Fitch Affirms PNC Financial's L-T IDR at 'A+' Following Large Regional Bank Review; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed PNC Financial Service Group, Inc.'s (PNC) Issuer-Default Ratings (IDRs) at 'A+/F1'. The Rating Outlook remains Stable. The affirmation reflects PNC's strong risk-adjusted earnings profile, stable and diverse business model, and its consistency of performance through time.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUFG), PNC Financial Services Group, Inc. (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

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, VIABILITY RATINGS (VR) & SENIOR DEBT

PNC's ratings were affirmed at 'A+/F1' and primarily reflect its strong risk-adjusted earnings profile, stable and diverse business model, and consistent performance through time.

PNC's earnings exceed the large regional peer average both now and through the financial crisis, supported by high levels of non-interest income, a good funding profile, and manageable credit costs. Fitch notes that although PNC's core margin continues to compress and is below peer levels, PNC has good revenue diversity, helping to insulate the company from a very challenging interest rate environment. PNC enjoys a funding advantage relative to many of its peers, and benefits from a strong deposit franchise, ranking in the top five in terms of deposit market share in 80% of the 17 state footprint it operates in.

PNC's ratings are also supported by its consistent track record, which is attributed to a moderate risk appetite. Legacy PNC generally avoided subprime, Alt-A mortgage lending, higher risk home equity and credit cards. Fitch views PNC's management team very favorably, possessing the appropriate level of depth and expertise, as well as a consistent approach to identifying, monitoring and mitigating risk. Fitch notes that most of its recent earnings volatility and elevated litigation costs are related to its acquisition of National City Corporation. Absent this acquisition, many of its litigation and mortgage repurchase-related charges would likely have been avoided, and PNC would have fared very well through the financial crisis.

Fitch notes that PNC's loan loss experience is more consistent and better than peer averages. While NPAs remain elevated for PNC, actual NCOs consistently track below peer averages. PNC's level of reserves to total loans was the second highest of the large regional peer group at June 30, 2014, which Fitch views as prudent given above average loan growth, and relatively higher credit risk in its securities portfolio than its peer group.

PNC's capital profile compares well to other large regional banks and considered solid relative to its risk profile. PNC performed very well under the two most recent CCAR stress tests. Given its advanced-approach institution status, PNC will face volatility in accumulated other comprehensive income (AOCI) due to interest rate movements, needing an associated capital buffer. As such, Fitch expects that PNC will manage capital conservatively over the near- to intermediate-term.

These rating strengths are somewhat offset by some tail risk related to mortgage-related issues including pending and potential litigation which Fitch has very little visibility into, and future risk related to home equity end-of-draws. Fitch notes that PNC has reported one of the largest increases in its reasonably possible legal losses in excess of amounts accrued (RPL) RPL among the large regional banks from a year ago. While visibility into ultimate legal risk is very limited, this proxy for possible legal risk would suggest PNC is still facing elevated litigation costs over the near term.

Fitch views home equity reset risk as an industry concern, though somewhat of a more acute issue for PNC than its other large regional bank peers given the relatively large home equity book. PNC has approximately $6.6 billion of home equity lines of credit (currently paying interest only) resetting to fully amortizing loans over the next few years, potentially at a higher interest rate environment. PNC discloses that the performance of those borrowers that enter the repayment period is significantly worse than those still in the draw period, with 8% of borrowers more than 30 days past due at June 30, 2014. While this warrants close monitoring, PNC's reserves and capital should be sufficient to withstand higher levels of related delinquencies, losses and modifications. Further, PNC has been monitoring this risk for several years now, and it is incorporated into the loan loss reserves. Since the HELOCs set to convert relatively evenly over the next several years, this should allow PNC to restructure or provision without any overwhelming burden on one particular year.

RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT

As PNC is one of the highest-rated large regional banks, an upgrade is currently viewed as unlikely over the near term. However, a sustained and meaningful improvement in earnings that exceeds peer averages, without compromising the company's risk parameters, which sustains a strong capital profile could lead to ratings momentum over the long-term.

PNC's ratings are underpinned by the stability in its strategic direction and risk appetite. To the extent that PNC were to veer away from its historical competencies, Fitch would evaluate any new strategic direction or increased risk taking for rating implications. Viewed as also unlikely, there may be negative ratings pressure if PNC were to report meaningful deterioration in asset quality, coupled with weaker profitability metrics, or aggressive capital management.

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. PNC may attempt to monetize some of its ownership in BlackRock over time given the concentration risk that resides with such a large holding in one company. BlackRock contributed approximately 10% of consolidated income in 1H14, and provided nice revenue diversification. As such, Fitch would monitor any divestiture closely for ratings impact, as PNC's risk-adjusted earnings profile is one of the key rating drivers.

KEY RATING DRIVERS - HOLDING COMPANY

PNC's IDR and VR are 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 default probabilities.

RATING SENSITIVITIES - 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 the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely though for PNC given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that PNC may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

PNC has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, PNC is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

PNC's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by PNC and by various issuing vehicles are all notched down from PNC or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by PNC and its subsidiaries are primarily sensitive to any change in PNC's VR.

KEY RATING DRIVERS - SUBSIDIARY AND AFFILIATED COMPANY

The IDRs and VRs of PNC's other major rated operating subsidiaries are equalized with PNC's IDR reflecting Fitch's view that these entities are core to PNC's business strategy and financial profile. These entities include: PNC Funding Corp and National City Credit Corp, whose IDRs would be sensitive to the same factors that might drive a change in PNC's IDR.

RATING SENSITIVITIES - SUBSIDIARY AND AFFILIATED COMPANY

As the IDRs and VRs of the subsidiaries are equalized with those of PNC to reflect support from their ultimate parent, they are sensitive to changes in the parent's propensity to provide support, which Fitch currently does not expect, or from changes in PNC's IDRs.

To the extent that one of PNC's subsidiary or affiliated companies is not considered to be a core business, Fitch could also notch the subsidiary's rating from PNC's IDR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

PNC's uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by PNC and its subsidiaries are primarily sensitive to any change in PNC's long- and short-term IDRs.

Fitch has affirmed the followings:

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+';

--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

--Long-term IDR at 'A+'; Outlook Stable;

--Senior unsecured at 'A+';

--Subordinated at 'A';

--Short-term IDR at 'F1';

--Short-term debt at 'F1';

--Support at '5';

--Support floor at `NF'.

PNC Financial Corp.

--Subordinated at 'A'.

PNC Capital Trust C

--Fort Wayne Capital Trust I

--Trust preferred at 'BBB'.

PNC Preferred Funding Trust I, II

--Hybrid capital instruments at 'BBB'.

National City Credit Corporation

--Short-term IDR at 'F1';

--Support at '5';

--Commercial paper at 'F1'.

National City Corporation

--Senior unsecured at 'A+';

--Subordinated at 'A';

--Convertible preferred (trust preferred securities) at 'BBB';

--Preferred stock at 'BBB-'.

National City Bank (Cleveland)

--Long-term deposits at 'AA-';

--Senior unsecured at 'A+';

--Subordinated 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-'.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral) (July 15, 2014);

--'Risk Radar Global 3Q14' (September 15, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891935

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Contacts

Fitch Ratings
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com
or
Primary Analyst
Julie Solar, +1-312-368-5472
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Justin Fuller, +1-312-368-2057
Senior Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director

Contacts

Fitch Ratings
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com
or
Primary Analyst
Julie Solar, +1-312-368-5472
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Justin Fuller, +1-312-368-2057
Senior Director
or
Committee Chairperson
Joo-Yung Lee, +1-212-908-0560
Managing Director