DBRS Confirms PNC Financial at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed its ratings for PNC Financial Services Group, Inc. (PNC or the Company) and its subsidiaries, including the Company’s A (high) Issuer & Senior Debt rating and its R-1 (low) Short-Term Instruments rating. The trend on all ratings is Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

PNC’s ratings are underpinned by a strong banking franchise with robust market shares and a diversified revenue stream from a corporate-driven business that is complemented by a growing retail franchise, and a well-developed asset management business in addition to a significant investment in Blackrock. Ratings also reflect strong funding and capital profiles and stabilizing asset quality. Overall, DBRS sees PNC as being well positioned within its rating category. DBRS notes that significant deterioration in core earnings could place negative pressure on ratings.

PNC’s extensive banking franchise produces solid and sustainable earnings. Drivers for generating recurrent revenues include its leading deposit market shares in many large metropolitan statistical areas (MSAs), steady fee income contributions from multiple sources, and a strong expanding middle-market business banking franchise. The Company’s primary geographic markets are in 17 states and Washington, D.C. DBRS sees the Company’s success in growing and deepening relationships across its franchise as its primary opportunity to achieve future revenue growth.

Reflecting the difficult interest rate environment, PNC’s 2013 DBRS calculated income before provisions and taxes (IBPT) was down 2.7% year-over-year (YoY), driven by sustained margin contraction, partially offset by sound loan growth, higher adjusted fee income generation and lower adjusted expenses. During 2013, spread income decreased 5.1% driven by a 37 bps narrowing of net interest margin (NIM) to 3.57%, partially offset by a 4.9% increase in average earnings assets. The narrower NIM, in part reflected a $300 million decline in purchase accounting income, a headwind that will continue in 2014. Meanwhile and attributable to its strong franchise, higher average earning assets reflected a broad based 7.6% increase in average loans, despite the difficult business environment.

Adjusted fee income (excluding non-core items, including a significant positive swing in provisions for residential mortgage repurchase obligations) increased 4.6%, YoY and represented a solid 42% of total revenues, providing stability to earnings. Improved adjusted fee income was attributable to higher levels of asset management, corporate services and consumer services revenues.

Expenses were well managed, and down 7.4% YoY, as the Company exceeded its $700 million in cost savings related to its continuous improvement program. Overall, PNC is looking to attain another $500 million in cost savings in 2014, most of which will be used to fund investments in technology and the retail transformation. Although PNC’s efficiency ratio for 2013 was still modestly elevated at 61%, it was much improved from 68% in 2012 and competitive with peers.

Asset quality continues to improve with non-accrual loans, troubled debt restructurings, and criticized commercial loans declining in 2013. Meanwhile, net charge-offs fell in the second half compared to the first half of the year, and were down for the full year. Finally, despite sustained reserve releases, which benefited earnings, the Company’s reserve coverage of 1.8% of loans remains sufficient.

PNC’s strong funding profile reflects a sizable core deposit base that more than amply funds net loans. Importantly, PNC’s deposit position is defensible. Indeed, the Company has a dominant 23% market share in Pennsylvania, and a top five deposit market share in eight of its 10 largest deposit holding states.

Capital is ample and provides solid loss absorption capacity. During the year, capital improved, driven by retained earnings. Specifically, PNC’s estimated Tier 1 common ratio was solid at10.5% at YE13 (9.6% at YE12), and its Tier 1 capital ratio was 12.4% (11.6%). Importantly, the Company’s Basel III pro forma tier 1 common ratio was an estimated 9.4% at YE13.

Headquartered in Pittsburgh, Pennsylvania, the PNC Financial Services Group, Inc. reported total assets of $320 billion and total deposits of $221 billion as of December 31, 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 Organisations. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Mark Nolan
Rating Committee Chair: Roger Lister
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 9 December 2013

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