DBRS Comments on PNC’s 1Q12 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 1Q12 earnings. PNC reported net income attributable to common shareholders of $766 million for 1Q12, up from $451 million in 4Q11.

The mostly positive balance sheet trends PNC has displayed in recent quarters continued in 1Q12. While q-o-q balance sheet comparisons are somewhat skewed by the March 2 closing of the RBC Bank (USA) deal, which added $15 billion of loans and $18 billion of deposits, PNC reported that organic commercial loan growth was a solid 4% in the first quarter. PNC also continued to grow retail checking accounts in the quarter and continues to benefit from the runoff of higher cost retail CDs.

In DBRS’s view, PNC has benefited from a well-executed acquisition and integration of National City, which has been reflected in better-than-market growth rates in underlying business drivers in recent periods. An enhanced presence in new markets has allowed the Company to win new clients by offering its more comprehensive product suite and capabilities. Given this recent history, DBRS is optimistic that PNC can capitalize on similarly meaningful growth opportunities across the legacy RBC Bank (USA) franchise. In addition to steadily, albeit slowly, improving market conditions, DBRS expects PNC to sustain its positive underlying business momentum and add to its already solid earnings capacity. 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 balance sheet trends along with a strong quarter for mortgage banking and asset management, up 46% and 14% respectively from 4Q11, supported 5% q-o-q revenue growth. First quarter revenues were $3.7 billion, up $183 million from 4Q11. Net interest income was $2.3 billion, up 4% q-o-q, reflecting higher average loan balances and an improving deposit mix. Average transaction deposits increased 4% from 4Q11, while average retail CDs declined 6%. Lower balances along with a sharp decline in the funding costs on these CDs, contributed to PNC’s NIM growing 4 bps q-o-q to 3.90% for 1Q12. DBRS notes that PNC still has around $5 billion of higher-cost (>2%) CDs that will roll off or reprice lower in 2Q12. The Company is also redeeming around $800 million of outstanding Trust Preferreds, which should further reduce funding costs.

PNC reported total first quarter expenses that declined 10% from 4Q11 to $2.5 billion. Excluding a $198 million noncash charge related to the early redemption of trust preferred securities from 4Q11 expenses and excluding litigation, foreclosure and integration charges from both the fourth quarter and 1Q12, expenses were down around 4% q-o-q. Based on these adjusted expense levels, PNC’s DBRS-calculated income before provisions and taxes increased $266 million from 4Q11 to $1.5 billion.

The generally positive trends in credit continued in the first quarter for PNC. Aside from inflows related to home equity-related rule changes, most categories of NPLs were down. Also, the acquisition of RBC Bank (USA) added around $250 million of OREO. Excluding these and the home equity inflows, NPA inflows were similar to 4Q11. Overall, excluding purchased impaired loans, reported NPAs declined 6% q-o-q to $4.4 billion, but given loan growth declined 10 bps as a percent of loans plus OREO to 2.50%, 60+ day delinquencies continued to decline. These trends supported a provision that, at $185 million, was down $5 million from 4Q11, and $148 million below 1Q12 net charge-offs. DBRS continues to view PNC as well reserved with an allowance for loan and lease losses (ALLL) to loans ratio of 2.38% at the end of 1Q12 and an ALLL/NPL (excluding purchased impaired loans) ratio of 115%.

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. The closing of the RBC Bank (USA) acquisition reduced PNC’s Tier 1 Common ratio by about 120 bps, but this was partially offset by earnings and AOCI movement. As a result, PNC’s estimated Tier 1 Common ratio was 9.3% at March 31, 2012, down from 10.3% at year end. PNC continues to target a Basel III Tier 1 Common ratio of between 8.0% and 8.5% by the end of 2013.

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 DBRS Criteria – 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 under Related Research