PNC Bank Corp. was among the first five bank holding companies to obtain Fed approval for a section 20 securities subsidiary. Ten years later, it is the only bank from that group not authorized to underwrite corporate debt and equity securities.
But not for long, according to George Lula, executive vice president at PNC and manager of its section 20 unit, PNC Capital Markets Inc. Pittsburgh-based PNC will apply to the Federal Reserve Board this year for corporate debt and equity authorization, known as Tier 2 powers, Mr. Lula said in a telephone interview.
"We believe that expanded securities capabilities are a requirement to support our client base," he said.
The new powers would place PNC Capital Markets in competition with the 20-plus commercial bank subsidiaries that already have Tier 2 powers-as well as a host of investment banks and securities firms.
But the bank may have little choice if it wants to hold on to its corporate clients.
"As companies move through the business cycle from small to middle- market size, banks lose that business," said James M. Schutz, senior banking analyst with ABN Amro Chicago Corp. But with the help of a section 20, "They're able to retain that business. They're very aggressively trying to capture more of their customers' business."
Providing capital-markets access to PNC Bank Corp.'s corporate customers through the subsidiary, a practice known as one-stop shopping, is key to the company's strategy, Mr. Lula said.
"The whole purpose in expanding capital-markets capability is to serve client needs. To present a viable value proposition in the future will require one-stop-shopping capability. Brand image in corporate banking requires it," said Mr. Lula.
Revenue from the unit, although healthy, is not a driving force behind its growth. Last year's revenue was approximately $80 million, according to Mr. Schutz, or less than 6% of PNC Bank Corp.'s total fee revenues of $1.4 billion.
Yet PNC Capital Markets has developed competitive capabilities in several key areas: private placements; asset-backed securitizations; structured finance, such as industrial revenue bonds; public finance; syndicated lending; and derivatives and foreign exchange products.
PNC's loan syndications operation ranked 20th last year on Loan Pricing Corp.'s agent-only league table, with 65 deals accounting for over $10.6 billion in loan volume.
The unit also raised over $2.8 billion last year in 99 municipal finance deals and $776 million in 12 private placements, according to PNC.
Investment banking services such as merger and acquisition finance and advisory services are focused on sell-side engagements, valuations, fairness opinions, and recapitalizations.
Most of the units' clients are middle-market companies, with between $50 million and $500 million in annual sales. Many of those are national clients, but most are located in Pennsylvania, New Jersey, Ohio, and Kentucky.
The unit is structured to reflect its focus on four industries: health care, metals and mining, communications, and real estate, with research efforts centered on these sectors.
With a staff of almost 200, the unit is organized by capital-market products with specialists working on one of the four industries in each product group, said Mr. Lula.
The Fed's elimination last December of three of the barriers between section 20s and their affiliate banks is already prompting change at the subsidiary.
"We aggressively cross-market our securities and capital-markets capabilities now," said Mr. Lula. "We haven't evolved to the point where we have dual employees, but that will probably happen this year."
