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 and Stable trend reflect a strong banking franchise, underpinned by a diverse set of businesses, including a strong corporate banking franchise, a growing retail franchise, a well-developed asset management business and a significant investment in BlackRock, Inc. Providing stability to earnings, the Company’s diverse set of revenue streams produce a high level of fee income. Along with its national businesses, the Company has a diverse customer base located across multiple regions, including the appealing mid-Atlantic and southeastern states, as well as the resurgent Midwest region. The Company’s ratings also consider PNC’s healthy balance sheet fundamentals, including sound asset quality, robust funding, and a strong capital profile. Finally, the Company’s earnings power remains sound, despite ongoing pressure from the difficult operating environment.

Overall, DBRS sees PNC as being well positioned within its rating category. Nonetheless, DBRS notes that sustained material improvement in core earnings, while continuing to enhance the franchise, could result in positive rating actions. Conversely, sustained significant deterioration in core earnings, and/or weakening balance sheet fundamentals could place negative pressure on the ratings.

PNC’s extensive banking franchise includes 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.

PNC’s earnings power remains sound, despite the difficult operating environment. PNC reported 1Q16 net income attributable to common shareholders of $859 million, down 11% quarter-over-quarter (QoQ), and 8% year-over-year. Lower QoQ results were driven by higher credit costs, and an 11% decline in non-interest income, which in part reflected seasonality, a decline in capital markets activity, and weaker equity markets, which pressured asset management fees. Meanwhile, PNC reported slightly higher spread income, QoQ, reflecting a modest increase in the net interest margin, along with higher average levels of investment securities and commercial loans. Finally, expenses remained well managed, and were down 5% QoQ.

For 2015, PNC reported net income available to common shareholders of $3.9 billion, down 1.7% from 2014. The decline in earnings reflected lower revenues, partially offset by a decline in non-interest expense and lower provisions for loan loss reserves. Positively, during 2015, PNC’s 22% economic interest in BlackRock provided solid contributions to the bottom line. On top of exceeding its goal of $500 million in cost savings in 2015, PNC has targeted an additional $400 million in cost savings for 2016, most of which will be used to fund technology and business investments.

Despite pressure from the downturn in the energy sector, asset quality remains sound. Importantly, the Company’s energy loans are moderately sized, and represent less than 2% of total loans. For 1Q16, levels of non-performing assets (NPAs) and net charge-offs (NCOs) were up moderately QoQ. Specifically, NPAs increased $127 million from YE15 and represented 1.23% of total loans, OREO and foreclosed assets, up from 1.17% at YE15, yet down from 1.40% at YE14. Improvements in the non-energy portfolios partially offset higher levels of non-performing loans in the oil, gas, and coal sectors, which totaled $301 million at March 31, 2016, up from $42 million at December 31, 2015. Meanwhile, NCOs represented a very low 0.29% of average loans for 1Q16, and 0.19% for 2015. Finally allowance for loan and lease losses represented an adequate 1.31% at March 31, 2016. The Company expects the provision for credit losses in 2Q16 to be between $125 million and $175 million, similar to 1Q16.

Other balance sheet fundamentals remain strong, including solid funding and liquidity profiles that reflect a sizable core deposit base, which more than adequately supports net loans, and healthy levels of liquid assets that reflect a high-quality securities book and LCR of above 100%. Meanwhile, PNC’s capital position remains robust, providing solid loss absorption capacity and support for future growth opportunities, either organically or through acquisitions. Even after repurchasing $0.5 billion of common shares in 1Q16, and $2.1 billion in 2015, the Company’s capital ratios remain strong, including an estimated fully phased-in Basel III common equity tier 1 capital ratio of 10.1%, at March 31, 2016.

Headquartered in Pittsburgh, PNC Financial Services Group, Inc. reported total assets of $361.0 billion and total deposits of $250.4 billion as of March 31, 2016.

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 (December 2015). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016), and DBRS Criteria - Guarantees and Other Forms of Support (February 2016). 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: Michael Driscoll
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 1 April 2015

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