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 completed the integration of its June 1, 2021 acquisition of BBVA USA in under one year, and is on track to achieve targeted cost savings this year while enhancing revenues and earnings. DBRS Morningstar views the acquisition as a solid strategic fit, with attractive growth prospects, which accelerates PNC’s goal to build a national footprint. Of note, PNC now has a presence in the 30 largest Metropolitan Statistical Areas (MSA) positioning the Company well for future growth.
PNC’s balance sheet remains strong with good capital levels that meet internal targets. Nonetheless, we view the Company’s current capital cushion over regulatory requirements as being in the lower end of peer range.
The ratings and Stable trend also consider that the current unsustainably strong asset quality is likely to deteriorate gradually, as consumer credit strength and recent strong corporate liquidity decline.
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-peers performance, reflecting 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 the 6th largest US bank, with an extensive regional branch footprint covering the Mid-Atlantic, Southeast, Southwest and Midwest. Aided by the BBVA USA acquisition, the Company attained national reach in many of its commercial and retail businesses. 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/Good
PNC’s earnings power is consistent and resilient, with profitability metrics remaining in the top tier of its large regional bank peer group. Additionally, PNC derives a high percentage of revenues from non-interest income sources. The Company reported a 13.3% ROACE and 1.1% ROAA for 9M22, below its historical earnings but in line with peers. The 9M22 results have improved each quarter with a 59% efficiency ratio and 14.97% ROACE for the three months ended September 30, 2022. Results have benefited from higher net interest income due to rate increases, good loan growth, and resilient credit performance. Overall, PNC has maintained solid expense control despite the integration and inflationary pressures, achieving positive operating leverage in 9M22, with expectation of full year positive operating leverage.
Risk Combined Building Block (BB) Assessment: Strong
PNC has a strong track record for credit risk management, with high credit quality retail portfolios while C&I and CRE loans are predominantly secured with a moderate total CRE exposure relative to regional peers. PNC’s asset quality remained sound through the pandemic but provisioning remains conservative given the uncertain outlook. Acquired loan portfolios from BBVA were easily absorbed and loss and delinquency rates remain below historical averages. The Bank has a clean record on operational risk management and consistently reinvests in data and information security.
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. While deposits have declined from peak levels last year, PNC has seen lower than expected repricing pressure. PNC repositioned its securities portfolio this year to reduce the impact of AOCI, although this does not affect regulatory capital levels.
Capitalization Combined Building Block (BB) Assessment: Strong
Capital levels remain sound. Capital generation has been robust, and PNC has returned more than 100% of earnings to shareholders in 9M22. PNC’s CET1 ratio of 9.3% had a cushion over required levels of 190 basis points at 3Q22, which is at the low end of peer range. We expect PNC to maintain or build slightly on its current capital cushion, and be more in line with historical levels of about 200 basis points, given the uncertainty in the outlook.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/405209
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ or Governance factors that had a significant or relevant on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted
The principal methodology is Global Methodology for Rating Banks and Banking Organizations (June 23, 2022): https://www.dbrsmorningstar.com/research/398693/dbrs-morningstar-publishes-updated-global-methodology-for-rating-banks-and-banking-organisations. In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277