PNC Financial Downgraded by Moody’s (MCO) (PNC) (USB)

PNC Financial has been rated A3 for its senior debt. Moreover, PNC Financial’s primary banking subsidiary has a standalone bank financial strength rating (BFSR) of C+ along with the baseline credit assessment (BCA) of a2.

Further, the bank's long-term deposit rating is A2, whereas the short-term deposit rating stands at Prime-1.

Reasons Behind the Downgrade

The rating agency is concerned with the obstacles faced by PNC Financial in achieving a high level of profitability. In the recent quarters, the company’s earnings have been negatively impacted by elevated mortgage repurchase provisions. Further, a challenging macro economic environment for loan and revenue growth has added fuel to the fire.

Moody feels that the purchase accounting accretion due to PNC Financial’s earlier acquisitions will prove to be a drag on its financials, especially amidst the current low interest rate environment. This is mainly attributable to pressure on its net interest margin as a result of lower reinvestment rates on loans and securities. According to the rating agency, the company is not well placed to generate higher profitability levels in the near term.

As of September 30, 2012, PNC Financial estimated Basel III Tier 1 common ratio was 7.2% on a fully phased-in basis. Thus the company still lags behind its target of 8.0 – 8.5%. However, management anticipated to reach its target by the end of 2013. However, according to Moody’s, PNC Financial’s current capital levels are not adequate to buffer against a financial crisis.

Our Viewpoint

While downgrades in ratings affect investors’ confidence in the company and its creditworthiness in the market, we note that PNC Financial’s robust core franchisee is a positive. Further, a diverse revenue stream, solid capital position and a healthy balance sheet also augur well.

Nevertheless, regulatory issues along with the expectation of a continued low interest rate environment are likely limit the stock’s upside potential in the upcoming quarters.

Last week, Moody’s had also lowered U.S. Bancorp’s (USB) ratings. Moody’s have reduced the senior debt rating of U.S. Bancorp to A1 from Aa3. Despite having a diversified business model which is also well-managed, U.S. Bancorp cannot avoid the ill-effects of a low interest rate environment. As a consequence, the company’s net interest margin is likely to remain stressed.

PNC Financial currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. U.S. Bancorp also retains a Zacks #3 Rank.