DBRS Comments on PNC Financial’s 1Q11 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 1Q11 earnings. PNC reported net income of $832 million for 1Q11 compared to $820 million in 4Q10. 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.

DBRS sees PNC’s first quarter performance as reflective of solid underlying business momentum in what was a challenging revenue environment. In the quarter, good expense control and another moderate decline in the provision for credit losses more than offset the 7% decline in revenues. The success PNC is having in growing relationships across the enlarged franchise was also evident in first quarter results and should support future revenue growth. The Company saw good client growth in Corporate & Institutional Banking and reported a consecutive quarter of moderate increase in both commercial loan demand and line utilization from PNC’s key middle-market customers. PNC also added 56,000 new checking accounts in the quarter, which was up from 27,000 last quarter, and represents roughly 75% of the total growth for all of 2010. As loan demand increases and interest rates begin to rise, the Company will more fully realize the benefits of this strong, low cost deposit franchise, in DBRS’s view.

First quarter revenues of $3.6 billion were split 60%/40% between net interest income and noninterest income. PNC maintained net interest income at $2.2 billion (down $25 million from 4Q10) as a decline in purchase accounting accretion was offset by lower deposit costs, reduced long-term wholesale borrowings and flat levels of earning assets. The NIM increased one basis point (bps) from 4Q10 to 3.94%. Fee revenues of $1.5 billion were down $247 million from the fourth quarter which included a $160 million gain on the sale of 7.5 million BlackRock shares. Corporate services revenues declined 41% from the very strong 4Q10 to $217 million and other fee lines exhibited typical seasonal declines. These declines were offset by lower repurchase reserves and higher loan sales in the quarter. Despite the revenue headwinds, 1Q11 income before provisions and taxes was essentially unchanged at $1.56 billion attributable to an 11.5% linked quarter decline in non-interest expense.

PNC’s credit metrics showed further, moderate improvement in the first quarter though DBRS notes that higher provisioning for its core home equity portfolio swung the Retail Banking segment to an $18 million loss in the quarter. Excluding purchased impaired loans, nonperforming assets (NPAs) declined 0.8% from year end to $5.3 billion and 90+ day delinquencies declined $56 million to $486 million. The Company also reported a meaningful decline in criticized loan balances, a key leading indicator for commercial credit. Given these mostly positive trends, PNC reduced its loan loss reserves modestly in the quarter as provisions of $421 million were $112 million less than first quarter NCOs. The Company’s $4.8 billion loan loss allowance at the end of 1Q11 remains adequate, in DBRS’s view. Reserves to NPLs was 108% at quarter end and reserves to total loans were 3.19%, compared to 3.25% at year end.

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. PNC reported an estimated Tier 1 Common ratio of 10.3%, at quarter end, up from 9.8% at year end. The estimated Tier 1 ratio was 12.6%, up 50 bps from December 31. PNC expects its Tier 1 Common ratio under Basel III will be 9%-plus by the end of 2012.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include 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, all of 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
Approver: Alan G. Reid
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.