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We have reiterated our Neutral recommendation on PNC Financial Services Group Inc. (PNC - Analyst Report) following a detailed analysis of the company fundamentals in perspective of the current economic and regulatory environment and its recent acquisitions.

PNC Financial’s third-quarter 2011 adjusted earnings of $1.55 per share were ahead of the Zacks Consensus Estimate of $1.49. Results also compared favorably with adjusted earnings of $1.45 per share in the prior-year quarter. Reported net income increased 7.6% year over year to $834 million.

A substantial contraction in the provision for credit losses, a strong balance sheet and improved credit quality were attributed to the results. Moreover, decreased non-interest expenses were the upside. However, a decline in the top line acted as a headwind.

PNC in Expansion Mode

Recently, PNC Financial received the approval from the Federal Reserve to acquire RBC Bank (USA), the U.S. retail banking subsidiary of Royal Bank of Canada (RY - Snapshot Report). The approval takes PNC Financial a step closer to the completion of the deal, slated for the first quarter of 2012.

In June 2011, PNC Financial announced its plan to purchase RBC Bank (USA) for $3.45 billion. The acquisition would help PNC Financial to expand its footprint in the Southeast markets. It would also make PNC Financial the fifth among U.S. banks, with 2,870 branches. PNC Financial expects the acquisition to be immediately accretive to earnings (excluding integration costs) upon closing.

Of late, PNC Financial also completed acquiring the 27-branch retail bank franchise in Georgia from Flagstar Bank, a subsidiary of Flagstar Bancorp Inc. (FBC - Snapshot Report). Flagstar Bank sold the leases associated with the branches and the associated businesses and retail deposits worth approximately $210 million at the closing.  PNC paid the Bank net book value of the acquired real estate plus fixed and other personal assets associated with the branches. The deal is a strategic fit for PNC Financial as it will expand operations in Atlanta and give it a competitive advantage.

In mid-2011, PNC Financial also completed the acquisition of 19 branches from a subsidiary of BankAtlantic Bancorp Inc. . Additionally, two related facilities in the Tampa - St. Petersburg area and associated deposits were also handed over to PNC as part of the sale.

Our Take

PNC's continued strengthening of balance sheet, with focus on risk and expense management, should propel its earnings ahead. Benefits from the 2008 National City acquisition continue to exceed the company's expectations. We also believe that the company's latest acquisition spree would be accretive to its revenue.

Yet, the top-line headwind is expected to remain in the near term, with continued soft demand for loans and a low interest rate environment. Regulatory issues also remain a concern.

Additionally, PNC Financial shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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