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

DBRS, Inc. (DBRS) confirmed the ratings of PNC Financial Services Group, Inc. (PNC or the Company), including the Company’s Long-Term Issuer Rating of A (high) and Short-Term Issuer Rating of R-1 (low). At the same time, DBRS 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
DBRS’s confirmation of PNC’s ratings reflects the Company’s strong banking franchise and favorable credit fundamentals, including ample earnings generation capacity, sound asset quality, as well as robust funding, liquidity and capitalization. The ratings also consider the still challenging, albeit improving operating environment, which includes low interest rates and sluggish economic growth.

RATING DRIVERS
DBRS views PNC as well positioned within its rating category. Over the longer term, sustained positive operating leverage combined with the successful build out into new geographies, could result in a positive rating action. Conversely, sustained deterioration in core earnings, and/or weakening balance sheet fundamentals could place negative pressure on the ratings.

RATING RATIONALE
PNC is the 6th largest bank in the U.S. by deposits, with top five deposit market share positions in nine states and D.C., including a dominant 23% market share in Pennsylvania. The Company provides a broad set of products and services to customers on a national basis, as well as in its primary geographic markets, comprising corporate, institutional, retail and residential mortgage banking, as well as asset management, which includes a significant investment in BlackRock, Inc. Notably, this diversified business mix generates a considerable amount of fee income (typically around 40-45% of total revenue), providing stability to earnings.

Excluding the impact from tax reform and significant non-core items, the Company generated $4.5 billion of net income in 2017 (up 12% versus 2016), which represented a return on average assets (ROA) of 1.20% (up from 1.10% in 2016). For the year, total revenues were up 8%, benefiting from higher interest rates, solid loan growth (up 5% from YE16) and record fee income. Loan growth was led by broad-based growth across corporate banking business, as well as residential mortgages. Meanwhile, strong results from Asset Management, which includes PNC’s BlackRock investment, and Corporate Services were the main drivers of the record annual fee income.

Noninterest expenses, excluding significant non-core items, increased 4% in 2017, reflecting higher compensation related to increased business activity, as well as ongoing investments in technology and business infrastructure. DBRS views continued investments in the franchise positively, given its perception that banks’ technological capabilities will be a significant differentiator for success over the long term.

More recently, PNC reported $1.2 billion of net income in 1Q18, representing a ROA of 1.34%. Results benefited from higher interest rates, a lower tax rate, solid loan growth, net interest margin expansion and strong fee income. Importantly, PNC’s balance sheet fundamentals remain strong, providing key support to the ratings. Specifically, the Company’s asset quality trends remain favorable, including relatively stable metrics over the past year. Additionally, PNC’s funding and liquidity profile remains robust underpinned by its deeply entrenched deposit franchise. Finally, capitalization remains solid, with an estimated Basel III common equity tier 1 ratio of 9.6% at the end of 1Q18.

Headquartered in Pittsburgh, PNC Financial Services Group, Inc. reported total assets of $379 billion and total deposits of $265 billion as of March 31, 2018.

The Grid Summary Scores for PNC are as follows: Franchise Strength – Strong; Earnings Power – Strong; Risk Profile –Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

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

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under 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.

Lead Analyst: Michael McTamney, CFA, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 6 April 2006
Most Recent Rating Update: 2 August 2017

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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