on the plans and processes put in place for completing the integration, the composition of the combined balance sheet assets and revenues and the proposed plans for the newly acquired assets.

Possible outcomes of the DBRS review following the completion of the transaction are a confirmation of the existing ratings, the application of a Negative trend or a downgrade of the long-term debt ratings of not more than one notch.

DBRS believes that the in-market transaction will strengthen PNC’s service delivery network by expanding into many new Midwest markets and strengthening the Company’s presence in some of its existing markets. This transaction will create the fifth largest U.S. depository bank, with $180 billion in deposits, and the fourth largest branch network, with more than 2,700 branches. DBRS states, however, that most of the acquired franchise is located in slower-growing markets.

DBRS notes that the 10% combined, or $1.2 billion, expense reduction target seems attainable based on the ability to consolidate back-office operations, although it will not have the benefit of any significant branch closures since the overlap is minimal. The Company expects the deal to be fully accretive within two years of closing.

The proposed transaction includes a $7.7 billion capital raise using the U.S. Treasury’s Troubled Assets Relief Program (TARP) preferred shares program and is projected to produce a 10.0% Tier 1 ratio and a 3.5% tangible common capital ratio. Although the pro forma regulatory capital ratios are relatively strong, the projected tangible ratio will be weaker than many of its peers. However, DBRS expects that, over time, this ratio will be restored from earnings. PNC may also issue $1 billion in additional common equity to build the tangible capital ratio.

PNC has a good track record with past integrations, including four transactions in the past three years. The scale of the NatCity transaction integration, however, is nearly nine times larger than the largest acquisition in the Company’s history. Moreover, PNC will also be taking on a significantly higher risk profile in the $110 billion loan portfolio, which may pose significant challenges for the Company. This risk is somewhat mitigated by the 17.5% markdown of the acquired loan book and the potential use of the U.S. Treasury TARP for the purchase of troubled loans. With the uncertainties of the current market and a recessionary economy, the actual lifetime loss content of the portfolio is unknown.

PNC Financial Services Group, Inc., a financial holding company based in Pittsburgh, reported total assets of $146 billion at September 30, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.