PNC PNC Financial Services Group Inc

PNC Financial Services Group Inc. (PNC) is in an expansion mode. Last week, the company completed acquiring the 27-branch retail bank franchise in Georgiafrom Flagstar Bank, a subsidiary of Flagstar Bancorp Inc. (FBC).

Flagstar Bank sold the leases associated with the branches and the associated businesses and retail deposits worth approximately $210 million at the closing.  PNC paid the Bank net book value of the acquired real estate and fixed and other personal assets associated with the branches.

A Win-Win situation

The deal is a strategic fit for both PNC Financial and Flagstar Bank. For PNC Financial the acquisition will expand operations in Atlanta and add to its competitive edge. With over 70 branches located in the Atlanta metro area, including those that it plans to add from its pending acquisition of RBC Bank (USA), this purchase would aid in expanding its retail banking business. It would also leverage its corporate banking and wealth management prospects.

On the other hand, the sale of these branches would facilitate Flagstar to focus on its core markets. Efforts and resources can be employed to enhance the Michigan retail and commercial banking divisions and New England commercial banking operations.

PNC Financial was already one of the leading bank wealth managers in the country. The acquisition of National City in December 2008 has clearly strengthened its position and created a significant growth potential in new high-net-worth and institutional markets. The acquisition increased its deposit base and provided a larger distribution platform for cross-selling the company’s products and services.

In an effort to expand its business in the Southeast markets, PNC Financial has also signed a definitive agreement to purchase RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY). This acquisition would make PNC Financial the fifth among U.S. banks, with 2,870 branches.  The deal is expected to close in the first quarter of 2012.

PNC expects the acquisition of RBC Bank (USA) to be immediately accretive to earnings (excluding integration costs) upon closing. The acquisition remains subject to regulatory approvals, including that from the Board of Governors, and other customary closing conditions.

In mid-2011, PNC Financial also 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’s continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. 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.

Yet, the top line is expected to remain subdued in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory issues also remain an overhang.

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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