DBRS Confirms PNC Financial at A (high), Changes Trend to Stable

DBRS has today confirmed its ratings for PNC Financial Services Group, Inc. (PNC or the Company) and its subsidiaries, including the Company’s A (high) Issuer & Senior Debt rating and its R-1 (low) Short-Term rating. At the same time, DBRS changed the trend on PNC’s Long-Term ratings and the Long and Short-Term ratings of its subsidiaries to Stable from Negative, where it had been since December 31, 2008 following the completion of the Company’s acquisition of National City Corporation (NatCity).

The confirmation of PNC’s ratings and the trend change followed the Company’s recently completed common equity raise, the repayment of TARP capital and the announcement that it had reached a definitive agreement to sell its Global Investment Servicing (GIS) unit to the Bank of New York Mellon Corp. for $2.3 billion. The Company raised gross proceeds of $3.0 billion in common equity (excluding the overallotment) and anticipates recording a $1.6 billion increase in Tier 1 Common Capital upon closing of the GIS transaction, which is expected in 3Q10. While the repayment of $7.6 billion of TARP-related preferred stock will reduce regulatory capital ratios, PNC’s common equity levels and the mix of capital were meaningfully improved by the sale of GIS and the stock offering. Pro forma for these items, PNC reports a Tier 1 Common Capital ratio of 8.0% compared to 6.0% at year end 2009. Moreover, PNC has a sizable unrealized gain of $4.3 billion as of December 31, 2009 on its stake in BlackRock.

The return to Stable trend also considers PNC’s strong operating performance during the current cycle. Except for one quarter, which included a conforming provision charge related to NatCity, PNC has been profitable in each quarter. Moreover, the NatCity integration, a key factor in assigning the Negative trend has progressed smoothly to date and has been accretive to earnings. In the fourth quarter, the first major system conversion was completed without incident and, in February 2010, the second of the four scheduled conversions also completed smoothly. The final phases of the conversion of former NatCity customers and branches are scheduled for April and June 2010. In 2009, the Company realized cost savings of more than $800 million. PNC also increased its multi-year cost savings goal to $1.5 billion from $1.2 billion.

The Company is generating robust quarterly income before taxes and provisions (IBPT) in the $1.6 billion range while quarterly provisions have been around $1 billion, providing an ample earnings cushion against future unforeseen credit events. PNC’s provisions in 2009 exceeded net charge-offs (NCOs) by $1.2 billion bolstering the Company’s loss absorption capacity and at year-end loan loss reserves were 3.17% of total loans. Further, purchased impaired NatCity loans are being carried around 64% of unpaid principal balance as of December 31, 2009. Revenue generation from PNC in the fourth quarter reflected continued strength in net interest income. The Company’s NIM expanded 29 basis points (bps) from 3Q 09 to 4.05% as rates paid on deposits declined 11 bps from the prior quarter to 0.93%. Excluding the BlackRock-related gain, PNC’s fourth quarter fee revenues were $1.7 billion and represented 41% of PNC’s 4Q09 operating revenues compared to 45% in the prior quarter.

DBRS expects PNC’s earnings to be flat-to-lower in the near- to intermediate- term as net interest income will be pressured due to still weak loan demand and more normalized collections on re-paid impaired loans (which benefited 4Q09 net interest income). Fee income growth will be dependent on PNC’s ability to successfully cross-sell fee-based products to legacy NatCity customers. Conversely, the divestiture of GIS and lower mortgage banking revenues will pressure non-interest income. Asset quality issues will continue to be a primary focus and will likely constrain earnings for the Company due to the ongoing requirement for elevated provisioning. The Company’s ability to generate operating leverage in excess of credit costs will be an important earnings driver. DBRS also notes that PNC’s balance sheet is currently very asset sensitive, which should benefit earnings once the Fed begins interest rate tightening.

PNC’s ratings are underpinned by the Company’s strong franchise, which has generated strong recurrent revenue and IBPT while achieving positive operating leverage in recent years. The Company has navigated the recent market and credit turmoil relatively well, with above-peer asset quality, and PNC’s IBPT has been able to absorb elevated quarterly loan loss provisions. DBRS anticipates that PNC is likely to continue to outperform most of its peer banks through its conservative risk approach, focusing on incremental improvement and careful execution. Moreover, the acquisition of the former NatCity franchise has dramatically expanded and strengthened PNC’s delivery network, making it the nation’s fifth largest bank by deposits. DBRS believes that the potential of selling PNC’s product set and employing its expense discipline across its new acquisition present significant medium- to long-term opportunities for the Company.

While DBRS continues to see some near- to medium-term risks for PNC, the Company’s strengthened tangible common equity and continued ability to generate stable and sustainable IBPT are sufficient to cope with the potential headwinds. DBRS sees the economic recovery as fragile at this point as economic growth has yet to translate into meaningful job creation and unemployment remains elevated. As a result, housing markets remain unsettled and the Company retains significant exposure to higher-risk real estate assets which will continue to pressure asset quality. That being said, recent positive trends indicating some stability in credit quality suggest that pressure may be abating. Also pressuring banks generally are a potential myriad of new restrictions and taxes imposed by the government which may disproportionately impact large banks. Positively, the Company is no longer burdened by the $380 million in annual TARP dividends.

Headquartered in Pittsburgh, Pennsylvania, the PNC Financial Services Group, Inc. reported total assets of $270 billion and total deposits of $187 billion as of December 31, 2009.

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

The applicable methodologies are Global Bank Methodology for Rating Banks and Banking Organisations, and Rating Bank Preferred Shares and Equivalent Hybrids which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.