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Morgan Alcalay

PNC AT A GLANCE

P/E ► 25.5 AVG EV/EBITDA ► 13.6 AVG ROA ► 1.7% AVG ROE ► 2.8% AVG Debt to Equity ► 9.25 AVG Interest Coverage Ratio ► 2.72 HIGH

 

 

 

 

 

 

PNC Bank (NYSE:PNC) is a regional bank with ~ 1,100 branches in the eastern United States.^[1]

Unlike other banks, a large percentage of PNC Bank's income - 47% in fiscal 2007 - comes from non-interest, or fee-based, revenue.^[2] As other banks have faced increasing default rates on loans and mortgages, PNC Bank has maintained a steadier stream of income because its interest income makes up a smaller percentage of its total revenue. However, PNC Bank is still highly exposed to commercial real estate construction, home equity loans, and residential mortgages, with more than 45% of its loan portfolio in these three asset classes.^[3] This has led to a record $315 million provision for loan losses in fiscal 2007.^[4]

Approximately 17% of PNC Bank's net income comes from the company's 33% ownership stake in asset manager BlackRock (BLK).^[5] This revenue is recorded by the equity method, under which PNC claims 33% of BlackRock's revenues and net income. Any increase in the value of BlackRock (BLK) will therefore add to the value of PNC Bank.

In 2008 PNC acquired National City Bank for $5.58 billion. ^[6]

Company Overview

PNC Bank is a regional bank and financial services institution with banking outlets throughout the eastern United States. Through its four business segments - Retail Banking, Corporate and Institutional Banking, Global Investment Servicing, and BlackRock - PNC Bank provides both interest revenue-based traditional banking and fee-based services for large investors and investment funds. Unlike other regional banks, a large percentage - 47% in fiscal 2007 and 52.3% for the first half of 2008^[2][7] - of PNC's revenue is non-interest. Because of PNC's relative independence from interest income, the company is protected during periods of changing interest rates.

Business and Financial Metrics

Interest income in fiscal 2007 increased nearly 30% from 2006 mainly due to a corresponding increase in interest earning assets.^[8] With the fiscal 2007 acquisition of Mercantile Bancshares Corporation and Yardville National Bancorp, PNC added over $24 billion to its assets.^[3] Additionally, net interest margin increased from 2.92% to 3.00%in fiscal 2007, meaning that PNC received .08% more interest for each dollar it loaned in 2007 than in 2006.^[8]

Non-interest income decreased in fiscal 2007 due to a change in the accounting method used to account for income from the company's share in BlackRock (BLK). In 2006, BlackRock (BLK) entered an agreement with Merrill Lynch (MER) to acquire Merrill Lynch's investment management segment through the issuance of new common stock and preferred stock. With the acquisition, total outstanding shares of BlackRock (BLK) increased, while the number of shares that PNC owned remained constant. Because of this, PNC recorded a one time gain of $2.1 billion^[9] in non-interest income, reflecting the increase in the value of BlackRock (BLK), while lowering its stake in BlackRock (BLK) to 34% from 70%. ^[10] This smaller share caused PNC to change its accounting method for BlackRock (BLK) income from consolidated statements to the equity method. ^[9] Omitting these factors, PNC's non-interest revenue increased by 10% in fiscal 2007, due to higher deposit service and corporate service revenues.^[9]

Business Segments

PNC Net Income by Segment^[5]

PNC operates in four segments: retail banking, corporate and institutional banking, global investment servicing, and asset management.^[11] This mix of fee-based and interest-based services helps shelter PNC from adverse credit markets and allow it to grow even when interest rate spreads decrease.

Retail Banking (56% of revenue, 61% of net income)^[5]

In fiscal 2007, Retail Banking posted $893 million in net income on revenues of $3.8 billion.^[5] The segment provides deposit, lending, brokerage, trust, investment management, and cash management services to approximately 2.9 million consumer and small business customers. With more than 1100 branches and 3900 ATMs^[11], this segment operates primarily in Pennsylvania, New Jersey, Washington, DC, Maryland, Virginia, Ohio, Kentucky and Delaware.^[12] PNC has focused on acquisitions to grow its geographic footprint, acquiring small regional banks Mercantile Bankshares Corporation, Sterling Financial Corporation, and Yardville National Bancorp in fiscal 2007.^[12] Additionally, PNC operates a fee-based brokerage, PNC Investments, with over $73 billion under management.^[11][13]

Corporate and Institutional Banking (23% of revenue, 29% of net income)^[5]

In fiscal 2007, Corporate and Institutional Banking posted $432 million in net income on revenues of $1.5 billion.^[5] The segment provides lending, treasury management, and capital markets-related products and services to mid-sized corporations, government entities, and large corporations.^[12] The largest part of this segment is PNC's asset based lending, wherein a loan is secured by a corporation's asset, and real estate lending.^[11] Although the loan loss provision for corporate and institutional banking increased by $85 million to $125 million in fiscal 2007, much of the increase was due to commercial real estate loans absorbed during PNC's acquisition of Mercantile Bankshares Corporation.^[14]

Global Investment Servicing (12% of revenue, 9% of net income) ^[5]

In fiscal 2007, Global Investment Servicing posted $128 million in net income on revenues of $831 million.^[5] This segment provides investing services to both large mutual fund and hedge fund managers as well as small investors. Services include offering fund accounting and administration services, transfer agency and shareholder services, global custody and securities lending services, subaccounting services, managed account services, alternative investment services, banking transaction services.^[11] PNC has focused its growth on this segment through acquisitions of companies that offer new services to investors. In 2007, the company acquired Albridge Solutions Inc., a provider of portfolio accounting and enterprise wealth management services, and Coates Analytics Group LP, a provider of Web-based analytics tools.^[15]

BlackRock (5% of revenue, 17% of net income^[5]

With 33.5% ownership in asset manager BlackRock (BLK), PNC posted $253 million in net income on revenues of $338 million in fiscal 2007.^[5] BlackRock (BLK) works on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, liquidity and alternative investment products.^[11] As of 2Q2008, BlackRock (BLK) had $1.42 trillion of assets under management and performed risk management, strategic advisory and enterprise investment system services to clients with portfolios totaling more than $7 trillion.^[16]

Key Trends and Forces

PNC Bank Is Not Exposed to Subprime Loans, But Its Outstanding Loans Are Affected by the Credit Crisis

Although PNC Bank does not have any subprime loans,^[17] it is affected by the secondary effects of falling house prices and decreased demand for new home construction. When housing prices fall, homeowners with home equity loans find themselves with more in loans than there house is worth. Similarly, developers find themselves building projects that may be worth far less than the cost to build them. With 48% of its $68 billion loan portfolio in commercial real estate projects, home equity loans, and residential mortgages^[3], PNC Bank is highly affected by the 2007 credit crunch. In fiscal 2007, PNC Bank's nonperforming loans increased to $478 million from $171 million in 2006.^[18] Additionally, PNC Bank owns $26 billion of commercial and residential mortgage backed securities classified as securities available for sale.^[19] If the underlying mortgages default, these securities will lose value and the company will have to record them at a lower value.

PNC Bank Must Take on Mercantile and Yardville's Assets Without Being Overwhelmed By Their Bad Debt

With its acquisition of Mercantile Bankshares Corporation, PNC increased its total assets by $21 billion, including $12.5 billion in deposits, a 20% increase from the company's 2006 average of $101.82 billion.^[20][21][12] Besides the increase in assets, PNC Bank must also integrate Mercantile's 235 branches into PNC's existing network. Additionally, with the acquisition of Yardville, PNC Bank gained another $2.6 billion in assets. Although this acquisition was much smaller, it forced PNC Bank to increase its provision for loan losses by $45 million to account for bad debt inherited from Yardville.^[12][8] In order for PNC Bank to increase revenues, it must write off any bad debt from these two companies and integrate them into current operations.

Competition

PNC is the 14th largest bank holding company by domestic deposits.^[22] The company faces competition for deposits from both national banks and regional banks in the northern United States.

Regional Competitors

• National City (NCC) is the 11th largest bank holding company by domestic deposits.^[22] With 1400 retail banking branches in 9 states, National City and PNC intersect in Ohio, Indiana, Kentucky, and Pennsylvania.^[23][24] Addtionally, National City has a larger percentage of its loans in mortgages, and operates 410 retail mortgage outlets throughout the United States.^[23]

• Toronto Dominion Bank (TD), operating under the names Commerce Bank and TD Banknorth in the United States, is the 20th largest bank holding company by domestic deposits.^[25] With 1100 retail banking branches in 13 states, Toronto Dominion Bank and PNC intersect in Pennsylvania, New Jersey, Maryland, Virginia, Delware, and Washington DC.^[26] Additionally, Toronto Dominion Bank has large wealth management subsidiaries, the discount brokerage TD Waterhouse, and the online brokerage TD Ameritrade.^[26]

National Competitors

• Bank of America (BAC) is the largest bank holding company by domestic deposits.^[25] With 6100 retail banking branches in 32 states, Bank of America and PNC intersect in Pennsylvania, New Jersey, Maryland, Virginia, Delaware, Kentucky, Indiana, and Washington DC.^[27] Bank of America also operates in 30 foreign countries.^[27][28]

• Wachovia (WB) is the third largest bank holding company by domestic deposits.^[25] With 3,300 retail banking branches in 21 states, Wachovia and PNC intersect in Pennsylvania, New Jersey, Maryland, Virginia, and Delaware.^{[29] [30]} Wachovia also has a large brokerage unit, with 1,500 offices and 19,000 representatives nationwide.^[30]

References

1. ↑ PNC 2007 10-K pg. 37  
2. ↑ ^{2.0 2.1} PNC 2007 10-K pg. 66  
3. ↑ ^{3.0 3.1 3.2} PNC 2007 10-K pg. 25  
4. ↑ ^{4.0 4.1} PNC 2007 10-K pg. 17  
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9} PNC 2007 10-K pg. 35  
6. ↑ Huffington post
7. ↑ PNC 2008 10-Q pg. 1  
8. ↑ ^{8.0 8.1 8.2} PNC 2007 10-K pg. 22  
9. ↑ ^{9.0 9.1 9.2} PNC 2007 10-K pg. 23  
10. ↑ PNC 2067 10-K pg. 41  
11. ↑ ^{11.0 11.1 11.2 11.3 11.4 11.5} Business Overview.
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} PNC 2007 10-K pg. 3  
13. ↑ PNC 2007 10-K pg. 36  
14. ↑ PNC 2007 10-K pg. 40  
15. ↑ PNC 2007 10-K pg. 2  
16. ↑ About BlackRock.
17. ↑ PNC Financial Profit Rises on Corporate Loans.
18. ↑ KEY 2007 10-K pg. 47  
19. ↑ KEY 2007 10-K pg. 26  
20. ↑ KEY 2007 10-K pg. 18  
21. ↑ KEY 2007 10-K pg. 20  
22. ↑ ^{22.0 22.1} Top 50 Bank Holding Companies by Total Domestic Deposits.
23. ↑ ^{23.0 23.1 23.2} National City Corp.
24. ↑ PNC Business Overview.
25. ↑ ^{25.0 25.1 25.2 25.3}
26. ↑ ^{26.0 26.1 26.2} Toronto Dominion Bank About Us.
27. ↑ ^{27.0 27.1 27.2} Bank of America.
28. ↑ Bank of America Investor Fact Book.
29. ↑ Wachovia Locations.
30. ↑ ^{30.0 30.1 30.2} Wachovia Company Facts.