In a regulatory filing with the Securities and Exchange Commission last week, PNC Financial Services Group Inc. (PNC) disclosed that its wholly owned subsidiary, PNC Funding Corp., has accomplished the sale of $500 million in debt securities through a public offering. The company sold 3% senior notes due May 19, 2014. The proceeds would be used for general corporate purposes.
PNC Financial continues to strengthen its balance sheet with a focus on risk and expense management. Moreover, benefits from the National City acquisition continue to exceed the company’s expectations.
With one of the most attractive business mixes in the banking industry, PNC Financial is making decent progress on improving its core profitability while coming out of the cycle, with a higher net-interest margin, stronger fee income and improved efficiency.
We expect PNC Financial to perform better than its peer group due to its limited dependence on and exposure to the credit environment as more than half of its revenue is derived from fee businesses. The company has taken a great deal of credit risk out of its balance sheet in recent years, exiting businesses such as credit card, indirect auto lending, as well as non-relationship syndicated loans.
PNC Financial’s first quarter earnings came in ahead of the Zacks Consensus Estimate by 10 cents. Results were helped by a lower provision for losses coupled with a modest increase in revenues.
Currently, we are concerned over the weak demand for PNC Financial’s loans in the upcoming quarters. Both commercial lending and consumer lending businesses have witnessed a decline, but commercial lending has been the worst hit.
Though this trend eased somewhat at the end of 2009, given PNC’s lower utilization levels for commercial lending among middle market and large corporate clients, we expect a weak loan demand and low utilization rates until the economy improves.
Additionally, though credit metrics have stabilized over the past few quarters, we believe an improvement will take longer, given the sluggish economic recovery. As of now, we have a Neutral recommendation on the stock.
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