UPDATE 4-PNC to repay TARP; sell stock, unit

* PNC to sell $3 bln in stock, offer $1.5-$2 bln in notes

* BNY Mellon to raise $800 mln in stock

* BNY Mellon stock drops 1.1 pct, PNC falls 2.2 pct (Recast first paragraph with TARP repayment plans, adds details on capital raising, updates share prices)

By Elinor Comlay

NEW YORK, Feb 2 (Reuters) - PNC Financial Services Group (PNC.N) plans to pay back $7.6 billion to the government, raising most of the money by selling its investment servicing unit to Bank of New York Mellon (BK.N) and by issuing stock.

PNC said on Tuesday it had reached agreement with banking regulators on repaying the Troubled Asset Relief Program money and would also sell $1.5 billion to $2 billion in notes to provide additional liquidity after it returns the government money.

As part of the agreement it will sell its Global Investment Servicing unit for $2.31 billion and sell $3 billion of stock.

News of the stock sale helped push PNC's shares down by as much as 3 percent. They closed down 2.2 percent for the Tuesday session at $54.65.

Many major banks such as Wells Fargo & Co (WFC.N) and JPMorgan Chase & Co (JPM.N) have already repaid TARP funds, freeing them from government restrictions on dividend payments, share repurchases and some compensation restrictions.

The TARP funds helped finance PNC's 2008 acquisition of troubled Cleveland bank National City Corp.

PNC said signs of an improving economic environment and stabilizing financial system led it to believe it was the appropriate time to redeem preferred shares held by the U.S. Treasury.

"As a result, we are pleased to have reached an agreement with our regulators to return the taxpayers' investment in PNC," said PNC Chairman and Chief Executive James Rohr in a statement.

MORE FEES FOR BNY

PNC approached BNY Mellon at the end of last year to discuss selling the business, which provides accounting and other services to fund managers, said Jim Palermo, co-chief executive of BNY Mellon Asset Servicing.

For BNY Mellon, the unit will add $855 billion of assets under administration and increase its position in fund accounting and administration, among other businesses. The deal also gives BNY Mellon access to hedge fund and mutual fund clients it does not already cover. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

See also Breakingviews "Bank of New York pays full price for small gain" [ID:nN02245853] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

New York-based BNY Mellon, which has $22.3 trillion of assets under custody and administration, will have the No. 2 position in fund accounting and administration after the deal, it said.

Large players usually have an advantage over smaller ones in processing businesses, because of the significant technology spending involved. Smaller players do not typically have the resources to spend as much on technology, and stand to realize less profit from their investment.

"It further adds a high proportion of fee-based revenues to our business which is an important part of our strategy," said Palermo. Adding fee-based revenue makes the company less reliant on more volatile revenue from capital markets, he said.

BNY Mellon plans to sell about $800 million of stock as part of the deal, which is expected to close in the third quarter. Shares of BNY Mellon closed 1.1 percent lower at $29.26 on Tuesday.

PNC's Global Investment Servicing unit is more than 30 years old. Based in Wilmington, Delaware, the unit employs about 4,500 people, BNY Mellon said. It has become the largest service provider to the U.S. mutual fund industry.

Goldman Sachs advised Bank of New York Mellon. Citigroup and Morgan Stanley advised PNC. (Additional reporting by Paritosh Bansal; Editing by Derek Caney, Steve Orlofsky, Tim Dobbyn)