(PNC) PNC Financial Services Group Offers $1 Billion Preferred Stock

PNC Financial Services Group Inc. (PNC) has offered $1 billion of perpetual preferred stock, according to a filing with the Securities and Exchange Commission. The capital infusion through this offering would be used by PNC Financial for general corporate purposes, including funding of the pending RBC Bank (USA) acquisition.

The coupon rate is 6.75% and the joint book-running managers of the offering are Bank of America Corp. (BAC), JPMorgan Chase & Company(JPM) and Morgan Stanley (MS).

Notably, in June 2011, PNC Financial announced its plan to purchase RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY), and has also signed a definitive agreement in this context. This $3.45 billion worth acquisition would help PNC Financial to expand its footprint in the Southeast markets. The purchase price of the RBC unit, which has approximately $25 billion of assets, represents a $112 million discount to tangible book value.

The purchase price is, however, subject to adjustment at close for actual net tangible asset value delivered, according to the terms of the agreement. PNC has the option to pay up to $1.0 billion of the consideration in common stock, or 3% of its outstanding common shares based on its closing price of $57.79 on June 17, 2011.

The deal is expected to close in March 2012, subject to customary closing conditions including regulatory approvals. It is anticipated to be accretive to PNC Financial’s earnings by the end of 2013 or sooner, depending on the purchase amount paid in stock. The deal would aid PNC Financial to significantly widen its operating footprint and double its presence in Florida, thereby creating opportunities for future growth.

Recently, as part of its effort to expand, 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. The acquisition would establish PNC’s retail banking footing in the Tampa Bay area. The company can also augment its other businesses by leveraging those branches.

Last week, PNC Financial reported its second-quarter 2011 adjusted earnings of $1.67 per share, well ahead of the Zacks Consensus Estimate of $1.47. The outperformance was backed by a contraction in the provision for credit losses, a strong balance sheet and improved credit quality. However, revenues were lower as client fee income growth was restricted by a decline in other non-interest revenue sources.

PNC’s continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. Moreover, 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. Hence, this capital infusion is a strategic fit for PNC Financial.

However, we expect the top line to remain restricted in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory initiatives also remain headwinds to both top and bottom lines.

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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