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

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of PNC Financial Services Group, Inc. (PNC or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, PNC Bank, N.A. (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS

The ratings confirmation and Stable trend reflect PNC’s relative stability through the turbulent period for U.S. banks starting in 1Q23, caused by bank failures and rapidly rising interest rates. As expected, PNC has experienced the migration of deposits to higher yielding products, and it is seeing the normalization of credit losses from the unsustainably low loss rates over the past three years. PNC’s conservative management of lending, focus on liquidity and renewed emphasis on cost reduction to match lower revenues due to market conditions, reflect the Company’s continued prudent management of its income statement, balance sheet and capital.

The ratings also consider the heightened economic and political risks at present, which may lead to prolonged periods of higher rates and slower economic growth, dampening earnings generation through higher funding and credit costs. PNC needs to further build its capital levels amidst the headwinds of margin pressure and diminished demand. Nonetheless, we view PNC as particularly well-positioned for these risks due to its current high liquidity, good capital levels and limited exposure to high risk businesses.

RATING DRIVERS

If PNC is able to continue to grow its franchise while reporting top-tier financial performance and maintaining strong asset quality metrics, its ratings would be upgraded. Conversely, a weaker-than-peer performance, reflecting a sustained deterioration in core earnings, asset quality, and capital levels would lead to a ratings downgrade.

RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
PNC is the 6th largest US bank, with an extensive regional branch footprint. Aided by the 2021 BBVA USA acquisition, the Company attained national reach in many of its commercial and retail businesses. The Company maintains a diverse business mix, including corporate, institutional, retail and residential mortgage banking, as well as asset and wealth management. PNC continues to implement its strategic priorities of expanding into new targeted national markets and through development of digital services platforms, while deepening relationships with existing customers. PNC is currently stepping up cost reduction efforts, with part of savings used to fund investments in technology and infrastructure. PNC will likely continue to make opportunistic smaller acquisitions where the acquired assets fit its credit quality targets and support growth in chosen markets and sectors. The Company acquired about $16 billion in capital commitment loan facilities from Signature Bridge Bank in early October 2023, adding to its existing capital commitment portfolio.

Earnings Combined Building Block (BB) Assessment: Strong/Good
PNC’s earnings power is consistent and resilient, with profitability metrics remaining in the top tier of its large regional bank peer group. Additionally, PNC derives a high percentage of revenues from non-interest income sources (around 35% in 9M23) The Company reported a 13.7% ROACE and 1.12% ROAA for 3Q23, below its historical high-teens average, but at the higher end of current peer ranges. The Company’s efficiency ratio averaged 62% for 9M23. Overall, PNC has maintained solid expense control despite the residual integration and inflationary pressures, achieving positive operating leverage in 9M23, with the possibility of full year positive operating leverage (excluding one-time charges in 4Q23).

Risk Combined Building Block (BB) Assessment: Strong
PNC has a strong track record for credit risk management, with high credit quality retail portfolios while C&I and CRE loans are predominantly secured, with a moderate total CRE exposure (11.2% of loans at September 30, 2023) relative to regional peers. PNC’s relationship lending with limited exposure to riskier categories results in lower through the cycle loss levels. PNC’s asset quality remains sound but the bank has provisioned conservatively, anticipating the deterioration in credit that is developing now in CRE, mostly in office CRE (2.7% of loans), with charge-offs in 2Q23 and provision build in this category in 3Q23. Total delinquency rates increased by 6% relative to the June 2023 quarter, but declined 21% from 3Q22 levels, with the recent period increase mainly due to consumer delinquencies. Net charge-offs (NCOs) declined to 15 basis points in the 3Q23, down from the June quarter, while loss and delinquency rates remain below historical averages. The Company has a clean record on operational risk management and consistently reinvests in data and information security.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
PNC maintains a solid funding profile underpinned by a sticky consumer deposit base (52% of total deposits of $424 billion, 89% insured). Commercial deposits (48% of total, 19% insured) include mainly “relationship” and Treasury Management deposits which are also more stable. With a loan to deposit ratio of 75%, deposits readily fund the loan portfolio. PNC has increased its on-balance sheet liquidity mainly in the form of deposits with the Federal Reserve ($38 billion). PNC has seen lower than expected repricing pressure with a cumulative deposit beta of 41% as of 3Q23, with expected mid-40% range expected for the full year. Positively, PNC has experienced lower deposit outflows, with deposits down just 3% from 3Q22 levels.

Capitalization Combined Building Block (BB) Assessment: Strong/Good
In anticipation of higher regulatory capital requirements, PNC has been building capital through earnings retention. Indeed, capital levels have improved 80 basis points from 3Q22 to 3Q23, with the CET1 ratio currently at 9.8%. We expect that PNC’s earnings will remain healthy, permitting continued incremental increases in its common stock dividend as well as limited share repurchases in the near term while also building capital levels.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/423008.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ or Governance factors that had a significant or relevant on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (July 4, 2023).

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

The principal methodology is Global Methodology for Rating Banks and Banking Organizations (June 22, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors (July 4, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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