DBRS Comments on PNC’s 3Q11 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 3Q11 results. PNC reported net income of $834 million for 3Q11, down 8.6% from the second quarter, which benefited from a one-time benefit that lowered the effective tax rate. On a pre-tax basis, PNC’s 3Q11 earnings were down just $3 million from 2Q11 to $1.1 billion.

In 3Q11 results, DBRS sees further evidence of the success PNC has had in growing relationships and gaining market share across its enlarged franchise. The Company saw good client growth in Corporate & Institutional Banking and was able to grow loans and commitments again in the third quarter. PNC also added 95,000 new retail checking accounts in the quarter, up from 74,000 last quarter, and reported some consumer loan growth in the period. DBRS sees this sustained positive underlying business momentum as supportive of future earnings growth and reflective of PNC’s strong franchise. This success along with PNC’s diversified and recurrent revenue streams, historically well-managed expenses and strong liquidity all continue to underpin the Company’s current ratings, in DBRS’s view.

Continued positive underlying trends supported a solid performance for PNC in an environment where core revenue growth has proven to be elusive for most banks. The Company reported 3Q11 revenues of $3.5 billion that were down $58 million from 2Q11 levels. Driving the q-o-q decline was a $105 million charge (2Q11: -$69 million) to reduce the value of commercial mortgage servicing rights (CMSR) and an increase in marketing and foreclosure-related expenses. Net interest income benefited from higher average loan balances, solid growth in core deposits, especially noninterest bearing balances, and the runoff of higher cost CDs in the quarter. As a result, net interest income increased $25 million from 2Q11 to $2.2 billion. The low rate environment did, however, impact the NIM, which declined 4 basis points (bps) to a still-solid 3.89%.

Second quarter fee revenues of $1.4 billion were down 5.7% from 2Q11, driven by the noted CMSR charge, which reduced Corporate Services revenues. The Company also had lower gains on securities sales in the third quarter. Partially offsetting these declines were strong quarter residential mortgage revenues (up 21% to $198 million) and higher service charges on deposits. DBRS notes that PNC anticipates the Durbin Amendment will reduce debit interchange fees by about $75 million in 4Q11. The Company’s acceptable revenue performance in a challenging environment, combined with well-managed expenses, down 1.7% q-o-q, resulted in PNC reporting income before provisions and taxes of $1.4 billion for 3Q11, down $22 million from 2Q11.

PNC’s credit metrics continued to improve in the third quarter. Earnings benefited from a provision for credit losses that, at $261 million, was down 6.8% from 2Q11 and $104 million below 3Q11 net charge-offs (NCOs). Excluding purchased impaired loans, nonperforming assets (NPAs) declined 4.1% q-o-q to $4.3 billion and represented 2.77% of total loans plus OREO. Supporting the lower provision and a reserve release that was less than the prior quarter’s, DBRS notes that criticized commercial loans declined by around 7.7% q-o-q though early stage and 90+ day delinquencies did increase somewhat from 2Q11, primarily due to higher delinquencies for government insured loans. DBRS continues to view PNC as well reserved with an allowance for loan and lease losses (ALLL) to loans ratio of 2.92% at period end and an ALLL/NPL (excluding purchased impaired loans) ratio of 122%. Company-wide NCOs were down 12% from the prior quarter to $365 million in 3Q11, and represented 0.95% of average loans. DBRS notes that provisions and NCOs related to the distressed asset portfolio declined further in the quarter and the total portfolio was $12.9 billion at the end of 3Q11, down $504 million from June 30.

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 September 30, unchanged from the end of 2Q11. The estimated Tier 1 ratio was up 30 bps q-o-q to 13.1%, driven by the issuance of preferred stock in the quarter.

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: Alan G. Reid
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 21 July 2011

For additional information on this rating, please refer to the linking document under Related Research.