Wednesday, 21 October 2009 05:00

If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 5 - PNC Bank

This is the fifth in my series on what lies off balance sheet of your local big bank. Since the media doesn't seem to focus on these risks, and I have yet to see anything substantial from the sell side, I guess its left up to me to spread the word. The precursors to this are:

  1. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?
  2. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan
  3. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - Bank of America
  4. And the next AIG is... (Public Edition)
  5. If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? Pt 4 - Wells Fargo

Enter PNC Financial, the "off the books" edition!!!

Unconsolidated VIE (Variable interest entities) exposure

PNC's exposure to unconsolidated VIE's primarily consists of liquidity
commitments of $6.3 billion and other credit enhancements of $.6
billion to Market Street, a multi-seller asset-backed commercial paper
conduit. Other unconsolidated VIE exposure includes partnership
interests in some low income housing projects and CDOs. Based on
maximum exposure and the expected loss rate under each of these
arrangements, we expect the loss from unconsolidated VIEs at $989
million (6.9% of the tangible equity).

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Market Street's activities primarily involve purchasing assets or
making loans secured by interests in pools of receivables from US
corporations that desire access to the commercial paper market. Market
Street funds the purchases of assets or loans by issuing commercial
paper.

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PNC loan sale and securitization activity

PNC sells commercial mortgage loans to FNMA and FHLMC. Under the
sale agreements, PNC assumes up to one-third of the risk of loss on
unpaid principal balances. As of June 30, 2009, the unpaid principal
balance outstanding of loans sold as a participant in these programs
was $19.8 billion and PNC's potential exposure to loss was $5.9
billion. Based on the cumulative losses rate for commercial mortgage
loans in 2009 and 2010, we have arrived at expected loss of $512
million under the base case assumptions. The Bank already has created
$108 million of reserves under loan losses for these agreements. Thus,
the expected additional loss to be borne by PNC is $404 million (2.8%
of the tangible equity).

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As of June 30, 2009, outstanding principal balances of loans
transferred to the securitization QSPEs was $2.8 billion and the
related liabilities were $2.2 billion. The loans are sold to the QSPE
on a non recourse basis, subject to representations and warranties made
at the time of sale. The retained interest in the securitization
entities include seller's interest, interest only strips and retained
asset backed securities.

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To value the retained interests, the Bank makes assumptions
regarding expected credit losses. For valuing the interest only strips
from credit card securitization, the expected annual credit losses were
assumed at 6.77% (really wishful thinking!!!)
while we expect the annualized credit charge offs rate for 2009 and
2010 at 14.0% and 11.6%, respectively. Since the bank loss rates are
significantly lower than our expectations (not to mention significantly
lower than the industry trend, which is probably below that deserved by
the National City Acquisition), we expect additional loss of $39
million from fair valuation of the retained interest in credit card
securitization. Similarly fair valuation of retained interest in auto
loan securitization will result in loss of $0.4 million. Together, the
fair valuation of the retained interests in credit card and auto loan
securitization will result in loss of $39 million (0.3% of tangible
equity).

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Per share impact of VIE and QSPE losses

Under the base case scenario we expect losses from unconsolidated
VIE's and QSPE at $1,433 million or $3.1 per share. This is gross of
the valuation in our latest PNC Subscriber Forensic Analysis below.

Free Links and Analysis Lite More Intense Subscriber Analysis

PNC Report 050508 revised PNC Report 050508 revised 2008-08-30 06:38:42 711.95 Kb

spreadsheet PNC Report_update final - Pro 2008-10-15 13:21:22 590.98 Kb

spreadsheet PNC Report_update final - Retail 2008-10-15 13:21:38 337.21 Kb

pdf PNC SCAP Results recast using FDIC and NY Fed data - Pro 2009-05-15 07:31:21 455.37 Kb

pdf PNC SCAP Results recast using FDIC and NY Fed data - Retail 2009-05-15 07:30:25 395.18 Kb

spreadsheet PNC Simulated Government Stress Test 2009-05-01 13:09:19 664.87 Kb

pdf PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb

spreadsheet PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb

pdf PNC Stress Test update - Professional 2009-04-21 15:55:56 3.00 Mb

pdf PNC Stress Test update - Retail 2009-04-21 15:53:52 777.50 Kb

Last modified on Wednesday, 21 October 2009 05:00