TEXT-S&P: PNC Financial ratings unaffected by Q3 results
Oct 16 - Standard & Poor's Ratings Services today said that its ratings on PNC Financial Services Group (A-/Stable/A-2) are not immediately affected by the company's third-quarter earnings, which are within our expectations, given current operating conditions. PNC's adjusted pretax earnings totaled $1.2 billion, up 38% from the second quarter and up 2% from third-quarter 2011. PNC's net interest margin (NIM) declined sharply from second-quarter 2012 as a result of lower purchase accounting accretion, but core NIM was also down, as lower funding costs only partially offset lower yields. Funding costs were lower, mostly because of the redemption of higher-cost trust preferred securities (TruPS), which PNC replaced with lower-cost preferred stock. Loan growth helped to offset the impact of the lower NIM on net interest income. We project NIM will continue to decline as a result of the declining benefit from purchase accounting accretion, but loans should also keep growing. Adjusted noninterest income was up slightly over second quarter, reflecting client growth and higher equity markets. Costs were in line with the prior quarter. We expect PNC's total balance sheet will continue to grow slowly, as higher-cost deposits continue to run off, offsetting relationship deposit growth, and higher-risk acquired asset run-off offsets new loan growth. PNC's credit metrics generally continued to improve, although new regulatory guidance raising nonperforming loans and charge-offs somewhat counteracted this. Nonperforming loans dropped to 1.88% of total loans in the third quarter from 1.92% in the previous quarter. The net charge-off rate increased to 0.73% from 0.71% on an annualized basis from the second quarter. With a loan-loss reserve-to-nonperforming loan ratio of 118%, we believe PNC maintains sufficient reserves to cover potential losses. PNC targets a fully phased-in Basel III Tier 1 common ratio of 8.0%-8.5% by year-end 2013. We expect PNC's capital, as measured by Standard & Poor's risk-adjusted capital (RAC) ratio, will be flat to down after TruPS redemptions, the planned repurchase of up to $250 million of common stock in 2012, and loan growth. However, we don't expect the decline in capital to affect the ratings. The outlook on PNC is stable. We could lower the ratings if PNC's projected RAC ratio were to deteriorate to lower than 7% or if credit loss rates climb higher than those of peers and the industry, which would reflect greater relative risk. Conversely, we could raise our ratings on PNC if the company maintained a RAC ratio of higher than 10%. But we believe, based on the slow recovery of the domestic economy and the company's recent acquisition of RBC Bank (USA), that an upgrade is unlikely at this time. Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions.
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