DBRS Comments on PNC’s 4Q11 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 4Q11 earnings. PNC reported net income attributable to common shareholders of $451 million for 4Q11, down from $826 million in 3Q11.

Despite lower earnings, which were driven by a number of non-recurring expense items, DBRS sees PNC’s fourth quarter results as acceptable. The mostly positive balance sheet trends PNC has displayed in recent quarters continued in 4Q11. Benefiting from improving conditions, but also reflective of the success PNC has had in growing relationships and gaining market share across its enlarged franchise, loans were up 3% (unannualized) in the quarter, led by 6% growth in average commercial loans. PNC also continued to grow retail checking accounts in the quarter, and continues to benefit from the runoff of higher cost retail CDs. 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.

The noted underlying trends supported a revenue performance that was similar to the third quarter. Fourth quarter revenues were $3.5 billion, up $5 million from 3Q11. Net interest income was $2.2 billion in 4Q11, up 1% q-o-q, and benefited from higher average loan balances and solid growth in core deposits. In the quarter, $2.9 billion of higher cost CDs rolled off, driving a 9 bps decline in deposit costs. Nevertheless, the NIM declined 3 bps q-o-q to 3.86%, due primarily to a decline in purchase accounting accretion. Fourth quarter fee revenues of $1.4 billion were down $16 million from 3Q11. As expected, the Durbin amendment reduced fourth quarter fee revenues by $75 million. Offsetting this was the absence of a material commercial mortgage servicing rights impairment which reduced 3Q11 fee revenues by $105 million.

Fourth quarter expenses increased 27% from 3Q11 to $2.7 billion and included a pair of notable items: $240 million of costs related to residential mortgage foreclosure items due to ongoing governmental matters, as well as a $198 million noncash charge related to the early redemption of trust preferred securities. Also impacting 4Q11 expenses was a $103 million increase in personnel expenses that was attributed to higher costs related to variable compensation and deferred stock compensation. As a result of this expense growth, PNC’s reported income before provisions and taxes declined $574 million from 3Q11 to $830 million. DBRS notes that PNC expects costs to revert to 3Q11 levels in 1Q12.

PNC’s credit metrics continued to improve in the fourth quarter supporting a $71 million q-o-q decline in provision for credit losses to $190 million. Excluding purchased impaired loans, nonperforming assets (NPAs) declined 3.3% q-o-q to $4.2 billion and represented 2.60% of total loans plus OREO. New nonperforming assets declined $71 million to $854 million and criticized commercial loans declined by around 8.3% q-o-q. Early stage and 90+ day delinquencies did increase somewhat from 3Q11, though DBRS notes that government-insured balances make up significant portions of delinquent loans, especially 90+ day delinquencies. DBRS continues to view PNC as well reserved with an allowance for loan and lease losses (ALLL) to loans ratio of 2.73% at year end and an ALLL/NPL (excluding purchased impaired loans) ratio of 122%. Company-wide NCOs were down 10% from the prior quarter to $327 million in 4Q11, and represented 0.83% of average loans. DBRS notes that provisions and NCOs related to the Non-Strategic Assets Portfolio (formerly the Distressed Assets Portfolio) increased modestly in the fourth quarter, but remain manageable and are down substantially from prior year levels. The total loan portfolio in this segment was $12.7 billion at year end, down $441 million from September 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 grow retained earnings, though capital ratios did decline q-o-q. PNC reported a Tier 1 Common ratio of 10.3% at year end, down from 10.5% at the end of 3Q11 due to loan growth. DBRS notes that PNC expects its Tier 1 Common ratio to decline by around 100 bps upon the closing of its acquisition of RBC Bank (USA) in March. PNC also expects to achieve its Basel III Tier 1 Common target of 8.0% to 8.5% during 2013.

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

The principle applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the DBRS Criteria – 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. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include 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 under Related Research.