DBRS Morningstar Confirms PNC at A (high) on BBVA USA Acq. Announcement; Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of PNC Financial Services Group, Inc. (PNC or the Company), including the Company’s Long-Term Issuer Rating of A (high). The trend for all ratings is Stable. The ratings action follows the announcement by PNC that it is buying BBVA USA Bancshares, Inc. (BBVA USA), the U.S. unit of Spanish banking company BBVA, for $11.6 billion in cash. The deal is expected to close in mid-2021, subject to customary closing conditions and regulatory approvals.

KEY RATING CONSIDERATIONS
The confirmation of PNC’s ratings reflects DBRS Morningstar’s view that the combination is a solid strategic fit, with attractive growth prospects, which accelerates PNC’s strategy to build a national footprint. Additionally, significant cost savings opportunities have been identified and there is the added potential for revenue opportunities, as PNC introduces its deeper product offerings to BBVA USA’s franchise.

While DBRS Morningstar is wary of the substantial integration risk associated with such a large transaction, these concerns are somewhat mitigated when considering PNC’s proven track record of strengthening its franchise through successfully acquiring and integrating other large banking franchises. This transaction follows PNC’s sale of its ownership stake in BlackRock, which significantly enhanced PNC’s balance sheet and boosted capital levels, providing the dry powder to pursue opportunistic transactions such as BBVA USA.

RATING DRIVERS
Over the longer term, if PNC successfully integrates the BBVA transaction and delivers on its transaction assumptions including earnings growth, the ratings would be upgraded. Conversely, a weaker-than-peer performance reflecting a sustained deterioration in core earnings or asset quality, or if the merger integration is poorly executed, the ratings would be downgraded.

RATING RATIONALE
DBRS Morningstar sees the transaction as positive for PNC’s franchise. On a pro-forma basis, the combined company would become the fifth largest U.S. bank, with $564 billion in total assets with expanding market share positions across an attractive and fast growing footprint. Specifically, adding approximately $102.4 billion in assets, the acquisition will enhance PNC's domestic footprint, especially in Texas and other states in the fast growing Sunbelt. Unlike other recent bank transactions, the branch overlap of the two franchises is not significant, which may aid with integration as well as regulatory approval.

DBRS Morningstar expects the combination to provide tangible cost savings as well as revenue growth opportunities. Indeed, PNC has identified $900 million in annual cost savings to be realized by 2022 primarily associated with overlap of management and regulatory costs. Additionally, the combined entity will be able to leverage its considerable scale to increase investments in technology.

Importantly, credit fundamentals are expected to remain solid, providing key support to the ratings confirmation and maintenance of the Stable trend. Specifically, the combined company is expected to have a proforma CET1 ratio of approximately 9.3% at closing, in line with the levels prior to the gain from the sale of BlackRock. Additionally, DBRS Morningstar considers the gross loan mark to be conservative at 3.9% of BBVA USA loans.

Headquartered in Pittsburgh, PNC Financial Services Group, Inc. reported total assets of $462 billion as of September 30, 2020.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for PNC are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile –Strong; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrs.com.

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