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This is the fifth in my series on what lies off balance sheet of your local big bank. Since the media doesn't seem to focus on these risks, and I have yet to see anything substantial from the sell side, I guess its left up to me to spread the word. The precursors to this are:
  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)
  5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo
Enter PNC Financial, the "off the books" edition!!!

Unconsolidated VIE (Variable interest entities) exposure

PNC's exposure to unconsolidated VIE's primarily consists of liquidity commitments of $6.3 billion and other credit enhancements of $.6 billion to Market Street, a multi-seller asset-backed commercial paper conduit. Other unconsolidated VIE exposure includes partnership interests in some low income housing projects and CDOs. Based on maximum exposure and the expected loss rate under each of these arrangements, we expect the loss from unconsolidated VIEs at $989 million (6.9% of the tangible equity).

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Market Street's activities primarily involve purchasing assets or making loans secured by interests in pools of receivables from US corporations that desire access to the commercial paper market. Market Street funds the purchases of assets or loans by issuing commercial paper.

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PNC loan sale and securitization activity

PNC sells commercial mortgage loans to FNMA and FHLMC. Under the sale agreements, PNC assumes up to one-third of the risk of loss on unpaid principal balances. As of June 30, 2009, the unpaid principal balance outstanding of loans sold as a participant in these programs was $19.8 billion and PNC's potential exposure to loss was $5.9 billion. Based on the cumulative losses rate for commercial mortgage loans in 2009 and 2010, we have arrived at expected loss of $512 million under the base case assumptions. The Bank already has created $108 million of reserves under loan losses for these agreements. Thus, the expected additional loss to be borne by PNC is $404 million (2.8% of the tangible equity).

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As of June 30, 2009, outstanding principal balances of loans transferred to the securitization QSPEs was $2.8 billion and the related liabilities were $2.2 billion. The loans are sold to the QSPE on a non recourse basis, subject to representations and warranties made at the time of sale. The retained interest in the securitization entities include seller's interest, interest only strips and retained asset backed securities.

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To value the retained interests, the Bank makes assumptions regarding expected credit losses. For valuing the interest only strips from credit card securitization, the expected annual credit losses were assumed at 6.77% (really wishful thinking!!!) while we expect the annualized credit charge offs rate for 2009 and 2010 at 14.0% and 11.6%, respectively. Since the bank loss rates are significantly lower than our expectations (not to mention significantly lower than the industry trend, which is probably below that deserved by the National City Acquisition), we expect additional loss of $39 million from fair valuation of the retained interest in credit card securitization. Similarly fair valuation of retained interest in auto loan securitization will result in loss of $0.4 million. Together, the fair valuation of the retained interests in credit card and auto loan securitization will result in loss of $39 million (0.3% of tangible equity).

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Per share impact of VIE and QSPE losses

Under the base case scenario we expect losses from unconsolidated VIE's and QSPE at $1,433 million or $3.1 per share. This is gross of the valuation in our latest PNC Subscriber Forensic Analysis below.

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