PNC Bank Analysis Course Project Gloria Guzman FI564 Management of Financial Institutions Professor Tracy Thompson June 16, 2012 This comprehensive paper will analyze the financial standing of PNC Bank. In the first part o we will look at PNC Bank’s profile, mission statement and future direction. An analysis of PNC’s strengths and weaknesses based on PNC’s financial statements and ratios will be conducted. PNC will also be compared to the industry and to Bank of America.
The Federal Reserve interest rates over the past five years will be correlated to PNC’s Net income for the same timeframe. The analysis will conclude with my forecast for PNC’s future profitability. Business Summary “PNC Financial Services traces its history to the Pittsburgh Trust and Savings Company which was founded in Pittsburgh, Pennsylvania, in 1852. PNC Bank NA. is the principal subsidiary of the PNC Financial Services Group, Inc.
Based in Pittsburgh, Pennsylvania, PNC Bank offers consumer and corporate services in over 2,500 branches in Alabama, Delaware, the District of Columbia, Florida, Georgia, Kentucky, Indiana, Illinois, Maryland, Michigan, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Virginia, West Virginia, & Wisconsin. PNC owns about 35% of publicly traded fund manager BlackRock, which specializes in fixed-income products. BlackRock merged with Merrill Lynch Investment Managers in October 2006, and is now co-owned between PNC, Bank of America, and Barclays.
PNC is currently the seventh largest bank by deposits in the United States, as well as the sixth largest by total assets, fifth in total branches, and is the third largest bank off-premise ATM provider. ” The following is the mission and value statement from PNC’s 2011 annual report, “For more than 150 years, PNC has been committed to providing our clients with great service and powerful financial expertise to help them meet their financial goals. We are also proud of our longstanding istory of supporting the communities we serve – in education and the arts, and in many other ways. Here are the values developed by our employees that have guided us in the past – and continue to guide us today: Performance We apply knowledge, experience and innovation to develop and deliver the right solutions to all of our customers – large and small, retail and commercial. These fundamental skills have been critical to our success in the highly competitive financial industry. Customer Focus
Working hand-in-hand with our financial capabilities is our commitment to know our customers and understand their needs, concerns and aspirations. It’s this combination of financial skills and customer focus that allows us to make it easier for people to manage everyday banking tasks, as well as to meet their most important financial goals. Respect Understanding that great banking and customer service require speed and flexibility, we trust the capabilities, character and judgment of our colleagues, and empower them to make decisions and deliver quality and value for our customers
Integrity We’ve been conducting business with the highest ethical standards for more than 150 years because we know that our customers must be able to trust us to “do the right thing” in all situations and circumstances. Diversity We understand the critical value of our differences, and of our individual and collective strengths and skills. We celebrate this diversity and proudly apply these strengths to our business practices and customer service. Teamwork In our business, you can’t be successful without a commitment to teamwork throughout every level of the organization.
We work together to meet our goals and, in the process, to help our customers meet their goals. Quality of Life We recognize the importance of a healthy balance between business and personal life. We support a commitment to family and personal life, and support our employees as they contribute to the health and well-being of the communities in which they live. ” After reading the mission and value statement, PNC’s focus is on professional service with community involvement. PNC emphasizes knowledge and expertise to provide peace of mind and project confidence in a skeptical environment created by the recent financial crisis.
It emphasizes the long term goal to project a solid, long lasting and successful company. The image it wants to project is one of conservative growth oriented institution with the customer’s interest as a priority. In the words of PNC’s chairman, the future direction of PNC is as follows, “For 2012, we continue to focus on three capital priorities. First, we will build capital to support our clients, increase customer relationships and invest in our businesses. Second, we must maintain appropriate capital in light of global economic uncertainty.
Finally, we expect to return excess capital to shareholders as appropriate, subject to regulatory approval”. This future look into PNC’s operations gives current and future customers a message of PNC’s self control and conservative approach to growth. As the result of the recent crisis, many banks engaged in risky investments jeopardizing the stability of the organization and creating a systemic risk. It seems from PNC’s future direction, they have learned the lesson. Financial Ratios analysis. The primary measure used by regulators and analysts to measure a bank’s capital strength is the Tier 1 capital ratio.
Analyzing this ratio indicates the strength and the bank’s ability to absorb losses. The higher the ratio the better and it is also an indication that the bank is being managed conservatively. As of December 31, 2011, PNC Financial Tier 1 common capital ratio was an estimated 10. 3%, versus 9. 8% as of December 31, 2010. The increase supports the claims from PNC’s management on conservative risk management. For the industry, Tier 1 should not be less than 4%. PNC’s is well over the minimum. The most used financial ratios to evaluate banks will be used below to compare PNC’s past 5 years (based on its historical financial statements). Return on Assets (ROA) is calculated by dividing Net Operating Income by Total Assets. PNC’s ROA on table 1-1 indicate that PNC has generated in 2011 $1. 12 for every $1 in asset. In 2011 PNC’s ROA was 1. 12 a decrease of . 01 from 2010. Despite this drop compared to the industry (1. 10%) and BAC (0%), PNC’s ROA ratio of $1. 2 is above average. PNC is in a good position regarding its ability to generate profits. Table 1-1PNC ROA 20072008 20092010 2011 Return on Assets %| 1. 22| 0. 41| 0. 71| 1. 13| 1. 12| Table 2-1BAC ROA 20072008 2009 2010 2011 Return on Assets %| 0. 3| 0. 14| -0. 11| -0. 16| 0. 00| * Return on Equity (ROE) is calculated by dividing Net Income by Stockholder Equity. This shows additional earning generated by reinvested earnings and capital. PNC’s ROE ratio of 9. 33 in 2011 is very good compared to the industry (8. 84%) and BAC (. 04) in 2011. Table 1-2 PNC ROE 20072008 20092010 2011 Return on Equity %| 11. 44| 4. 38| 7. 24| 10. 01| 9. 33| Table 2-2 BAC ROE 20072008 20092010 2011 Return on Equity %| 10. 77| 1. 81| -1. 33| -1. 77| 0. 04| * Net Margin (profit margin) is calculated by dividing net profit by revenue.
This ratio indicates the profitability of a company’s operations. PNC net margin ratio in 2011 is almost back at pre-crisis level. Even during the recent financial crisis, its ratio was not that low. Comparing it to BAC Net Margin ratio, we see that PNC’s operations are yielding profits. Table 1-3 PNC NM2007 2008 2009 2010 2011 Net Margin %| 21. 88| 12. 27| 12. 34| 19. 84| 20. 93| Table 2-3 BAC NM 2007 2008 2009 2010 2011 Net Margin %| 22. 32| 3. 51| -1. 85| -3. 26| 0. 09| Debt to Equity Ratio (D/E) is calculated by dividing total liabilities by stockholder’s equity. It measures the bank’s financial leverage. It indicates what proportion of equity and debt the company is using to finance its assets. We see once again that PNC has a low Debt to Equity ratio which is a good indication that it does not have to resort to debt in order to finance its assets. The higher the D/E ratio the worse it is for the bank. Table 1-4 PNC Debt to Equity 2007 2008 2009 2010 2011 Debt/Equity| 1. 24| 1. 69| 0. 69| 0. 53| 0. 64|
Table 2-4 BAC Debt to Equity 2007 2008 2009 2010 2011 Debt/Equity| 1. 39| 1. 93| 2. 26| 2. 12| 1. 76| * Loan to Total Asset Ratio is calculated by dividing total loans by total assets. This ratio shows PNC at 58. 63% in 2011 (table 5-1) which means that PNC has . 5863 cents in loans for every $1 in assets. The higher this ratio indicates a bank is loaned up and its liquidity is low. The higher the ratio, the more risky a bank may be to higher defaults. Compared to BAC ratio of 89. 66%, PNC is less risky and more liquid than BAC.
Table 1-5 PNC Loan to Total Assets ratio 2007 2008 2009 2010 2011 Loans (Total) / Total Assets| 49. 18%| 60. 29%| 58. 38%| 56. 98%| 58. 63%| Table 2-5 BAC Loan to Total Asset ratio 200720082009 2010 2011 Loans (Total) / Total Assets| 51. 08%| 51. 24%| 40. 49%| 41. 52%| 43. 19%| * Loans to Deposits ratio is calculated by dividing the total amount of loans by the total amount in deposits. It shows us that PNC lends out . 846 cents of every $1 retained in liquid assets. This ratio is slightly higher than the industry average (79%) but given PNC other liquidity ratios, this does not raise any red flags.
PNC loan to deposit ratio is lower in comparison to BAC ratio of 89. 66% Table 1-6 PNC Loan to Deposit ratio 2007 2008 2009 2010 2011 Loans (Total) / Total Deposits| 82. 61%| 90. 99%| 84. 28%| 82. 12%| 84. 60%| Table 2-6 BAC Loan to Deposit ratio 2007 2008 2009 2010 2011 Loans (Total) / Total Deposits| 108. 84%| 105. 49%| 90. 77%| 93. 07%| 89. 66%| PNC Strengths By far, these days have got to be the toughest for banks but PNC bank has prevailed by maintaining its moderate risk policy. “PNC has always practiced conservatism when it comes to risk.
Its collection of fee-based businesses reduces its exposure to interest rate movements and credit cycles. ” PNC’s conservative approach allowed the company to avoid many of the problems their competitors experienced during the subprime debacle. PNC has performed well in the past few years and raised its Tier 1 common ratio to more than 10%. The financial ratios place PNC above the industry average and reinforce its financial strength. “PNC’s strength is in its core funding with a low-cost deposit franchise that contributes greatly to PNC’s revenues and its moderate-risk profile.
Net-interest income generated from its deposits contributed approximately 27% of overall revenue, while roughly 16% came from loan net-interest income. ” PNC has been able to increase its net income every year, from 2010 to 2011 it increased from 3. 04B to 3. 05B. The largest increase was from 2008 to 2009 which went from 882M to 2. 3B. This increase of 157. 8% was mainly due to a 135. 7% jump in interest income as effects of the financial crisis tapered. PNC’s income did not suffer as much during the crisis as other banks because PNC receives a large percent of its income from non-interest or fee-based revenue.
Because of PNC’s relative independence from interest income, the company is protected during periods of changing interest rates. Other sources of income include BlackRock and a company called PFPC, which are the second largest fund accountant and full-service transfer agent in the world. Also, PNC owns a company called Midland, which is the second-largest commercial mortgage servicer in the United States. PNC is also taking advantage of its strong position to expand and grow. In 2008 PNC purchased National City, expanding its market share in the Eastern US. This acquisition allowed PNC to become the sixth largest bank in the USA.
In addition, PNC is also acquired Bank Atlantic which has increased PNC market in Florida. PNC continues to grow through the acquisition of 27 branches from Flagstar bank making PNC the fifth largest bank in branches in the USA. PNC is still involved in talks with different banks to continue its growth. This together with a well managed moderate risk policy should provide a bright future for PNC. PNC Weaknesses Really, the only potential weakness is the bank’s $2. 1 billion exposure to residential real estate loans, which account for about 2% of its assets.
However, its average credits scores are high and the loan-value ratios remain low. Another area that PNC must be careful with is the acquisition of bad debts and riskier assets and liabilities that come with acquiring other banks. Also, PNC will have to keep tight control on the expense ratios as expansion increases expenses. As with any other bank, new banking regulations and exceptionally low interest rates will continue to affect PNC, but not any greater than any of its competitors. Federal Reserve Interest Rates over the past five years Table 1-7 Series Description| Federal funds effective rate|
Unit:| Percent:_Per_Year| PNC Net Income| Multiplier:| 1| | | | | | | | | | | 2007| 5. 02| | 1. 47 B| 2008| 1. 92| | 882 M| 2009| 0. 16| | 2. 3 B| 2010| 0. 18| | 3. 04 B| 2011| 0. 1| | 3. 05 B| PNC’s earnings are affected by economic and monetary policies. These policy changes affect the supply of money and the general level of interest rates impacting profitability. A change in the level of interest rates affect the spread between the bank’s deposits and loans and as a result impacts the bank’s net interest income. These changes are beyond the bank’s control and they are difficult to predict.
In table 1-7 we can see the effects of the Federal Reserve Rate on PNC’s profitability. From 2007 to 2008 the Federal Reserve made the most drastic change going from 5. 02 to 1. 92, this had a negative effect on PNC’s net income, decreasing from 1. 47 billion to 882 million. The changes in Federal Rate do account for all of PNC’s decrease but it does play a major role. PNC’s profitability has not been affected by the Federal Reserve changes as much as other banks because PNC’s income is diversified amongst different sources, as previously discussed.
The Federal Reserve has announced that it will keep interest rates low at least until 2014. This prepares PNC for a low net income from interest bearing assets and reinforces the importance of growing in other sources of income. Conclusion PNC is financially strong and it holds a well diversified and highly liquid balance sheet. This together with a monitored moderate risk policy will enable PNC to stay in track with their future direction. PNC plans to undertake several strategic acquisitions, engage in new online programs and services.
Based on this analysis of PNC, looking at the industry and comparing it with BAC my forecast for PNC’s is very good. As an investor, I would recommend PNC as a buy. As a consumer I will use PNC for my banking needs. As a matter of fact, my current bank is BAC and after this analysis I am going to switch all of my accounts to PNC. In this industry, banks will not see the same profitability ratios as once they enjoyed but PNC will remain a top performing institution. PNC continues to pay close attention to capital adequacy and for good reason. Banks need sufficient capital to survive changes in the global economy.