DBRS Re-Release: PNC Financial Services Group, Inc. Confirmed Following the Acquisition of National City Corporation

On December 31, 2008, DBRS took a number of rating actions following the completion of the PNC Financial Services Group, Inc. (PNC or the Company) acquisition of National City Corporation (NatCity). NatCity has ceased to exist as a legal entity; consequently its ratings were confirmed and then withdrawn. NatCity entities and obligations were confirmed as they are equalized with the current PNC ratings. All outstanding debt obligations of the holding company are now the full risk and responsibility of PNC.

The long- and short-term ratings of PNC Financial Services Group, Inc. and its bank subsidiaries were confirmed at A (high) and AA (low), respectively, concluding the Under Review with Negative Implications status initiated on October 24, 2008. All PNC debt guaranteed by the Federal Deposit Insurance Corporation (FDIC) remains at AAA. All rating trends are now Negative, except for PNC’s R-1 (low) Short-Term Instruments rating and all FDIC-guaranteed debt, which have Stable trends. DBRS is currently assessing whether this bank combination should receive an SA2 support designation or remain an SA3. DBRS expects this assessment to be completed before the end of the first quarter of 2009.

The DBRS rating confirmations reflect the solid PNC franchise, which has generated strong recurrent revenue and asset growth while achieving positive operating leverage in recent years. The Company has navigated the recent market and credit turmoil relatively well, with above-peer asset quality; however, its fee income and asset management business will be somewhat constrained until market conditions improve. DBRS believes that PNC is likely to continue to outperform most of its peer banks through its conservative risk approach, focusing on incremental improvement and careful execution. Moreover, the transformational acquisition of the former NatCity franchise dramatically expands and strengthens its delivery network, making it the nation’s fifth largest depository bank. DBRS believes that the potential of selling PNC’s product set and employing its expense discipline across its new acquisition present a significant medium- to long-term opportunity for the Company.

The Negative trend reflects the increase in near- to medium-term risk to the Company at a time of substantial turmoil in the credit and capital markets. DBRS expects that PNC’s earnings will be somewhat pressured by deteriorating credit quality, security impairment and rising credit costs, primarily driven by declining housing prices. The macroeconomic picture has also darkened in the past quarter as the U.S. economy, already well into a recession, tries to stem rapidly rising unemployment as a new administration begins its term in office. Although the newly merged Company’s revenue base is well diversified, it increases the concentration of spread income in economically weaker Midwest markets, which are at risk of a deeper and longer recession.

In the midst of a deteriorating economy and disrupted financial markets, the Company is acquiring NatCity, which significantly increases the Company’s exposure to stressed assets. NatCity brings substantial exposure in its $110 billion loan book to residential mortgage, consumer, construction, commercial and other troubled loans. Although managed down previously and written down substantially at closing through purchase accounting adjustments, these assets remain at risk for potential further losses should markets continue to deteriorate. In addition to integration risks for the Company, NatCity may also face material costs of legal disputes that could have an impact on its business and distract management. The scale and scope of the NatCity integration and associated re-training given its 1,500 branches will require the full focus of management and every bit of PNC’s integration experience. DBRS believes that PNC’s phased-in approach over approximately two years is prudent and mitigates some of the integration risk. It is these near- to medium-term challenges, combined with the current financial turmoil and capital market disruptions, that present headwinds sufficient to assign a Negative trend. Declining financial performance, including deteriorating credit quality or profitability; the inability to reduce high risk assets; or a troubled integration could lead to negative rating actions, while risk asset reduction, continuing strong profitability and a successful integration could restore the trends to Stable.

PNC has traditionally maintained an entirely core-funded loan book, which has reduced funding needs for the Company. Nonetheless, PNC has been a beneficiary of the U.S. Treasury’s many debt-funding and liquidity programs. DBRS notes that PNC will likely work down and recast NatCity’s more expensive deposit and debt-funding structure, which will yield further cost savings. Furthermore, shortly after closing this transaction, the Company will receive $7.7 billion in capital from the Troubled Asset Relief Capital Purchase Program (TARP CPP), which will elevate its capital ratios, offsetting some of the capital pressure from the acquisition. Nonetheless, DBRS will be looking for PNC to rebuild its tangible capital levels over time to peer normal range through earnings and securities appreciation.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.