Wednesday, 08 July 2009 20:00

The difference between a professional investor and a professional reporter is... Featured

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That the professional (fundamental) investor always looks for the numbers to back up the assertion while the reporter may often run with the assertion. I have caught a lot of executives lying over the last two years, and many of those lies have ended up in insolvency, bankruptcy, emergency mergers and collapse (speaking of bankruptcy, I should have preliminary previews of 2 or 3 very likely bankruptcy candidates coming on tap within a week or so for subscribers).

Case in point (in terms of lying, that is) is the recent article in the Wall Street Journal regarding PNC Bank - Jun. 29 PNC Waits to Repay TARP Funds:

 Some banks have repaid their TARP funds. There are many more that still can't. And then there's PNC Financial Services Group Inc. Who is one of those banks that "still can't"!

Unlike competitors such as J.P. Morgan Chase & Co. and U.S. Bancorp, the Pittsburgh-based regional bank has chosen not to repay the Treasury Department's investment in the firm, even though PNC likely could do so immediately. Yeah, right!

While bank officials declined to comment for this article, PNC Chairman and Chief Executive James Rohr was asked by an analyst in May about the company's plans for paying back $7.6 billion in preferred shares the government purchased from PNC last year through the U.S. government's Troubled Asset Relief Program.

"We see significant advantages in redeeming TARP" sooner rather than later, and could do so "as soon as possible," he said. I don't see where he said he can do so now, though!

Mr. Rohr added, though, that "we're going to do it in a shareholder-friendly manner."

Mr. Rohr's comments suggest that PNC shareholders are unlikely to face the heavy dilution that other bank investors have faced recently. But they are going to face the heavy losses from the poorly thought out acquisition of National City using thos very same TARP funds that they now wish they didn't take, and would love to be able to pay back but can't since they need it to cushion against the train wreck that they just purchased. Many firms re-paying TARP have raised the necessary cash in part by issuing new shares, which dilutes current investors. The National City purchase is a prime example of how the loose money bandied about by the Bush administration with no strings attached was abused by the banks that recieved TARP. The government gives PNC billions of dollars of TARP money to strengthen the banking system and PNC goes off and buys a subprime and Alt-A slush fund called National City, instantly becoming a bank at risk, funded by the US taxpayer. Hey, other reporters noticed it...

PNC Will Post Loss on Provision Tied to National City

PNC to cut 5,800 jobs; shares sink after weaker Q4

PNC Bank considered less stable after buying National City Corp.

PNC, Wells Fargo Slump Into 2009 After Buying Lenders

In contrast, PNC intends to re-pay Uncle Sam by setting aside future profits, rather than minting new shares, Mr. Rohr said. Really? I would have thought you were in little bind when Congress decided to put a little teeth in the TARP, but after you had already went on your rather irresponsible shopping spree at the taxpayers expense...

The stance also signals a willingness to limit the compensation of PNC's managers according to the government stipulations that come with TARP. Those curbs have made executives at financial firms with large trading and investment-banking operations eager to escape TARP. Willingness, or inability to do anything about it due to their current situation?

"It's very different if you have a bunch of managers that are about to jump ship," says Anton Schutz, manager of the Burnham Financial Services Fund. "If you run an investment bank, that's where you really run into compensation issues." That's because investment bankers are overpaid and everyone knows it, except for investment bankers, of course. They think they deserve every thick dime...

Another reason why PNC isn't racing to abandon TARP, according to analysts: PNC acquired National City Corp. last year after the Cleveland-based rival started teetering from losses on subprime loans.

Although most analysts think PNC will eventually turn hefty profits from the deal, a further downturn could force PNC to dip into its capital reserves to support National City loans. Whew! It's about time you came around to this line of thinking. Let's delve into this a little farther, shall we?

In addition, the firm holds far more construction and industrial loans than some consumer-focused competitors. Those loans have been slower to show losses than mortgages and credit cards, and could yet hammer PNC and other regional firms.

Somebody should write to the reporter, Marshall Eckblad at This email address is being protected from spambots. You need JavaScript enabled to view it. and inform him of the work done over at BoomBustBlog.

 PNC and the government's estimation of what PNC needs to be considered a "healthy" bank

The recent Fed's estimation of total capital requirement of $06 bn under the adverse case scenario in the SCAP bank stress tests would lead to a dilution impact of about 3.2% for existing shareholders' based on current market price of $42.2 per share. However PNC's capital requirement of $0.60 bn seems overly conservative considering the banks deteriorating capital position. PNC's tangible equity capital to risk weighted assets has declined to 2.32% as at December 31, 2008 from 7.89% as at December 31, 2006 largely due to acquisition of National City Bank. Based on the expected tangible equity capital of $4.9 bn and risk weighted assets of $237 bn as of December 31, 2010 PNC's actual capital requirement is estimated at $4.7 bn to maintain a minimum ratio of 4% for Tangible Equity Capital to Risk Weighted Assets. The above capital requirements of $4.7 bn could result in dilution impact of 25% for its existing shareholders' based on PNC's current share price. 

  Fed 2 yr cumulative loss rate range Fed 2 yr cumulative average loss rate for US banks 2 yr cumulative loss rate for PNC 2 yr cumulative loss rate for STI
  Base Case Adverse Case Base Case Adverse Case Fed's loss rate assumptions Realistic loss rate assumptions Realistic loan loss estimate
First Lien Mortgages 5 – 6 7 – 8.5 5.5% 7.8% 8.1% 9.9%                 2.6
Prime 1.5 – 2.5 3 – 4 2.0% 3.5%      
Alt‐A 7.5 – 9.5 9.5 – 13 8.5% 11.3%      
Subprime 15 – 20 21 – 28 17.5% 24.5% 12.7%    
Second/Junior Lien Mortgages 9 – 12 12 – 16 10.5% 14.0%      
Closed‐end Junior Liens 18 – 20 22 – 25 19.0% 23.5%   3.2%                 0.3
HELOCs 6 – 8 8 – 11 7.0% 9.5%   3.7%                 0.9
C&I Loans 3 – 4 5 – 8 3.5% 6.5% 6.0% 6.1%                 3.2
CRE 5 – 7.5 9 – 12 6.3% 10.5% 11.2% 11.6%                 4.3
Construction 8 – 12 15 – 18 10.0% 16.5%   21.5%                 2.6
Multifamily 3.5 – 6.5 10 – 11 5.0% 10.5%   7.3%                 0.2
Nonfarm, Non‐residential 4 – 5 7 – 9 4.5% 8.0%   6.9%                 1.6
Credit Cards 12 – 17 18 – 20 14.5% 19.0% 22.3% 21.4%                 0.3
Other Consumer 4 – 6 8 – 12 5.0% 10.0%                     0.3
Securities (AFS and HTM)                             1.9
Others* 2 – 4 4 – 10 3.0% 7.0%   2.5% 0.3
Total loan losses           7.3% 12.9
*including misc commitments and obligations          

The Fed estimates the 2 year cumulative losses in first lien mortgages and junior lien mortgages at 8.1%. However, most of the regions in which PNC operates have witnessed significant housing price decline with an average housing price decline of 8.9% since 2008 while some of the regions including Florida, New Jersey, Maryland and Michigan we have witnessed double digit price decline.  In order to arrive at more realistic assumptions about the charge-offs for loans secured by residential properties, we analyzed the delinquencies and foreclosure trends as well house price movement in these states and have adjusted the general loss rates observed in these regions for the credit quality of PNC's portfolio.  Based on our expectations PNC's 2 year cumulative net charge-offs for First Lien Mortgages (incl Alt A) is expected to reach 9.9%. 


Primary geographies of PNC and National City 1Q-08 2Q-08 3Q-08 4Q-08 % change since 20008 Alt-A loss rate Sub prime loss rate
Pennsylvania 2.4% 1.2% -0.4% -0.8% 2.4% 14.3% 33.5%
New Jersey -1.5% -3.2% -4.8% -5.4% -14.1% 23.5% 43.4%
Washington 3.0% 0.5% -2.0% -3.8% -2.4% 11.1% 27.1%
Maryland -1.4% -4.2% -6.3% -7.7% -18.3% 18.8% 38.6%
Virginia -0.3% -2.6% -3.8% -4.6% -10.9% 21.2% 37.3%
Ohio 0.6% -0.3% -2.3% -1.9% -3.9% 15.6% 35.4%
Kentucky 2.8% 3.1% 1.7% 1.0% 8.8% 14.2% 34.7%
Delaware 1.0% -1.2% -2.0% -4.2% -6.3% 16.2% 39.1%
Florida -8.6% -13.0% -16.4% -19.5% -46.5% 37.1% 52.3%
Illinois 0.5% -0.6% -2.6% -3.0% -5.6% 22.9% 41.3%
Indiana 2.3% 1.6% -0.1% -0.5% 3.3% 16.1% 35.2%
Michigan -3.5% -5.2% -7.0% -6.9% -20.8% 22.5% 45.7%
Missouri 1.5% 0.6% -0.3% -0.6% 1.3% 13.4% 36.1%
Wisconsin 1.7% 0.8% -0.9% -0.9% 0.6% 17.8% 41.7%
Average (assuming equal weights) 0.0% -1.6% -3.4% -4.2% -8.9% 18.9% 38.7%
Overall U.S -0.2% -1.9% -3.9% -4.5% -10.1%    
Price change relative to National Average 0.2% 0.3% 0.5% 0.3% 1.3%    
Source: Federal Housing Finance Agency               

So long story short, or short story long - depending on how you look at it, I think the government, the WSJ, and those wishful PNC shareholders have a rude awakening coming... 

Read 3943 times Last modified on Thursday, 09 July 2009 00:22
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at, where we're ushering the P2P Economy.
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