PNC Financial Services Group (PNC) has acquired RBC Bank for $3.45b, a $112m discount to tangible book value. PNC will likely start making money on this transaction sometime in early 2013. The stock presently trades at $56.80 with a fifty two week range of $49.43-$65.19.The transaction is to close in March, 2012.
One appreciates the long term potential of this deal. PNC has a track record of successful assimilation, notably the National City acquisition. By acquiring the well-placed branches of RBC Bank, PNC moves out southeast, primarily North Carolina, also Virgina, Washington D.C., South Carolina, Georgia, Alabama and Florida (where PNC already has assets from the National City transaction).The direct competitor appears to be BB&T (BBT), the North Carolina-based entrenched regional bank. If PNC employs the characteristics of it's operations elsewhere, BB&T is in for a tussle. BB&T is plagued with spotty customer service, many dated branches and technical problems, not the least being poorly attended ATM machines and check posting service. PNC on the other hand excels in customer service, making banking online and on site a quick task. While this contrast between the two regionals may not translate into an enhanced stock price, it could have a long term impact as loyal BB&T customers discover banking with less annoyance.
The deal between PNC and RBC gives PNC a great entry point into the Southeast, and includes $19b in deposits and $16b of loans. PNC has been stellar cutting costs without sacrificing service. RBC had cost containment issues.Thus,investors should expect PNC to substantially improve margins at RBC branches as standard systems and efficiencies are implemented.
PNC is taking into account bad loans with a fair value mark on RBCs loan book of 12.5% ($2.2b). The most aggressive marks were taken on consumer portfolios, including home equity loans.
The deal makes PNC the fifth largest bank by deposits in the country. BB&T is eighth. PNC will be a top 10 deposit franchise in North Carolina, Georgia and Alabama with RBC assets in these states.
A price target 12 months hence of $70.00 is not unreasonable, which may include dividend hikes. PNC is set to provide a long term growth and dividend story.