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PNC: The Making Of A Super-Regional Bank

Posted: Jun 16, 2009 06:03 AM by Greg Sushinsky

Tickers in this Article: USB, KEY, C, WFC, PNC

On the heels of purchasing distressed National City Bank last fall, PNC Financial Services Group (NYSE:PNC) continues to grow into its new super-regional identity. As PNC digests the National City acquisition, it is moving forward on other fronts. How should investors regard PNC as it does business in the future as a super-regional?

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The Big Deal
Last fall PNC, then a Midwest regional bank based in Pittsburgh, made a controversial strategic move to purchase its troubled Midwest rival bank, National City, based in Cleveland. PNC purchased National City for $5.6 billion and also received an infusion of $7.6 billion of TARP money. The move at once accomplished two things: it eliminated a once-powerful rival yet also amassed a pile of bad assets, largely residential mortgages. The deal was hailed as either a masterstroke or an invitation to financial disaster for the conservative PNC.

Scale Matters
PNC's current market cap is roughly $19 billion, which puts it in the size category with financials such as US Bancorp (NYSE:USB) and its $32 billion market cap. US Bancorp, based in Minneapolis, is a multi-state financial with the flexibility to compete locally yet the scale to compete in a wider geographic arena. PNC's devouring of National City, once a $25 billion market cap company itself, added toxic assets to PNC's own balance sheet but also gave it important new footing throughout the Midwest.

Contrast this with KeyCorp (NYSE:KEY), the one-time crosstown rival of National City with a $3 billion market cap, which tried but failed to buy National City. Its possible move from regional to super-regional was blunted by this failure. Of course, size or scale is only one thing. While most banks had their market caps trimmed in the market meltdown, Citigroup's (NYSE:C) was most famously chopped from roughly $300 billion to $19 billion - a substantial amount for most but a positively puny market value for the one-time juggernaut.

Management Most Important
The most important consideration is still how a bank is managed. Citigroup's massive and traumatic path from a mega-bank to a shell is both the sign and the result of its harrowing recent management history. Wells Fargo (NYSE:WFC), on the other hand, with its $109 billion market cap has both the size and scope nationally, as well as the ability to work through its own acquisition of Wachovia, while it continues to pursue a superior management model. As a result, Wells Fargo is showing signs of renewed strength. (For more, see Analyzing A Bank's Financial Statements.)

PNC For The Future
While S&P recently downgraded PNC's holdings of the former National City assets, and the acquisition clearly has been a drag on earnings and likely will continue to be for the next year, PNC also raised the $600 million it needed to fulfill capital requirements and intends to pay back the TARP money it received. As the regional banking industry turns into a commodity industry, PNC will be well-positioned, not unlike what Wells Fargo has done but on a smaller scale. PNC has traditionally been a carefully run bank with various attractive niche products.

As PNC deals with the embedded National City toxic assets, it will move into position to assimilate the positive features of the acquisition, such as the increased geographical base and a strong foothold in traditionally profitable Midwest markets. Then the growth for PNC will come - that's the payoff.

To learn more, see The Industry Handbook: The Banking Industry.

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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