At the end of 1Q2008, PNC’s leverage (total assets / total equity) stood at 9.7x against an average leverage of 10.0x for its peers (US regional banks). However, on adjusting for intangibles PNC’s leverage increases significantly to 25.7x and comprates negatively against its peer group average of 21.8x owing to a higher proportion of intangibles to its shareholders’ equity (around 65%). Take note that in our analysis we highlighted PNC’s poor regulatory capital ratios vis-à-vis its peers. If we were to exclude the intangibles for the entire peer group, PNC’s regulatory ratios would be even worse off in comparison with its peers due to its higher proportion of intangible to shareholders’ equity. This is simply an alternative way of expressing what I hope was thoroughly articulated in the PNC analysis, the adequacy of PNC’s capital is lacking.
Although in 1Q2008 PNC’s reported EPS of $1.10 per share compared to $1.26 in 1Q2007, PNC’s reported net income for 1Q2008 included several non-recurring gains, totaling $244 mn (including gain on sale of Hilliard Lyons of $114 mn, Visa redemption gain of $95 mn, BlackRock LTIP shares mark-to-market adjustment of $37 mn). Despite Mercantile, ARCS and Albridge acquisitions, PNC’s fee based income excluding the impact of extraordinary gains declined 19.1% in 1Q2008 over 1Q2007. Excluding the impact of these one time items, PNC’s adjusted EPS declined to $0.67 versus $1.26 in 1Q2007. Thus we believe that although PNC’s reported numbers represent quite the rosy outlook - an outlook which we failt to share, PNC’s core operating result remain under pressure.
Although PNC’s provisions at $188 mn and $151 mn for 4Q2007 and 1Q2008 were at low levels (which on its face seems to be a positive), expected higher charge-offs would warrant a higher allowance for provisions for PNC in the coming quarters since the bank’ has inadequate provisioning. In our analysis, we have commented on PNC’s inadequate provisioning for loan losses which seems a serious concern owing to expected rising NPAs/charge-offs