DBRS Morningstar confirms PNC Financial Services Group, Inc. at A (high); Stable trend

DBRS Morningstar confirms that PNC Financial Services Group, Inc. to A (high); Steady trend.

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 main banking subsidiary, PNC Bank, North America (the bank). The trend for all ratings is stable. The Bank’s intrinsic rating (IA) is AA (low), while its support rating remains SA1. The company’s support rating is SA3 and its long-term issuer rating is positioned one notch below the Bank’s IA.

KEY SCORING CONSIDERATIONS

The confirmation of the ratings and the stable trend reflect PNC’s solid operational performance and its ability to successfully grow its franchise both organically and through acquisition. Indeed, PNC has finalized the integration of its June 1, 2021 the acquisition of BBVA United States in less than a year, and is on track to achieve targeted cost savings this year while improving revenues and profits. DBRS Morningstar views the acquisition as a strong strategic fit, with attractive growth prospects, which accelerates PNC’s goal of building a national footprint. It should be noted that PNC now has a presence in all 30 largest Metropolitan Statistical Areas (MSAs), positioning the company for future growth.

PNC’s balance sheet remains solid with good capital levels that meet internal objectives. Nonetheless, we consider the Company’s current capital buffer against regulatory requirements to be at the lower end of the peer range.

The ratings and Trend Stable also consider that the current quality of assets, whose strength is not sustainable, is likely to deteriorate gradually, as the strength of consumer credit and the recent strong liquidity of companies decline.

DRIVER RATING

Longer term, if PNC is able to continue to grow its franchise while posting top-tier financial performance and maintaining a similar risk profile, its ratings would be improved. Conversely, a performance below that of its peers, reflecting a sustained deterioration in core earnings or asset quality, would lead to a ratings downgrade.

RATING RATIONALE

Combined deductible Building Block Rating (BB): Very strong/Strong

PNC is the 6th largest bank in the United States, with an extensive regional branch presence spanning the Mid-Atlantic, Southeast, Southwest, and Mid-West. Helped by the BBVA United States acquisition, the Company achieved national reach in many of its commercial and retail businesses. The Company maintains a diversity of businesses, including corporate, institutional, retail and residential mortgage banking, as well as asset management.

Combined earnings Building Block Rating (BB): Strong/Good

PNC’s earning power is consistent and resilient, with profitability metrics remaining at the top of its peer group of major regional banks. Additionally, PNC derives a high percentage of its revenue from non-interest revenue sources. The company posted a ROACE of 13.3% and a ROAA of 1.1% for 9M22, below its historic earnings but in line with its peers. 9M22 results improved each quarter with an efficiency ratio of 59% and a ROACE of 14.97% for the three months ended September 30, 2022. Results benefited from higher net interest income due to rate increases, good loan growth and resilient credit performance. Overall, PNC maintained strong expense control despite integration and inflationary pressures, achieving positive operating leverage in 9M22, with expectations of positive operating leverage for the full year.

Combined risk Building Block Rating (BB): Strong

PNC has a strong track record in credit risk management, with high credit quality retail portfolios, while C&I and CRE loans are primarily secured with moderate total exposure to CRE compared to its regional peers. PNC’s asset quality has remained strong during the pandemic, but provisioning remains cautious given the uncertain outlook. Loan portfolios acquired from BBVA were easily absorbed and loss and delinquency rates remain below historical averages. The Bank has a flawless record in operational risk management and constantly reinvests in data and information security.

Funding and liquidity combined Building Block Rating (BB): Very strong/Strong

PNC maintains a strong 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. As deposits declined from last year’s record highs, PNC came under lower-than-expected repricing pressure. PNC repositioned its securities portfolio this year to reduce the impact of AOCI, although this did not affect regulatory capital levels.

Combined capitalization Building Block Rating (BB): Strong

Capital levels remain strong. Capital generation was robust and PNC returned over 100% of its earnings to shareholders in 9M22. PNC’s CET1 ratio of 9.3% had a cushion from required levels of 190 basis points in 3Q22, which is at the lower end of the peer range. We expect PNC to maintain or slightly increase its current capital cushion and be more in line with historical levels by around 200 basis points, given the uncertainty of the outlook.

More details on dashboard indicators and Building block ratings can be found at https://www.dbrsmorningstar.com/research/405209>

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

No environmental/social/or governance factors had a material or relevant impact on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar Analytical Framework is available in 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)

Remarks:

All figures are in WE dollars unless otherwise specified

The main methodology is the global rating methodology for 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>. Additionally, 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 main sources of information used for this assessment include company documents. DBRS Morningstar considers that the information available to it for the purpose of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities participated in the rating process for this rating metric. 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 decision.

Conditions that lead to a negative or positive trend assignment are generally resolved within 12 months. DBRS Morningstar’s outlook and ratings are monitored regularly.

For more information on this credit or this industry, visit www.dbrsmorningstar.com.

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