PNC PNC Financial Services Group Inc

PNC Financial Services Group Inc. (PNC) is purchasing RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY) and have signed a definitive agreement in this context. The acquisition of this RBC banking business for $3.45 billion would help PNC to expand its footprint in the Southeast markets. The purchase price of the RBC unit, which has approximately $25 billion of assets, represents $112 million discount to tangible book value.

The Deal Details

The deal would augment PNC’s network with additional 424 RBC branches located in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. This would result in PNC becoming the 5th among U.S. banks with 2,870 branches. Moreover, PNC would inherit $19 billion in deposits and $16 billion in loans from this transaction. In addition, PNC would also acquire certain credit card assets of RBC Bank, (Georgia) National Association. However, Royal Bank of Canada will continue providing other U.S. operations such as capital markets and wealth management services.

The purchase price is however, subject to adjustment at close for actual net tangible asset value delivered, according to the terms of the agreement. PNC has the option to pay up to $1.0 billion of the consideration in common stock, or 3% of PNC's outstanding common shares based on PNC's closing price of $57.79 on June 17, 2011.

The cash part funding will be made by PNC with available cash, debt issuance and a preferred stock offering. The part to be paid in stock will be limited to such an extent so that Royal Bank of Canada's ownership of PNC common stock will not exceed 4.9% of PNC's outstanding common shares right away following the close.

The deal is expected to close in March 2012, subject to customary closing conditions, including regulatory approvals. It has already been approved by the boards of directors of both companies. It is anticipated to be accretive to PNC’s earnings by the end of 2013 or sooner depending on the purchase amount paid in stock.

Merger and integration costs of PNC are projected to be about $322 million and the company plans to reduce RBC Bank’s noninterest expense by approximately $230 million. Estimated internal rate of return of the deal to PNC is in excess of 19%. The purchase price is currently estimated at approximately97% of RBC Bank tangible book value.

A Win-Win Situation

The deal would create a win-win situation for both parties. It would significantly widen PNC’s operating footprint and double its presence in Florida, thereby creating opportunities for growth in future.

On the other hand, RBC, which forayed into the U.S. market in 2001 with the $2.2 billion purchase of North Carolina-based Centura Bank, has suffered significant losses in its U.S. operations. It incurred a $1 billion write-down for its losses with the collapse of the U.S. real estate market and would find the deal price helpful.

The Acquisition Scenario

The financial crisis has opened up opportunities for a number of Wall Street banks to capitalize on as a number of companies are either selling them off or shedding their businesses after suffering losses. In fact last week, Capital One Financial Corp. (COF) announced an agreement to acquire ING Direct USA, the online banking unit of Amsterdam-based ING Groep NV (ING), in a stock-cum-cash transaction valued at $9.0 billion.

The deal would catapult the company to the fifth position from the present eighth, in terms of deposits in the U.S. The sale of the U.S. unit by ING comes as a condition of receiving the government bailout during the financial crisis.

Recently, as part of its effort to expand, PNC completed the acquisition of 19 branches from a subsidiary of BankAtlantic Bancorp Inc. (BBX). Additionally, two related facilities in the Tampa - St. Petersburg area and associated deposits were also handed over to PNC as part of the sale. PNC shelled out a premium for the deposits in the transaction in addition to the net book value of the acquired real estate and fixed assets related to the branches and facilities.

The acquisition would establish PNC’s retail banking footing in the Tampa Bay area. The company can also augment its other businesses by leveraging those branches. BankAtlantic had announced its intention to sell its Tampa operations last August, to concentrate on its prime footprint in Southeast Florida where it presently has 79 branches. Notably, the company had incurred significant losses in the recent years from its soured real estate loans.

Our Take

PNC’s continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. Moreover, benefits from the 2008 National City acquisition continue to exceed the company's expectations. We also believe that the company’s latest acquisition spree would be accretive to its revenue.

However, we expect the top line to remain restricted in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory initiatives also remain headwinds to both top and bottom lines.

PNC shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation. Considering its fundamentals, we also have a Neutral recommendation on the stock.

 
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