PNC FINANCIAL SERVIC

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PNC Financial Services : Fitch Affirms PNC Financial at 'A+', Outlook Stable Following Announced Purchase of BBVA USA

11/17/2020 | 05:07am

Fitch Ratings has affirmed PNC Financial Services Group, Inc.'s (PNC) Long-Term Issuer Default Rating (LT IDR) at 'A+' following its announced proposed purchase of BBVA Bancshares USA (BBVA USA).


The Rating Outlook remains Stable.


A full list of rating actions is at the end of this rating action commentary.


PNC's announced purchase of BBVA would create a bank with over $550 billion in assets at close. The consideration for this proposed all-cash purchase is $11.6 billion, or 1.34x BBVA USA's tangible book value (TBV).


The transaction is projected to close in mid-2021, subject to customary closing conditions, including regulatory approvals.


KEY RATING DRIVERS


IDRS and VIABILTY RATING (VR)


The affirmation of PNC's ratings reflect Fitch's view that risks associated with integration of such a large transaction are offset by the strategic and financial benefits as well as PNC's proven ability to execute on past large transactions.


The affirmation and Stable Outlook also reflect that Fitch had expected PNC to use the $11.1 billion of after-tax proceeds it received from the sale of its stake in BlackRock in 2Q20 on a material acquisition. At the close of the proposed transaction, PNC estimates that its regulatory common equity tier 1 (CET1) ratio will be 9.3% compared to 11.7% at 3Q20 and 9.4% at 1Q20 (pre-BlackRock sale). Fitch had not expected CET1 ratio to remain above 11.0% over the typical rating time horizon of 12 to 24 months as management had indicated that it could potentially deploy the excess capital opportunistically for future franchise enhancing acquisitions, which was incorporated in the current ratings and Stable Outlook.


Fitch believes the proposed purchase of BBVA USA by PNC is indeed franchise enhancing as it will augment the bank's already sufficient presence in the Southeastern United States while also expanding its footprint to demographically attractive Texas, Colorado and Arizona. At closing, the company will have a near-national franchise with a presence in 29 of the 30 largest markets in the U.S., allowing PNC to compete with U.S. G-SIB peers from a position of strength, in Fitch's view.


Fitch believes there are notable execution risks associated with the proposed purchase, particularly around realizing targeted returns during a reasonable time frame. However, in Fitch's view, these risks are somewhat mitigated by the relatively low purchase price multiple PNC is paying and the pro forma allowance for credit losses (ACL) related to BBVA USA's legacy loan book which is projected to be 3.85%. Fitch also notes that management at PNC has shown a strong ability to execute on past large acquisitions such as National City during the last economic downturn as well as the purchase of Royal Bank of Canada's U.S. bank in 2011.


HOLDING COMPANY AND SUBSIDIARIES


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.


The VR of PNC Bank, National Association (PNCBNA) is equalized with PNC's VR reflecting Fitch's view that these are core to PNC's business strategy and financial profile.


LONG- AND SHORT-TERM DEPOSIT RATINGS


The uninsured deposit rating of PNCBNA is rated one notch higher than PNCBNA'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.


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. The IDRs and VRs do not incorporate any support.


SUBORDINATED DEBT AND OTHER HYBRID SECURITIES


Subordinated debt and other hybrid capital issued by PNC are all notched down from the common VR in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably.


PNC's holding company-issued subordinated debt is two notches below the bank's VR. In accordance with Fitch's Bank Rating Criteria, this reflects the baseline notching for loss severity of two notches. PNC's holding company-issued subordinated debt does not meet the specific conditions under our criteria for applying a one notch variance from the VR.


PNC's bank-level subordinated debt is notched one level below its VR for loss severity. In accordance with the Bank Rating Criteria, this reflects alternate notching to the base case of two notches due to Fitch's view of U.S. regulators' likely approach to early intervention and resolution alternatives under U.S. law.


PNC's preferred stock rating of 'BBB' is notched four levels below its VR. This encompasses two notches for non-performance and two notches for loss severity. PNC's trust preferred securities remain four notches from the VR, encompassing two notches for non-performance and two notches for loss severity.


SENIOR DEBT


PNC's holding company senior unsecured debt rating is one notch below its LT IDRs, reflecting expected below average recoveries in a resolution scenario given the fact that its debt buffers are clearly below 10% of risk-weighted assets (RWA).


PNC's bank-level senior unsecured debt rating is equalized with its LT IDR. This reflects the use of alternate notching for its subordinated debt, as applicable, of one-notch in which case the agency does not notch down senior unsecured debt. It also reflects the expectation of average recoveries for senior unsecured debt holders at the bank-level driven by Fitch's view of U.S. regulators' likely approach to early intervention and resolution alternatives under U.S. law.


RATING SENSITIVITIES


IDRs and VRs


Factors that could, individually or collectively, lead to negative rating action/downgrade:


Fitch is sensitive to the timing of this proposed acquisition. The agency continues to expect a more-challenging operating environment due to the coronavirus pandemic, which will likely translate into higher credit losses across the industry as well as more depressed earnings performance for most U.S. banks. Should Fitch observe that the ACL associated with BBVA USA's legacy loan book is not sufficient in light of deteriorating economic conditions such that it adversely impacts PNC's earnings and capital, the bank's rating would likely be pressured.


Moreover, post-close, should PNC manage its reported CET1 ratio below 9% for a number of quarters while its execution of the proposed acquisition is in its infancy, the bank's rating and/or Rating Outlook would likely be adversely impacted. Moreover, integration failures that cause PNC to not successfully achieve deal economic forecasts could pressure the rating.


Factors that could, individually or collectively, lead to positive rating action/upgrade:


Fitch does not foresee an upgrade in PNC's ratings over the near term in light of the pending purchase as well as likely lingering risks associated with the continued economic fallout from the coronavirus pandemic.


However, over the medium term, if the bank adequately executes on this strategically compelling transaction that enhances its overall business model and franchise, in Fitch's view, while maintaining its perceived conservative risk appetite, the bank could see positive ratings momentum. This would also be predicated on the bank continuing to have an earnings profile in-line with higher rated peers, maintenance of capital at appropriate levels, and consistent asset quality measures.


HOLDING COMPANY AND SUBSIDIARIES


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. Fitch does not expect such a scenario at PNC's current high rating levels.


LONG- AND SHORT-TERM DEPOSIT RATINGS


The long- and short-term deposit ratings are sensitive to any change to PNCBNA's Long-and Short-Term IDRs.


SUPPORT RATING AND SUPPORT RATING FLOOR


Since PNC's SR and SRF are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.


SUBORDINATED DEBT AND OTHER HYBRID SECURITIES


Subordinated debt and other hybrid ratings are primarily sensitive to any change in PNC's VR.


SENIOR DEBT


Senior debt ratings are sensitive to changes in the IDR. The ratings of PNC's holding company issued senior debt are also sensitive to Fitch's analysis to determine whether the amount of debt buffers is clearly below 10% of risk-weighted assets.


BEST/WORST CASE RATING SCENARIO


International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]


REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING


The principal sources of information used in the analysis are described in the Applicable Criteria.


ESG CONSIDERATIONS


Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg


RATING ACTIONS


ENTITY/DEBT RATING PRIOR


PNC Bank, National Association LT IDR A+ Affirmed A+


ST IDR F1 Affirmed F1


Viability a+ Affirmed a+


Support 5 Affirmed 5


Support Floor NF Affirmed NF


senior unsecured


LT A+ Affirmed A+


subordinated


LT A Affirmed A


long-term deposits


LT AA- Affirmed AA-


short-term deposits


ST F1+ Affirmed F1+


senior unsecured


ST F1 Affirmed F1


National City Bank of Kentucky


long-term deposits


LT AA- Affirmed AA-


PNC Funding Corp


senior unsecured


LT A+ Affirmed A+


senior unsecured


ST F1 Affirmed F1


PNC Capital Trust C


preferred


LT BBB Affirmed BBB


National City Bank (Cleveland)


senior unsecured


LT A+ Affirmed A+


short-term deposits


ST F1+ Affirmed F1+


Provident Bank (The)


long-term deposits


LT AA- Affirmed AA-


PNC Financial Services Group, Inc. LT IDR A+ Affirmed A+


ST IDR F1 Affirmed F1


Viability a+ Affirmed a+


Support 5 Affirmed 5


Support Floor NF Affirmed NF


subordinated


LT A- Affirmed A-


preferred


LT BBB Affirmed BBB


senior unsecured


LT A Affirmed A


senior unsecured


ST F1 Affirmed F1


VIEW ADDITIONAL RATING DETAILS


Additional information is available on www.fitchratings.com


(C) 2020 Electronic News Publishing, source ENP Newswire

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