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FIN376 Final Project

Brenda Jansen

Fall 2013

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Table of Contents:

History………………………………………………………………………………………………………………………………………3

Products and Services……………………………………………………………………………………………………………4-5

Management Structure…………………………………………………………………………………………………………….6

Risk Factors……………………………………………………………………………………………………………………………7-9

Geographic Considerations……………………………………………………………………………………………………..10

Regulatory Considerations………………………………………………………………………………………………….11-12

Profitability……………………………………………………………………………………………………………………………..13

Important Ratios………………………………………………………………………………………………………………..14-28

Investment Criteria……………………………………………………………………………………………………………29-30

Sources…………………………………………………………………………………………………………………………………..31

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History

PNC Financial Services Group, Inc. has a strong financial history dating back to the

1800s. There are many institutions that have come together to make PNC what it is today. The

Pittsburgh National Corporation was originally formed 1852 as Pittsburgh Trust and Savings

Company and is the oldest bank in Pittsburgh. It was the first bank to apply for a charter under

the National Banking Act of 1863. Later, the bank came to be the First National Bank of

Pittsburgh. They joined with Peoples-Pittsburgh Trust Company in 1946 forming Peoples First

National Bank and Trust Company. A new bank was born in 1959 when Fidelity Trust Company

merged with Peoples First which merged with First National. With the new bank came a new

symbol in the shape of a triangle to represent industrial and commercial strength on

Pittsburgh’s Golden Triangle.

PNC also has roots in “the Quaker bank” which is more formally known as Provident Life

and Trust Company. This insurance company was created in 1865. In 1922, the company split

into two separate entities of Provident Mutual Life Insurance Company and Provident Trust

Company. Provident Trust Company of Philadelphia merged with Provident Tradesmens Bank

and Trust Company in 1957 to create Provident National Bank.

Big things started happening in the 1980s when Pennsylvania passed a law in 1982 that

allowed banks to have statewide banking. Two of the first banks to act on this were Pittsburgh

National and Provident National. In 1983, the two banks came together in the largest U.S. bank

merger at the time and used their shared initials to create a new entity called PNC Financial

Corp.

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Products and Services

PNC offers a wide variety of services to all different kinds of customers. They serve

individuals, small businesses, corporations, and government entities. They are different

products and services available to each different group.

In retail banking, PNC provides the typical bank products and services of lending,

deposits, cash management, and investment services. They have over 6 million consumer and

small business customers in 19 states and the District of Columbia. Banking is made to be easy

to access with PNC’s 2,700 branches and 74,000 ATMs as well as online and mobile services. To

help people save and spend smarter and avoid unnecessary fees, PNC created their award-

winner Virtual Wallet. Mike Ley, senior vice president of digital experience said that “The PNC

Virtual Wallet team understands the financial pitfalls individuals face throughout the year.” It is

a great tool to help people with their saving and budgeting.

PNC is also a wealth management group and helps out wealthier individuals by proving

services such as tailored investments, wealth planning, trust and estate administration and

private banking services. Their Wealth Insight product provides customers a real-time view of

assets and portfolio performance. PNC’s Institutional Investments serves companies and not-

for-profit organizations and their retirement plans by being their investment manager and

trustee. PNC also has a multi-strategy investment management organization called PNC Capital

Advisors, LLC to serve the long-term goals of their client by focusing on style purity and risk

management.

PNC also serves the middle market through their Corporate and Institutional Banking.

They are not only one of the leading credit providers to middle market companies but also

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develop lasting relationships with their customers by offering treasury management, capital

markets and international banking services. Harris Williams, PNC’s investment bank is one of

the most successful advisory teams in the nation.

PNC offers residential mortgage banking at their 2,700 bank branches and 90 retail

mortgage offices located throughout the U.S. PNC Mortgage is one of the top residential

mortgage originators and servicers in the nation. As of September 2013, PNC’s loan portfolio is

$115 billion.

PNC also owns about 25% of BlackRock which is one of the largest publicly traded

investment management firms in the country. They provide equity, fixed income, liquidity and

alternative investment products to institutional and individual investors around the world.

BlackRock also provides risk management, investment system outsourcing, and financial

advisory services to institutional investors.

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Management Structure

I would say that PNC has a vertical management structure because they are a large

financial company and thus has lots of levels of management. PNC’s president and CEO is

William S. Demchak. He was elected to CEO in February of 2013 after James E. Rohr elected to

step down as CEO at the Annual Meeting of Shareholders on April 23, 2013. Rohr will assume

new role as executive chairman and plans to retire in 2014. PNC also has a Board of Directors

made of 15 men and 2 women. I found the gender balance to be interesting and wondered why

there aren’t as many ladies on the board. However, it is typical that there are more men than

women in the financial services industry. Hopefully this will change in the future as there are

many up and coming women in finance. PNC also has manager on the regional and branch

levels. All these levels of management help the company strong in their individual areas. They

have to be careful that they don’t become “silo-ed” however.

William S. Demchak

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Risk Factors

PNC faces risk from the current economic conditions. There is the possibility that we

could fall back into a recessionary period. In their Annual Report for 2012, PNC notes that

although the economic recovery continued, it didn’t do so at the same pace as other recoveries.

There is also the risk of weak economic conditions impacting their lending and services

business.

There is also risk in the financial services industry from the regulatory environment. This

includes all the laws and regulations that the federal government has that effects banks like

PNC. One of the big things that PNC talked about in their 2012 Annual Report is the Dodd-Frank

Act that was signed into law on July 21, 2010. “The Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank) mandates the most wide-ranging overhaul of financial

industry regulation in decades” (Annual Report). The law created some new regulatory bodies

and also requires that regulators approve more than 300 implementing regulations and

conduct numerous studies that are likely to lead to more regulations. There is uncertainty as to

the ultimate impact of this new law.

New capital and liquidity standards have made it so banks need to maintain more and

higher quality capital and greater liquidity. The proposed rules issued in June 2012 would revise

the Basel I risk-weighting framework (referred to as the standardized approach) and the Basel II

risk-weighting framework (referred to as the advanced approaches). These rules would replace

the use of credit ratings with alternative methodologies for assessing creditworthiness and

establish a new framework known as the Simplified Supervisory Framework Approach for risk-

weighting securitization exposures.

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Recently, a risk retention plan has been introduced that would require lenders to retain

the risk of loans they sell into the secondary market. “Lenders are mostly relieved that

regulators broadened an exemption for mortgage securitizers to avoid a 5% risk retention

requirement” says Joe Adler. In a comment letter from PNC Financia l Services, E. Todd

Chamberlain (chief executive of PNC Mortgage) says that “as an exemption to the risk retention

rule, Qualified Residential Mortgages (QRM) should not be defined in a manner that would

leave only a small fraction of the residential mortgage market subject to risk retention."

PNC also faces risk from their competition. There are many other big banks in the U.S.

such as Citigroup. It is also important to note that financial services institutions are interrelated

and transactions with these other companies exposes them to credit risk as a result of trading,

clearing, counterparty, and other relationships.

Banks deal with a lot of estimations when dealing with the amount of loss allowances

and impairments. Because this is highly subjective, any inaccurate estimation could significantly

impact their operations or financial operations. There are also different ways to interpret the

various methods of asset valuation. The bank business also uses models extensively and poorly

designed or implemented models present risk.

Just as in any business, there is operational risk that results from inadequate or failed

internal processes and systems, human error and external events. This includes areas of

technology and information systems. PNC needs to be able to keep up to date in their

technology in order to remain competitive. There are frequent introductions of new

technology-driven products and services in the financial services industry. They are able to

serve their customers better and reduce cost by using technology effectively. In my experience

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with PNC’s corporate banking online services, I have found that they are out of date. When

scanning checks to the bank online, I have to use a computer that has Windows XP on it

otherwise the scanner won’t cooperate with me.

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Geographic Considerations

PNC has grown significantly since its beginnings in the 1800s. They started out in

Pittsburgh and then expanded to the entire state of Pennsylvania. Today, PNC has bank

branches in 19 states and the District of Colombia. They have remained mostly in the Midwest

and areas of the East Coast (the Mid-Atlantic and Southeast regions). PNC definitely has

opportunities to expand into more states in the East Coast and possibly venture out west to big

states such as California.

Their business is both national and global in scope. Through PNC’s ownership in

BlackRock, they are able to provide equity, fixed income, liquidity and alternative investment

products to institutional and individual investors around the world. In this way, PNC is reaching

out to investors not only here in the U.S. but also to those in countries around the world. This

also means that there are risks involved because bad economic conditions in another country

could hurt PNC.

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Regulatory Considerations

Unlike most other countries, the U.S. has bank regulation on both the federal and state

level. Nationally, we have the Federal Reserve as our regulatory body. The monetary and tax

policies of the Fed have a significant impact on PNC as they are the governmental agency who

set the interest rates.

As mentioned earlier, there are risks that PNC faces from new laws and regulations that

are passed by the U.S. government. There is uncertainty of ultimate impacts of Dodd-Frank law

that was passed in July 2010. In June 2012, there were new capital and liquidity standards that

were proposed. There is also debate over the 5% risk retention requirement in the recent risk

retention plan.

PNC is a member of the Federal Deposit Insurance Corporation (FDIC) and must adhere

to their standards in order to remain a member. The FDIC provides deposit insurance to bank

customers up to $250,000. Because PNC is publically-traded company, every year they must file

with the Securities and Exchange Commission (SEC). This filing is a formal document or financial

statement submitted to the SEC. It was reported on November 15, 2013 that PNC Financial

Services Group, Inc. posted a U.S. Securities and Exchange Commission (SEC) filing (Form 4).

Under Section 12 of the '34 Act, every director, officer or owner of more than ten percent of a

class of equity securities registered must file a statement of ownership regarding such security

with the SEC. The Office of the Comptroller of the Currency (OCC) in the U.S. Department of the

Treasury helps regulate banks. Their motto is to ensure a “safe and sound federal banking

system for all Americans.”

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In each state that PNC has a bank branch, there are various standards that are specific

to each state that they must follow. Each state has their own governing body in addition to the

Federal Reserve.

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Profitability

As I observed from the profitability ratios, PNC’s net profit margin has been declining

over the past three years. They also had negative profit growth in 2011 and 2012. However,

their sales growth rate is up in 2012 which is a good sign. These ratios are explained more in

depth in the following pages.

PNC makes most of their revenue is from the fees and interest that they charge their

customers. Government regulations on interest rates have a significant impact of the amount of

revenue that PNC takes in.

There is also the risk that a failure to sustain reduced amounts of the provision for credit

losses, which has benefitted results of operations in recent periods, could result in decreases in

net income. After the economic downturn in 2007, PNC had high levels of provision for loan

losses. The provision totaled $3.9 billion in 2009 and has declined to $1.0 billion in 2012.

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Important Ratios

2010 2011 2012

Operating Profit Margin 33.07% 34.17% 29.98%

Net Profit Margin 22.38% 21.44% 19.35%

Return on Assets 1.29% 1.13% 0.98%

Return on Equity 11.23% 9.02% 7.69%

P/E Ratio 9.40 9.90 10.26

Price to Book 1.06 0.89 0.79

Sales Growth -6.48% -5.60% 8.28%

Profit Growth 41.36% -9.60% -2.28%

Net Interest Income/Average Assets 3.49% 3.21% 3.16%

Provision for Loan Losses/Average

Assets

0.95% 0.42% 0.32%

Net Income/Average Assets 1.29% 1.13% 0.98%

Cash Dividends/Net Income 7.87% 20.18% 28.92%

Tier 1 Capital/Average Assets 9.87% 10.72% 9.91%

Non-Current Loans/Total Loans 2.32% 1.85% 1.99%

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Operating Profit Margin

Operating Profit Margin is a measure of how much revenue is left after taking care of

variable costs. This ratio is often used to measure pricing strategy and operating efficiency.

From 2010 to 2011, PNC’s operating profit margin increased by about 1%. But from

2011 to 2012, it dropped about 4% to 29.98%. This shows that in 2012 PNC had more variable

costs relative to revenue than they did in previous years.

33.07%

34.17%

29.98%

27.00%

28.00%

29.00%

30.00%

31.00%

32.00%

33.00%

34.00%

35.00%

2010 2011 2012

Operating Profit Margin

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Net Profit Margin

Net Profit Margin is calculated by taking net income divided by sales. This percent

measures how much of every dollar of sales is actually retained in earnings.

As this graph shows, PNC’s net profit margin has been dropping over the past three

years. From 2010 to 2012, they went from 22.38% to 19.35% for a decrease of 3%. This means

that they aren’t retaining as much of their sales as earnings.

22.38%

21.44%

19.35%

17.50%

18.00%

18.50%

19.00%

19.50%

20.00%

20.50%

21.00%

21.50%

22.00%

22.50%

23.00%

2010 2011 2012

Net Profit Margin

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Return on Assets

Return on Assets is calculated by dividing net income by total assets. ROA is a measure

of how profitable a company is relative to its total assets and shows how efficiently

management is using the company’s assets to generate earnings.

As the graph shows, this return has been declining a little over the past three years.

They have stayed around 1% which means that PNC is not effectively managing their assets.

They need to increase in this area.

1.29%

1.13%

0.98%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

2010 2011 2012

Return on Assets

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Return on Equity and Return on Investment

Because PNC doesn’t have a Cost of Goods Sold figure, the Return on Equity and Return

on Investment percentages are the same. Return on Equity is calculated by dividing net income

by shareholder’s equity. ROE is a measure of profitability by showing how much profit is

generated by shareholder investment. Return on Investment is used to evaluate the efficiency

of a company’s investments. The return of an investment (gains minus cost) is divided by the

cost of the investment.

From 2010 to 2012, PNC’s ROI and ROE have declined about 4%. This means that they

are profiting as much from shareholder investment and their investment aren’t as efficient as

they were in previous years.

11.23%

9.02%

7.69%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2010 2011 2012

ROE/ROI

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P/E Ratio

P/E Ratio (or Price-Earnings Ratio) is calculated by taking the market stock price and

dividing by the earnings per share (Net Income/Outstanding Shares). It is a measure of a

company’s current share price compared to its per-share earnings. PNC’s P/E Ratio has slightly

increased over the past three years. This is a good sign for investors. It means that their stock

price is about 10 times their book value.

9.40

9.90

10.26

8.80

9.00

9.20

9.40

9.60

9.80

10.00

10.20

10.40

2010 2011 2012

P/E Ratio

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Price to Book

Price to Book is calculated by taking the market stock price and dividing by the book

value per share (Shareholder Equity/Outstanding Shares). It equals the amount of money per

share an investor would receive if, in theory, a company were to cease operations and liquidate

all of its assets.

PNC’s Price to Book ratio has fallen over the past three years. It dropped below 1 in

2011 meaning that the market stock price is lower than the book value and the stock is

underpriced.

1.06

0.89

0.79

-

0.20

0.40

0.60

0.80

1.00

1.20

2010 2011 2012

Price to Book

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Sales Growth

The Sales Growth Ratio shows how much a company’s sales have increased from the

previous year. It is calculated by taking the current year sales and subtracting the prior year

sales and dividing this number by the prior year sales.

As we can see by the graph, PNC had negative sales growth in 2010 and 2011 but in

2012 they were able to increase their sales by 8.28%. This shows that things are looking up for

them as they move forward into 2013 and beyond.

-6.48% -5.60%

8.28%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2010 2011 2012

Sales Growth

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Profit Growth

Profit Growth Ratio is a measure of how much a company’s net profit (or net income)

has increased from the previous year. It is calculated by taking the current year net profit and

subtracting the prior year net profit and dividing this number by the prior year net profit.

PNC had a large increase in profits from 2009 to 2010 due to the fact that their 2009

numbers were low are a result of the economic crash. However, in 2011 and 2012 PNC had

negative profit growth which doesn’t look good.

41.36%

-9.60% -2.28%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

2010 2011 2012

Profit Growth

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Net Interest Income/Average Assets

This ratio is a measure of earnings performance. The higher the ratio is, the better off

the company is. As the graph shows, PNC has dropped slightly over the past three years. This

means that the interest income that they are bringing in isn’t growing as much in relation to

assets.

3.49%

3.21% 3.16%

2.90%

3.00%

3.10%

3.20%

3.30%

3.40%

3.50%

3.60%

2010 2011 2012

Net Interest Income/Average Assets

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Provision for Loan Losses/Average Assets

This ratio measures the quality of loans on the books. A lower ratio in this area is better.

PNC has reduced their provisions for credit losses in relation to assets which is a good thing.

They have dropped a fraction of a percent from 0.95% in 2010 to 0.32% in 2012. Hopefully this

sort of trend will continue into the future.

0.95%

0.42%

0.32%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

2010 2011 2012

Provision for Loan Losses/Average Assets

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Net Income/Average Assets

This ratio is a measure of earnings quality and is one that you want to see above 1%. As

you can see by this graph, PNC’s ratio has been dropping and in 2012 they fell below 1%. They

need to make some changes in order to get their ratio above 1% and not let it fall any more in

2013 and beyond.

1.29%

1.13%

0.98%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

2010 2011 2012

Net Income/Average Assets

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Cash Dividends/Net Income

By analyzing the cash dividends to net income ratio we can measure the external

shareholder returns and internal capital retention. This is a good thing to look at when you are

trying to measure future growth as well. A lower ratio means that a company is expected to

have higher growth.

As this graph shows, PNC’s ratio has considerably increased over the past three years.

They had a ratio of 7.87% in 2010 which grew to 28.92% in 2012. This could indicate that PNC is

having as much growth in 2011 and 2012 and evidenced by the negative profit growth rates in

these years.

7.87%

20.18%

28.92%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2010 2011 2012

Cash Dividends/Net Income

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Tier 1 Capital/Average Assets

This ratio measures the leverage of a bank. A higher ratio is more desirable in this area.

Over the past three years, PNC hasn’t changed too much in this area. The graph makes it seem

like there was a big jump in 2011 but it really only went up 1% and then dropped 1% in 2012.

They seem to be doing alright in this area although they could increase some more in future

years.

9.87%

10.72%

9.91%

9.40%

9.60%

9.80%

10.00%

10.20%

10.40%

10.60%

10.80%

2010 2011 2012

Tier 1 Capital/Average Assets

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Non-Current Loans/Total Loans

This ratio measures loans that are more than 90 days past due and are still accruing

interest. You want to see lower ratios in this area. As you can see by this graph, PNC has been

able to keep their ratio around 2% which is good. They have decreased a fraction of a percent

from 2010 to 2012. Things look good in this area as long as PNC can continue to keep their ratio

down.

2.32%

1.85% 1.99%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2010 2011 2012

Non-Current Loans/Total Loans

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Investment Criteria

Credit Rating:

*As of November 30, 2013

By looking at this chart we can see that PNC ’s credit rating isn’t the best but it’s not the

worst. As we know, a BBB rating is considered the lowest “good” stock. Fitch gives PNC’s

preferred stock a BBB- which is below the BBB mark. However, this is the only rating that falls

below BBB.

Other criteria:

One of the things I noticed while doing the ratios is that PNC ’s profit growth rates have

been going down over the past two years. This does give PNC opportunity to grow more in 2013

and beyond. Looking at sales, we can see that PNC had negative growth in 2010 and 2011 but

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positive growth in 2012. Things are looking up in terms of sales. Also, PNC’s P/E is going up

which is a good sign as well.

In 2013, stock price has gone from 55 in January to 75 in December. In an article on

November 19, it was noted that bank stocks are on the rise. However, William Hummer of

Wayne Hummer Investments said that some broader market declines are likely to be short-

lived amid a bullish environment for equities. He says that because of the probable

confirmation of Janet Yellen as Federal Reserve chairman, a rally has pushed indexes to record

highs and has led many investors to continue to bring money into the market because they

believe asset purchases will continue under her leadership (Soukup).

PNC has a diverse range of products and services offered which allows them to serve a

variety of customers in a number of different areas. Because of their broad geographic location,

PNC is able to have customers in many different states and around the world. One thing I would

suggest is that they expand to other states particularly in the East Coast and West Coast.

Based on these factors, I would invest in PNC because things seem to be looking up for

them in terms of sales, P/E, and stock price. They are diversified and have a broad scope which

means that if one area of their business isn’t doing as well, there are other areas that can make

up for this. I also use PNC as my personal bank and I think it is wise to invest in companies that

you use and have direct contact with.

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Sources

Adler, J. (2013, Nov 19). Why banks are still wary of risk retention plan. American Banker.

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Business Overview. (n.d.). In The PNC Financial Services Group, Inc.. Retrieved December 2,

2013

Credit Ratings. (2013, November 30). In The PNC Financial Services Group, Inc.. Retrieved

December 4, 2013

Corporate History. (n.d.). In The PNC Financial Services Group, Inc.. Retrieved December 2, 2013

National commercial banks; pnc financial services group, inc. files SEC form 4, statement of

changes in beneficial ownership of securities (nov. 15, 2013). (2013). Investment Weekly

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The PNC Financial Services Group, Inc. (2012). Annual report 2012. Retrieved from

http://phx.corporate-ir.net/phoenix.zhtml?c=107246&p=irol-reportsannual

PNC - Historical Prices. (n.d.). In Yahoo! Finance. Retrieved December 2, 2013

Soukup, R. (2013). Monday's bank stocks: Sector rises, markets mixed. SNL Bank & Thrift Daily,

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