On Tuesday,PNC Financial Services Group Inc. (PNC) announced that it will not issue any common stock related to the acquisition of RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY).
PNC Financial was uncertain of whether to issue common stock to assure U.S. regulators about the funding aspect of the deal. But, fortunately the Federal Reserve approved the bank’s plan and intimated that common stock offering is not required. The deal, which is expected to close in March 2012, is anticipated to be immediately accretive to PNC Financial’s earnings.
Moreover, PNC Financial did not repurchase shares in the first nine months of 2011 and is not expected to repurchase share anytime soon. The share repurchase program, which does not bear any termination date, has been in effect since October 4, 2007 and has 25 million shares remaining as of September 30, 2011.
In June, PNC Financial signed a definitive agreement related to its RBS acquisition. The acquisition of the RBC business for $3.45 billion would help PNC Financial to expand its footprint in the Southeast markets.
The deal would augment PNC Financial’s network with additional 424 RBC branches located in North Carolina, Florida, Alabama, Georgia, Virginia and South Carolina. Therefore, PNC Financial would become the fifth US bank, having 2,870 branches. Moreover, the company is expected to inherit $19 billion in deposits and $16 billion in loans from this transaction. In addition, the bank would also acquire certain credit card assets of RBC Bank, (Georgia) National Association.
The deal would aid PNC Financial to significantly widen its operating footprint and double its presence in Florida, thereby creating opportunities for future growth.
We believe continued strengthening of balance sheet with a focus on risk and expense management should propel PNC Financial’s earnings ahead. Moreover, benefits from the 2008 National City acquisition continued to exceed the company's expectations. However, we expect the top line to remain restricted in the near term due to a continued soft demand for loans and a low interest rate environment. Regulatory initiatives also remain headwinds to both top and bottom lines.
PNC Financialcurrently retains its Zacks #3 rank, which translates into a short-term 'Hold' rating. Moreover, considering the fundamentals, we are maintaining our long-term "Neutral" recommendation on the stock.
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