October 3, 2017 / 8:56 PM / a year ago

Fitch Affirms PNC Financial Services Group, Inc.'s IDRs at 'A+/F1'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has affirmed PNC Financial Services Group, Inc.'s (PNC) ratings at 'A+/F1'. The Rating Outlook remains Stable. The affirmation reflects PNC's strong earnings profile, stable and diverse business model, consistent performance through time, and solid liquidity profile. A full list of rating actions is at the end of this rating action commentary. The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), and Wells Fargo & Company (WFC). Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly. KEY RATING DRIVERS IDRs, VRs, AND SENIOR DEBT PNC's rating affirmation reflects the company's strong earnings profile, stable and diverse business model, consistent performance through time, and solid liquidity profile. PNC's earnings remain solid and compare well with other large regional banks. Earnings have benefited from diversified sources of non-interest income, well-controlled core expenses and lower credit costs. Fitch also views PNC's company profile as strong, buttressed by its solid deposit market shares, as well as diverse business model, with particular strengths in corporate banking, middle-market M&A advisory, and wealth management. PNC's margin tends to lag the large regional peer median given a greater proportion of lower-yielding commercial loans in the book. This may change over time as PNC seeks to grow its credit card, home equity, and direct auto loan portfolios. Fitch characterizes PNC's risk appetite as generally superior to most large regional banks. The stability of PNC's results through the cycle is a useful indicator of risk appetite. PNC has both an earnings profile and asset quality performance that have outperformed peers and also demonstrated less volatility over the past 10 years and past 10 quarters, supporting its high ratings. Despite an expectation of lower than peer loan losses, Fitch notes that PNC has grown C&I and multifamily loans at a rate higher than peer over the past twelve months. However, Fitch does not expect outsized deterioration relative to peers as a result of this loan growth. Further, the Federal Reserve once again estimated very low loan losses under the severely adverse scenario relative to peers for PNC. PNC's capital profile is considered appropriate, particularly in light of its risk profile. At June 30, 2017, PNC's transitional CET1 was 10.3%, slightly below the peer median. PNC has yet to exit parallel run, but it is anticipated the standardized approach will remain the binding constraint. Fitch views PNC's liquidity and funding profile as among the strongest of the large regional peer group. At June 30, 2017, its loan to deposit ratio was 84%, one of the lowest in the peer group. While this ratio could rise as loan growth resumes to more normalized levels, Fitch would expect PNC to manage its liquidity position in a conservative manner, as it has historically done so. The company also has access to a diversified array of funding sources. PNC has yet to publicly disclose its LCR, but will be required to do so next year. Fitch considers PNC's stake in BlackRock as providing an overall benefit to the credit profile, since BlackRock's fees add an additional source of revenues to the earnings mix. BlackRock contributed 13% of consolidated income in 1H17. PNC has been looking to monetize its ownership in BlackRock in a tax efficient manner given the concentration risk that resides with such a large holding in one company, but to this point, has been unable to find anything that has been executable. At June 30, 2017, PNC had a significant unrecognized pre-tax gain of $7.7 billion (excluding any liquidity discount or deferred tax liability) or a considerable 25% of CET1. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES PNC's subordinated debt is notched one level below its VR for loss severity. PNC's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while PNC's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured long-term deposit ratings of PNC Bank, N.A. are rated one notch higher than the bank's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. The long- and short-term deposit ratings are mapped to IDRs according to our Global Bank Rating criteria. HOLDING COMPANY PNC's IDR and VR is equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR PNC has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES VR, IDRs, AND SENIOR DEBT With a long-term IDR of 'A+', PNC remains one of the highest rated banks in the world. There is currently a low likelihood that PNC's ratings would be upgraded over the near term. However, over time, upwards ratings migration would be predicated on a superior earnings profile relative to peers, maintenance of capital at appropriate levels, and consistent through the cycle asset quality measures. Conversely, a meaningful deterioration in asset quality, coupled with weaker profitability metrics, or more aggressive capital management could lead to a negative rating action, although Fitch currently views a downgrade as very unlikely. BlackRock's operations are relatively low risk, with little balance sheet-related risk. However, any strategic missteps or operational errors at BlackRock could create earnings volatility on PNC's profit and loss statement since this ownership typically accounts for more than 10% of consolidated earnings. A complete divestiture of its ownership of BlackRock would be evaluated for any rating implications depending on the intended use of the proceeds and plans to generate the foregone recurring revenues. However, Fitch views PNC's ability to fully monetize its ownership as limited, at least in the near term, but expects some incremental sales may occur. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings for PNC and its operating companies' subordinated debt, trust preferred securities, and preferred stock are sensitive to any change to the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to PNC's long- and short-term IDR. HOLDING COMPANY Should PNC's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since PNC's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings: PNC Financial Services Group Inc. --Long-term IDR at 'A+'; Outlook Stable; --Short-term IDR at 'F1'; --Viability at 'a+'; --Support at '5'; --Support floor at 'NF'; --Senior unsecured at 'A+'; --Short-term debt at 'F1'; --Subordinated at 'A'; --Preferred stock at 'BBB-'. PNC Bank N.A. --Long-term IDR 'A+'; Outlook Stable; --Long-term deposits at 'AA-'; --Viability at 'a+'; --Subordinated at 'A'; --Senior unsecured at 'A+'; --Short-term IDR at 'F1'; --Short-term deposits at 'F1+'; --Short-term debt at 'F1'; --Support at '5'; --Support floor at 'NF'. PNC Funding Corp --Senior unsecured at 'A+'; --Subordinated at 'A'; --Short-term debt at 'F1'. PNC Capital Trust C --Trust preferred at 'BBB'. National City Corporation --Subordinated at 'A'; --Preferred stock at 'BBB-'. National City Bank (Cleveland) --Long-term deposits at 'AA-'; --Senior unsecured at 'A+'; --Short-term deposits at 'F1+'. National City Bank of Indiana --Long-term deposits at 'AA-'; --Subordinated at 'A'. National City Bank of Kentucky The Provident Bank --Long-term deposits at 'AA-'. Contact: Primary Analyst Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Justin Fuller Senior Director +1-312-368-2057 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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