DBRS, Inc. (DBRS Morningstar) confirmed the ratings of PNC Financial Services Group, Inc. (PNC or the Company), including the Company’s Long-Term Issuer Rating of A (high). At the same time, DBRS Morningstar 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
The ratings confirmation and Stable Trend reflect PNC’s strong operating performance and ability to successfully grow its franchise both organically as well as through acquisition. Indeed, PNC just completed the integration of its June 1, 2021 acquisition of BBVA USA and remains on track to achieve the cost savings outlined when the transaction was announced. DBRS Morningstar views the acquisition as a solid strategic fit, with attractive growth prospects, which accelerates PNC’s strategy to build a national footprint. Additionally, there is the added potential for revenue opportunities, as PNC introduces its deeper product offerings to BBVA USA’s franchise.
PNC’s balance sheet remains strong with capital levels exceeding internal targets. Additionally, liquidity levels are robust reflecting strong deposit growth and excess liquidity in the banking system. Asset quality has held up well and, despite reserve releases, reserve levels remain strong. The ratings also consider the expectation that asset quality metrics will likely worsen from these unsustainably low levels.
Over the longer term, if PNC is able to continue to grow its franchise while reporting top-tier financial performance and maintaining a similar risk profile, its ratings would be upgraded. Conversely, a weaker-than-peer performance, reflecting a sustained deterioration in core earnings or asset quality, would lead to a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
PNC is one of the largest regional banks in the U.S., with an extensive branch footprint covering the Mid-Atlantic, Southeast and Midwest regions. The Company maintains a diverse business mix, including corporate, institutional, retail and residential mortgage banking, as well as asset management.
Earnings Combined Building Block (BB) Assessment: Strong
PNC’s earnings power is strong, with profitability metrics remaining solid. Additionally, PNC derives a large percentage of revenues from non-interest income sources which has helped to offset net interest margin (NIM) pressure given the low rate environment and having excess liquidity levels. Earnings in recent periods have also been boosted by reserve releases. The Company reported a 11.17% ROACE and 1.16% ROAA for 9M21, below its historical earnings level. However, earnings levels will likely improve as expense synergies are realized and as the NIM improves with investment of the excess liquidity and potentially higher interest rates next year.
Risk Combined Building Block (BB) Assessment: Strong
Despite the economic fallout from the pandemic, PNC’s risk profile remains sound, with highly manageable levels of non-performing assets and net charge-offs. However, asset quality metrics will likely deteriorate somewhat from their unsustainably low current levels. With a similar mix, we do not view the addition of BBVA USA’s loan portfolio as adding incremental credit risk.
Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong/Strong
PNC maintains a solid funding profile underpinned by a defensible deposit base that easily funds the loan portfolio and strong levels of on balance sheet liquidity as well as access to capital markets.
Capitalisation Combined Building Block (BB) Assessment: Strong
Capital levels are solid and above the level expected following the closing of BBVA USA although regulatory capital levels, including a CET1 ratio of 10.3%, are expected to be managed down from their current levels and the Company has an active stock buyback program. The Company generates a significant amount of capital internally.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/388196.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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