DBRS Confirms PNC Financial Services Group, Inc. at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed the 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 rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.

PNC’s ratings consider the Company’s strong banking franchise underpinned by a corporate-driven business, complemented by a growing retail franchise, a well-developed asset management business, and a significant investment in BlackRock. The franchise, with a footprint located across the appealing mid-Atlantic and southeastern states, and the resurgent Midwest region, holds solid market shares in many markets that it serves. The bottom line benefits from its broad-based businesses, which provides diversified revenue sources, highlighted by a strong level of fee income, representing 43.4% of total revenues for 2014 (adjusted basis: excluding a number of items including gains from the sales of 3 items: securities, Visa stock, and a building).

Balance sheet fundamentals remain healthy, reflecting sound and improved asset quality, robust funding underscored by a defensible deposit franchise, and a strong capital profile. Ratings also consider the Company’s pressured core earnings generation, reflecting the challenging business environment and a decreasing level of purchase accounting accretion, which has led to a moderating net interest margin (NIM) and lower spread income. Overall, DBRS sees PNC as being well positioned within its rating category. Nonetheless, generating positive operating leverage and sustainable improving core earnings, while maintaining strong balance sheet fundamentals could have positive rating implications. Conversely, sustained significant deterioration in core earnings, and/or weakening balance sheet fundamentals could place negative pressure on the ratings.

PNC’s banking franchise is expansive regionally, including primary geographic markets in 17 states and Washington, D.C. The Company offers a broad based menu of lending, deposit and other fee income products and services. The franchise is supported by top five deposit market shares in many of the states that it serves. Overall, DBRS sees PNC’s success in growing and deepening relationships across its franchise, especially in the southeastern states, as the Company’s primary opportunity to achieve future revenue growth.

For 2014, adjusted income before provisions and taxes (DBRS’s core earnings measure) declined 7.3%, year-over-year (YoY), due to sustained margin contraction, partially offset by sound loan growth, stable adjusted fee income, and a decline in adjusted non-interest expenses.

Overall, spread income contracted 6.8% in 2014, due to a 49 bps narrowing of the NIM to 3.08%, driven by lower earning asset yields, higher levels of low yielding deposits at the Federal Reserve, and a $260 million decline in purchase accounting accretion. Partially offsetting these headwinds, average loans increased 5.1%, reflecting increases across most loan types. Meanwhile, the Company’s adjusted fee income was stable, YoY, and mostly reflected higher levels of corporate service income and asset management fees offset by lower levels of residential mortgage revenues. Finally, PNC’s 22% economic interest in BlackRock continues to provide solid contributions to the bottom line.

Expenses were well managed in 2014, and were moderately down, YoY. During the year, the Company successfully implemented $500 million of cost saving actions, and has targeted an additional $400 million for 2015. As in the prior year, the Company will utilize a portion of the cost saves for investments in technology and its retail transformation.

Asset quality was sound and improved, YoY, as evidenced by declining levels of non-accrual loans and troubled debt restructurings. Moreover, 2014 net charge-offs fell by 51%, from the prior year. Finally, despite sustained reserve releases, the Company’s reserve coverage of 1.6% of loans remains sufficient given its risk profile.

PNC’s solid funding profile reflects a sizable core deposit base that more than adequately supports net loans. For 2014, average deposits increased 5.1%, YoY. Importantly, the Company’s deposit franchise is highly defensible, including a dominant 24% market share in Pennsylvania, and a top five deposit market share in eight of its 10 largest deposit holding states.

Overall, the Company maintains a solid liquidity profile. As of December 31, 2014, PNC’s pro forma liquidity coverage ratio (LCR) exceeded the phased-in short-term regulatory minimum of 80%.

Despite repurchasing $1.1 billion of its common shares in 2014, PNC’s capital improved, driven by retained earnings. At YE14, the Company’s estimated pro forma fully phased-in Basel III common equity Tier 1 common ratio was a sound 10.0%, up from 9.4%, at YE13. In March 2015, The Federal Reserve did not object to PNC’s capital plan, which includes a 6% increase in dividends and the repurchase of up to $2.8 billion of common shares by 2Q16. Overall, it is DBRS’s view that PNC’s stress test results were sound.

Headquartered in Pittsburgh, Pennsylvania, the PNC Financial Services Group, Inc. reported total assets of $345.1 billion and total deposits of $232.2 billion as of December 31, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), DBRS Criteria - Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015), and DBRS Criteria - Guarantees and Other Forms of Explicit Support (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: 30 January 2014

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