October 16, 2012 / 8:30 PM / 5 years ago

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 

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