PNC PNC Financial Services Group Inc

We have reiterated our Neutral recommendation on PNC Financial Services Group Inc. (PNC).  The reaffirmation follows a detailed analysis of the company’s fundamentals, its strengths, opportunities, weaknesses and recent acquisitions sprees as well as the current economic environment.

PNC Financial’s first-quarter 2011 adjusted earnings of $1.57 per share were ahead of the Zacks Consensus Estimate of $1.37. Results reflected a substantial contraction in provision for credit losses, lower non-interest expenses, a strong balance sheet and an improved credit quality. However, revenues were lower due to a challenging operating environment.

PNC Financial stands solid from the balance sheet perspective. The company was core funded with a loan to deposit ratio of 82% as of March 31, 2011 and a strong bank liquidity position to support growth. We expect the company to post a growth in book value. Dividend increase also augurs well, and we anticipate share buybacks in the upcoming quarters.

Continued strengthening of balance sheet, with a 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.

PNC Financial recently completed the acquisition of 19 branches from a subsidiary of BankAtlantic Bancorp Inc. (BBX). This establishes PNC’s retail banking footing in the Tampa Bay area, and the company can also expand its other businesses by leveraging those branches.

In an effort to expand its business in the Southeast markets, PNC Financial has also recently signed a definitive agreement to purchase RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY). The deal, which is expected to close in March 2012, is subject to customary closing conditions, including regulatory approvals. It has already been approved by the boards of directors of both companies.

This deal is anticipated to be accretive to PNC’s earnings by the end of 2013 or sooner depending on the purchase amount paid in stock. This acquisition would result in PNC Financial becoming the 5th among U.S. banks, with 2,870 branches.

Yet, regulatory issues and top-line headwinds continue to restrict robust development at PNC Financial. Additionally, the low interest rate environment and the tepid economic recovery are adding to its woes.

The company has been experiencing a weak loan demand for the past couple of years, with both commercial and consumer lending businesses witnessing a decline. Though loan demand is showing signs of recovery of late, we believe a significant turnaround still remains elusive.

Hence, the positive and negative seem balanced for the stock and the Neutral recommendation is retained. Additionally, shares of PNC Financial currently retain the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

 
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