PNC Financial Services is a multibank holding company based in Pittsburgh, with three primary operating units: National City Bank, PNC Bank N.A. and PNC Bank Delaware.

As Q2 earnings reporting begins, let's review the ratings for PNC from the IRA Bank Monitor, looking both at current financial performance via our Stress Index and at where PNC stands in terms of "economic capital," a risk-based perspective on the bank's business similar to the Basel II regulatory framework.

PNC was rated A by the IRA Bank Monitor at the end of Q1, based on a stress index score of 1.2, versus the industry average of 2.4. The base year for the stress index is 1995, which equals 1. All of PNC's stress indexes for return on equity, defaults, capital, lending capacity and efficiency were below industry averages and, in some cases, below 1995 levels of stress. However, when you look at PNC's operating units, a different picture emerges.

National City, which was acquired by PNC last year and was significantly restructured, rated A+ as of Q1 and had stress indexes significantly below industry averages. However, the lead unit, PNC Bank N.A., was rated C as of the same period, with a stress index score of 2.6, which was a function of the bank's bank-level ROE of 7.45%.

Federal Home Loan bank advances equaled 5.8% of total assets as of Q1 2009, versus 8% a year earlier. Deposits equaled just 63% of total assets, half a standard deviation below peer for this crucial measure of liquidity, though 20% of the lead bank's deposits were non-interest-bearing. "

PNC's stress index score for capital was elevated at 7.8, versus the industry average of 5.2, which is half an order of magnitude above the 1995 benchmark for the stress index. PNC had tangible common equity, or TCE, of 6.23% as of Q1 2009, above minimum levels required by regulators but still below industry average levels.

PNC's nonperforming loans as of Q1 2009 equaled 6.42% of total assets and the level of chargeoffs to provisions was 0.58:1, meaning that PNC was adding roughly $2 to reserves for every $1 of current losses. PNC's bank units reported aggregate chargeoffs equal to 117bp (1.17%) of total loans and leases, half a standard deviation below peer for this important credit metric.

The efficiency ratio for PNC's bank subsidiaries, which measures the cost of revenue, was 53.1% as of Q1 and much improved from the 70% a year earlier. The fact that efficiency has improved 20% in over the past year suggests that PNC is aggressively cutting costs to prepare for a deteriorating credit environment.

Economic capital, or EC, calculated for PNC by the IRA Bank Monitor, equaled $32.4 billion, or roughly 1.4x Tier 1 risk-based capital and over 2.2x TCE. The distribution of EC was heavily weighted toward securities exposure ($21.3 billion), trading ($7.7 billion) and lending ($3.3 billion), suggesting that PNC has most of its significant risk in areas other than lending. When we compare PNC's income against EC, the risk-adjusted return on capital is 3.1%, versus 1.17% at Q1 2008. Neither of these RAROC metrics is particularly good compared with PNC's peers, which suggests that PNC is not being adequately compensated given its risk profile.

Overall, PNC currently appears stable, with below-peer levels of stress, but much of this apparent solidity reflects the subsidies from the Fed and Treasury. For example, PNC's subsidiary banks reported net interest income of just $892 million a year earlier, but as of Q1 2009 net interest income was $2.4 billion. While the subsidies from the Fed and Treasury are boosting PNC's current performance, PNC may face some significant earnings and risk management issues going into 2010.

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