(PNC) PNC Financial Services Group Sells Senior Notes

Last week, PNC Funding Corporation, a unit of PNC Financial Services Group Inc. (PNC), announced the sale of 5-year senior notes with a maturity value of $1.25 billion. PNC Financial sold the notes at a coupon rate of 2.7% and an issue price of $99.879.

The notes will mature on September 19, 2016, yielding 2.726% with spread of 185 basis points higher than Treasuries. The interest will be paid semi-annually, with the first payment due on March 19, 2012.

The new notes has been rated A3 by Moody’s Investors Service, a credit rating arm of  Moody’s Corporation (MCO), A+ by Fitch and A by Standard & Poor’s.

J.P. Morgan Securities LLC, a division of JPMorgan Chase & Co. (JPM), PNC Capital Markets LLC and Bank of America Corporation (BAC) are acting as joint book-running managers for the offering.

The proceeds from the offering are intended to be used for general corporate purposes.  Moreover, PNC Financial will use the proceeds for the pending purchase of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY).

RBC Acquisition

In June 2011, PNC Financial announced its plan to purchase RBC for $3.45 billion. It also signed a definitive agreement in this context.

This 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 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 for 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.

Earnings Recap

PNC Financial’s second-quarter 2011 adjusted earnings of $1.67 per share were ahead of the Zacks Consensus Estimate of $1.47. Results also compared favorably with adjusted earnings of $1.47 per share in the prior-year quarter.

Consequently, reported net income spiked 13.6% year over year to $912 million. A substantial contraction in the provision for credit losses, a strong balance sheet and improved credit quality were attributed to the results. However, revenues were lower as client fee income growth was offset by a decline in other non-interest revenue sources. Moreover, increased non-interest expenses were the downside.

Our Take

The sale of notes will provide the company some financial flexibility at this point. PNC Financial’s continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead.

We believe that the company’s latest acquisition spree would be accretive to its revenue. Yet, the top line is expected to remain subdued in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory issues also remain an overhang.

PNC Financial currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a Neutral rating on the stock.

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