DBRS Comments on PNC Financial’s 2Q11 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 2Q11 results. On June 21, 2011, DBRS confirmed all of PNC’s ratings and Stable trend after the RBC Bank (USA) acquisition announcement. PNC reported net income of $912 million for 2Q11, up 9.6% from the first quarter. Despite the lack of revenue growth, PNC’s diversified and recurrent revenue streams, historically well-managed expenses and strong liquidity all continue to support the current ratings level, in DBRS’s view.

The positive trends of recent quarters continued for PNC in 2Q11. Further successes in growing relationships and gaining market share across the enlarged franchise were again evident in the quarter. The Company saw good client growth in Corporate & Institutional Banking and reported a third consecutive quarter of growth in average commercial loans and another modest increase in line utilization among PNC’s key middle-market customers. PNC also added 74,000 new retail checking accounts in the quarter, an annualized growth rate of 5.4%. Growth in all of PNC’s markets remains ahead of the Company’s targets. DBRS sees this positive underlying business momentum as supportive of future earnings growth and reflective of PNC’s strong franchise, though DBRS notes that the improvement in linked quarter profitability was most directly related to ongoing declines in credit costs and a lower effective tax rate.

PNC reported second quarter revenues of $3.6 billion that were essentially unchanged from 1Q11 levels, declining less than 1%. PNC maintained net interest income at $2.2 billion (down $26 million from 1Q11) as further improvement in the deposit mix was offset by lower asset yields resulting from the persistent low rate environment. The NIM declined one basis point from 1Q11 to a relatively high 3.93%. Second quarter fee revenues of $1.45 billion were down $3 million from the previous quarter. Stronger quarters for Asset Management, Corporate Services (despite higher commercial MSR impairments) and Consumer Services were offset by a slowdown in mortgage activity, lower private equity gains and the absence of recoveries on insurance claims, which bolstered 1Q11 fee revenues. DBRS notes that PNC anticipates that debit interchange legislation will cost it less than $100 million in 4Q11. With flattish revenues and a 5% uptick in expenses that reflected the fact that 1Q11 expenses benefited from the reversal of an accrual for VISA litigation as well as higher litigation accruals and an increase in marketing costs in the second quarter, 2Q11 income before provisions and taxes declined $135 million from 1Q11 to $1.4 billion.

PNC’s credit metrics continued to improve in the second quarter. Excluding purchased impaired loans, nonperforming assets (NPAs) declined 9.3% from March 31, 2011 to $4.5 billion and represented 2.97% of total loans plus OREO. Included in total NPAs were $845 million of TDRs. DBRS is mindful that total TDRs were $1.9 billion at the end of 2Q11, up $84 million from last quarter. 90+ day delinquencies were similar to last quarter, but new nonperforming assets declined nearly 16% to $843 million from $1.0 billion in 1Q11. The Company also reported a meaningful decline in criticized commercial loan balances and early stage delinquencies, supporting a lower provision in the second quarter. The 2Q11 provision was $280 million, down from $421 million in 1Q11, and $134 million below 2Q11 net charge-offs, which themselves declined 22% from 1Q11. With the noted continued positive trends, DBRS continues to see PNC as well-reserved with an allowance for loan and lease losses (ALLL) to loans ratio of 3.08% at period end and an ALLL/NPL (excluding purchased impaired loans) ratio of 120%. DBRS notes also that provisions and NCOs related to the distressed asset portfolio continued to decline in 2Q11 and the total portfolio was $13.4 billion at the end of 2Q11, down $462 million from 1Q11.

PNC’s capital and liquidity profile remains sound, in DBRS’s view. Core deposits continue to fund the entire loan portfolio, and the Company continues to generate capital organically. PNC reported a Tier 1 common ratio of 10.5% at June 30, 2011, up from 10.3% at the end of 1Q11. The estimated Tier 1 ratio was also up 20 bps q-o-q to 12.8%. The Company still expects that it can fund the recently announced purchase of RBC Bank (USA) with cash and the proceeds of a preferred stock offering, though depending on regulators and potential new capital requirements, the issuance of up to $1 billion in common equity remains a possibility. DBRS notes that if no additional common equity was issued, PNC has previously indicated its Tier 1 common ratio would decline by 60 bps.

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 the 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: Roger Lister
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 21 June 2011

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