Morningstar DBRS Revises PNC Financial Services Group, Inc.'s Trend to Positive; Confirms A (high)

DBRS, Inc. (Morningstar DBRS) confirmed the credit 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, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, PNC Bank, N.A. (the Bank). The trend for all Long-Term credit ratings as well as the Short-Term credit ratings at the Bank level have been revised to Positive from 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 CREDIT RATING CONSIDERATIONS
The revision of the trend from Stable to Positive and confirmation of the credit ratings are supported by PNC's very strong banking franchise, which is underpinned by a deeply entrenched deposit base, spread across an extensive regional branch footprint that covers the Mid-Atlantic, Southeast, Southwest, and Midwest. As a result of PNC's clearly defined business strategy, the Company has attained national reach in many of its commercial and retail businesses through a combination of acquisitions and organic growth and strives to further its market share to achieve further scale economies. PNC has also demonstrated strong and consistent earnings, a reflection of a high percentage of revenues from non-interest income, low credit costs given its conservative underwriting standards, and strong emphasis on expense management.

The credit ratings also capture the Company's strong track record for credit risk management, with loss and delinquency rates that remain below historical and peer averages. Additionally, PNC's funding, liquidity and capitalization remain favorable given the Company's prudent management of its balance sheet. With a CET1 ratio of 10.3% at Q3 2024, the Company is currently 330bps above its minimum regulatory requirement, a strong buffer to weather any potential downturns considering the currently heightened levels of macroeconomic and political risk as well as to incorporate expected changes to regulatory capital requirements.

CREDIT RATING DRIVERS
The credit ratings would be upgraded with sustained strong financial results while maintaining solid balance sheet fundamentals and a conservative risk profile. Conversely, if the Company does not sustain its profitability and asset quality, the trend would revert to Stable. A material decline in PNC's earnings generation capacity or a severe deterioration in asset quality would result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong / Strong
Headquartered in Pittsburgh, PNC is one of the larger regional banks in the U.S., with total assets of $565 billion and total deposits of $424 billion. Notably, the Company's acquisition of BBVA USA Bancshares Inc. (BBVA USA) in 2021 helped expand the Company's branch presence from coast to coast, adding attractive market share in fast-growing Sunbelt states such as California, Texas, Arizona, and New Mexico, with PNC now presented in the 30 largest MSAs in the U.S. The Company maintains a diverse business mix, including corporate, institutional, retail and residential mortgage banking, as well as asset and wealth management.

Earnings Combined Building Block (BB) Assessment: Strong / Good
PNC's earnings power is consistent and resilient, underpinned by a diverse set of businesses that helps provide stability to its top line results and derive a higher percentage of revenues from non-interest income (around 38% in 9M 2024). The Company reported a 11.8% ROACE and 1.02% ROAA in 9M 2024, below its historical averages, but above large regional peer averages. PNC's efficiency ratio was at 62.7% for 9M 2024, and the Company has also maintained its track record for easily absorbable credit costs. Overall, the Company has maintained solid expense controls and expects to deliver positive operating leverage in 2024.

Risk Combined Building Block (BB) Assessment: Strong
PNC has a strong track record for credit risk management, with a high credit quality retail portfolio and commercial loans that are predominantly secured. Credit quality has remained relatively stable, and the Company's relationship-focused lending with limited exposure to riskier loan categories has historically resulted in lower through the cycle loss levels. PNC does have some CRE exposure (10.9% of total loans at Q3 2024), but that remains moderate relative to its regional bank peers, and the Company has provisioned conservatively (particularly in office CRE, where it continues to reduce its exposure). 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 (51% of average total deposits at Q3 2024). The remaining deposits include mainly commercial relationship and Treasury Management deposits, which are also more stable. With a loan to deposit ratio of 76% at Q3 2024, deposits also readily fund the loan portfolio. While the rate paid on total interest-bearing deposits in Q3 2024 increased 11bps QoQ, the Company believes that the total rate paid on deposits has reached its peak. Indeed, with the recent 50 bps Fed rate cut in September, PNC has begun reducing its deposit pricing and expects further rate cuts to only accelerate this repricing, which should act as a tailwind going forward.

Capitalization Combined Building Block (BB) Assessment: Strong
PNC's capitalization remains sound and is further supported by its consistent capital generation capabilities. The Company's CET1 ratio was at 10.3% at Q3 2024 (up from 9.9% at YE 2023), which was driven by net income and partially offset by dividends and share repurchases. Going forward, we expect the Company to pursue the simultaneous goal of capital returns and earnings retention given the current 330 bps cushion to minimum regulatory requirements and our expectation of still very sound earnings generation over the 2025 period.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/442417

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 04, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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.

Morningstar DBRS had 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277