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

CHICAGO--()--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, and its consistent performance through time.

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), 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, VRs AND SENIOR DEBT

PNC's rating affirmation reflects the company's strong earnings profile, stable and diverse business model, and its consistent performance through time. 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.

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. This is an important rating consideration and lends support to these institutions' higher ratings.

PNC's capital profile is considered appropriate, particularly in light of its risk profile. PNC has been one of the most consistent banks in the U.S., both from an earnings standpoint and PNC's historical loan losses. At June 30, 2016, PNC's transitional CET1 was 10.64%, slightly below the peer median. PNC has yet to exit parallel run, but it is anticipated the standardized approach will remain the binding constraint. Given its advanced-approach institution status, it will face volatility in accumulated other comprehensive income (AOCI) due to interest rate movements, necessitating the need for an associated capital buffer, which Fitch expects the company to maintain. PNC has yet to publicly state a CET1 target number, though Fitch expects the large regional banks to have long-term targets of between 8% and 9.5%.

PNC's liquidity remains good. At June 30, 2016, 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 disclosed that its estimated pro forma Liquidity Coverage Ratio was in excess of 100% at both the consolidated and bank levels at quarter-end. This more than exceeds the minimum phased-in requirement of 90%, which became effective for Advanced Approach banks on Jan. 1, 2016.

Holding company coverage is also considered solid with approximately $4.8 billion in cash and short-term investments at the parent to cover $1.9 billion in maturities over the next 12 months, as well as ongoing interest expenses, common dividends, and preferred dividends. This does not even include $1.3 billion in bank dividend capacity. PNC continues to have good access to the capital markets.

The credit environment remains quite benign, with just 27bps of loan losses in 1H16. Given the commercial make-up of PNC's loan portfolio, comprising 66% of loans, loan losses can be a bit lumpy from quarter to quarter. However, PNC has historically reported lower loan losses than peers, with less volatility when viewed over many years.

Over the past 12 months, PNC has reported relatively modest loan growth both in absolute and relative terms. The loan mix has shifted somewhat over the past two years to a greater percentage of lower-yielding, but also lower loss content commercial loans, as PNC shrinks its home equity and education portfolios. PNC disclosed in public commentary last year how competitive lending particularly in the C&I space had become, prompting the company to slow lending in this area. The bank has grown C&I loans by just 2% over the past 12 months, as compared to the peer average of 8%. Given Fitch's concerns regarding competition particularly in C&I lending since the financial crisis, this is viewed as prudent.

However, CRE lending has been relatively robust over the past year. PNC disclosed that it grew commercial real estate balances by a significant 16% over the last year alone, mainly in permanent lending given continuing disruptions in the CMBS market. Fitch expects that the inherent credit risk in this newly originated book of loans will be acceptable given PNC's historical track record and sound underwriting practices. Nonetheless, Fitch will monitor this growth for any deterioration upon further loan seasoning.

PNC exposure to the energy sector is on the lower end of the large bank universe. At June 30, 2016, PNC reported $2.7 billion of oil and gas outstandings and around $0.5 billion of coal outstanding balances, or combined roughly 1.5% of total loans. PNC reported some further deterioration in the energy portfolio in 2Q16. However, it is anticipated that any related loan losses will present an earnings headwind, and not erode capital.

PNC has approximately $3.3 billion of HELOCs (currently paying interest only) resetting to fully amortizing loans in the next few years. The performance of those borrowers that enter the repayment period is significantly worse than those still in the draw period, with 3% of balances 30 to 89 days past due at June 30, 2016, and another 5% more than 90 days past due, as compared to just 0.29% past due for the entire home equity portfolio. While this warrants close monitoring, PNC's reserves and capital should be sufficient to withstand higher levels of related delinquencies, losses and modifications. Further, home equity loan losses remain very low, at just 24bps in 1H16, also an improvement from last 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. 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, 2016, PNC had a significant unrecognized pre-tax gain of $5.3 billion (excluding any liquidity discount or deferred tax liability). BlackRock contributed 13% of consolidated income in 1H16 and provided revenue diversification.

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 deposit ratings of PNC Bank, N.A. are rated one notch higher than PNC'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.

HOLDING COMPANY

PNC's IDR and VR are equalized with those of its operating companies and bank, 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 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

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 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.

Based on public commentary PNC has made regarding the regulatory environment, Fitch does not expect PNC to be an active acquirer over the near term. Rather, Fitch expects PNC to continue to execute on its strategy in the Southeast markets, Chicago, and St. Louis, with initiatives to improve penetration and growth in these markets. Any sizeable acquisition would be evaluated for any rating implications.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for PNC and its operating companies' subordinated debt and preferred stock are sensitive to any change to PNC's 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 the potential that Fitch could notch the holding company IDR and 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'.

PNC Preferred Funding Trust I, II

--Hybrid capital instruments 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+';

-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

Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135

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or
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Contacts

Fitch Ratings
Primary Analyst:
Julie Solar, +1-312-368-5472
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst:
Justin Fuller, +1-312-368-2057
Senior Director
or
Committee Chairperson:
Christopher Wolfe, +1-212-908-0771
Managing Director
or
Media Relations:
Hannah James, +1-646-582-4947
New York
hannah.james@fitchratings.com