DBRS Comments on PNC Financial’s 4Q10 Earnings – Senior at A (high), Ratings Unchanged

DBRS Inc. (DBRS) has today commented that its ratings for PNC Financial Services Group, Inc. (PNC or the Company), including its Issuer & Senior Debt rating of A (high) are unchanged following the release of the Company’s 4Q10 earnings. PNC reported net income of $820 million for 4Q10 compared to $1.1 billion in 3Q10. DBRS notes that third quarter results benefited from the $328 million after-tax gain on the sale of Global Investment Servicing.

PNC’s fourth quarter performance reflected stable revenue trends, further improvement in credit, though net charge-offs were up, and for the first time in many quarters a moderate increase in both commercial loan demand and line utilization from PNC’s key middle-market customers. Total revenues in 4Q10, which included a $160 million gain on the sale of a portion of PNC’s BlackRock shares, were $3.9 billion, up 8.4% from last quarter. Expenses were up similarly in the quarter to $2.3 billion, due in part to higher foreclosure-related expenses. DBRS notes that PNC reached its goal of $1.8 billion in National City related cost savings in the quarter. Fourth quarter IBPT was $1.6 billion, up from $1.4 billion in 3Q10 and well in excess of the loan loss provision of $442 million. PNC’s diversified and recurrent revenue streams, adequate capital levels and strong liquidity all continue to support the current ratings level, in DBRS’s view.

Excluding the gain on the sale of BlackRock shares, fourth quarter revenues were split 59%/41% between net interest income and noninterest income. Net interest income of $2.2 billion was essentially flat from the prior quarter as the NIM contracted 3 bps to 3.93%. Average earning assets were up slightly from the third quarter as growth in agency RMBS offset declines in average loan balances, though as noted average commercial loans were up about $0.5 billion from 3Q10. PNC also continues to lower its funding costs, benefitting in part from the continued roll-off of higher cost, non-relationship time deposits. The Company also reduced its wholesale borrowings, had 5% growth in transaction deposits and added 27,000 new checking accounts in the quarter. Once interest rates begin to rise, the Company will more fully realize the benefits of this strong and growing deposit franchise, in DBRS’s view.

Fourth quarter fee revenues, excluding the BlackRock gain were $1.5 billion, up from $1.4 billion for 3Q10. A weaker quarter for residential mortgage and an additional $55 million of Reg. E-related declines in service charges were offset by stronger quarters for Corporate Services and Asset Management. Corporate service fees more than doubled from 3Q10 to $370 million attributable to a strong quarter for advisory fees and an increase in the value of the Company’s commercial mortgage servicing rights. With the National City conversion completed and expense targets achieved, PNC can focus its efforts on selling products and services across the former National City franchise, which DBRS sees as a key opportunity for growth in what remains a sluggish environment. The Company sees potential revenue growth of more than $500 million as PNC’s sales practices are fully implemented across its Western (legacy National City) markets.

PNC’s forward-looking credit metrics showed continued improvement in 4Q10 and trends support further declines in provisioning in coming quarters, given the current economic outlook. Early stage delinquencies fell $74 million from the end of 3Q10 and represented 0.95% of total loans at year end, while 90+ day delinquencies declined by $59 million, and were 0.39% of year-end balances. Excluding purchased impaired loans, nonperforming assets (NPAs) declined 6.5% from 3Q10 to $5.3 billion. At year end, the Company’s $4.9 billion reserve represented 3.25% of total loans and leases and 109% of NPLs providing ample loss absorption capacity. NCOs did increase in the quarter, to $791 million (3Q10: $614 million), driven by higher residential real estate and CRE charge offs. Balances in the Distressed Asset Portfolio were $14.8 billion at year end, down $912 million from the end of 3Q10. PNC expects 25% runoff in this portfolio in 2011.

PNC’s capital and liquidity profile remains sound, in DBRS’s view. Core deposits continue to fund the entire loan portfolio, capital continues to grow and PNC’s quarterly earnings highlight the Company’s ability to generate capital internally. At December 31, 2010, PNC reported an estimated Tier 1 Common ratio of 9.8%, up from 9.6% last quarter. The estimated Tier 1 ratio was 12.1% at year-end (3Q10: 11.9%). Under Basel III guidelines, PNC estimates that its Tier 1 Common ratio would be reduced to 6.6%, primarily due to its BlackRock holdings and the much higher risk-weighting its $7.6 billion portfolio of non-investment grade RMBS would receive under the proposed rules. Nevertheless, PNC expects that as that portfolio pays down and the Company continues to generate capital internally, its Tier 1 Common ratio under Basel III will reach 7% some time in 2011.

Currently, PNC is one of the 19 banks subject to a second round of Federal Reserve stress tests to ensure capital adequacy. The stress tests will test a bank’s ability to absorb losses over the next two years under at least two scenarios (baseline and adverse) and will take the proposed Basel III capital requirements into account. Test results will also determine whether an institution may resume capital distributions (stock dividends and/or repurchases). The stress test results are expected to be communicated to BHCs (not publicly) no later than March 21, 2011. Given its strong capitalization, DBRS expects a positive result.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations, Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank
Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit
Insurance Corporation and SNL Financial. DBRS considers the information available to it for the
purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 23 March 2010

For additional information on this rating, please refer to the linking document below.