PNC Financial Services (PNC)

TOP CONTRIBUTORS

Morgan Alcalay

Andrew Lewis

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

Unlike other banks, a large percentage of PNC Bank's income 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]

Some of PNC Bank's net income comes from the company's 33% ownership stake in asset manager BlackRock (BLK).^[4] 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. Additionally, in 2008 PNC purchased National City, expanding its market share in the Eastern US.

Company Overview

PNC Bank is a regional bank and financial services institution with banking outlets throughout the eastern United States. Through its six business segments, 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 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^[5]

In 2009, PNC generated a net income of $2.4 billion on revenues of $12.09 billion. This represents a 162.9% increase in net income and a 157.8% increase in total revenue from 2008, when the company earned $914 million on $6.30 billion in total revenues. This spike in profitability was driven by a 135.7% jump in interest income as the effects of the 2008 financial crisis tapered.

Business Segments^[6]

PNC operates in six segments. As a result, it generates a mix of fee-based and interest-based services that help to shelter the company from adverse credit markets and allow it to grow even when interest rate spreads decrease.

Retail Banking (39.5% of total revenues)

This 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 11,00 branches and 3,900 ATMs^[7], this segment operates primarily in Pennsylvania, New Jersey, Washington, DC, Maryland, Virginia, Ohio, Kentucky and Delaware.^[8] 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.^[8] Additionally, PNC operates a fee-based brokerage, PNC Investments, with over $73 billion under management.^[7][9]

Corporate and Institutional Banking (36.4% of total revenues)

This segment provides lending, treasury management, and capital markets-related products and services to mid-sized corporations, government entities, and large corporations.^[8] 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.^[7]

Asset Management Group (0.7% of total revenues)

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.^[7] 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.^[10]

BlackRock (1.8% of total revenues)

BlackRock (BLK) works on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, liquidity and alternative investment products.^[7]

Residential Mortgage Banking (3.0% of total revenues)

This is a segment established in 2009 for selling residential mortgages.

Distressed Assets Portfolio (0.6% of total revenues)

This segment manages distressed assets that the company holds in the wake of the 2008 financial crisis.

^[6]

Key Trends and Forces

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.^[11][12][8] 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. 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.^[13] The company faces competition for deposits from both national banks and regional banks in the northern United States.

Regional Competitors

• 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.^[14] With 1,100 retail banking branches in 13 states, Toronto Dominion Bank and PNC intersect in Pennsylvania, New Jersey, Maryland, Virginia, Delware, and Washington DC.^[15] Additionally, Toronto Dominion Bank has large wealth management subsidiaries, the discount brokerage TD Waterhouse, and the online brokerage TD Ameritrade.^[15]

National Competitors

• Bank of America (BAC) is the largest bank holding company by domestic deposits.^[14] 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.^[16] Bank of America also operates in 30 foreign countries.^[16][17]

• Wachovia (WB), now owned by Wells Fargo (WFC) , is the third largest bank holding company by domestic deposits.^[14] With 3,300 retail banking branches in 21 states, Wachovia/Wells Fargo and PNC intersect in Pennsylvania, New Jersey, Maryland, Virginia, and Delaware.^{[18] [19]} Wachovia/Wells Fargo also has a large brokerage unit, with 1,500 offices and 19,000 representatives nationwide.^[19]

References

1. ↑ PNC 2007 10-K pg. 37  
2. ↑
3. ↑
4. ↑
5. ↑ PNC 2009 10-K pg. 20  
6. ↑ ^{6.0 6.1} PNC 2009 10-K pg. 49  
7. ↑ ^{7.0 7.1 7.2 7.3 7.4}
8. ↑ ^{8.0 8.1 8.2 8.3} PNC 2007 10-K pg. 3  
9. ↑ PNC 2007 10-K pg. 36  
10. ↑ PNC 2007 10-K pg. 2  
11. ↑ KEY 2007 10-K pg. 18  
12. ↑ KEY 2007 10-K pg. 20  
13. ↑ Top 50 Bank Holding Companies by Total Domestic Deposits.
14. ↑ ^{14.0 14.1 14.2}
15. ↑ ^{15.0 15.1} Toronto Dominion Bank About Us.
16. ↑ ^{16.0 16.1} Bank of America.
17. ↑ Bank of America Investor Fact Book.
18. ↑ Wachovia Locations.
19. ↑ ^{19.0 19.1} Wachovia Company Facts.