PNC Financial Services GroupCovering Analyst: Matthew Miller Email: Miller24@uoregon.edu

Business Overview

› Founded in 1852 as The Pittsburgh Savings and Trust Company

› One of the largest diversified providers of financial services in the U.S.

› Strong loan and customer growth in 2012

PNC is Growing

Percentage Growth

2012 2011 2010

Retail Checking Relationships 12.39% 5.42% 1.39%

Corporate Banking Total Loans 27.66% 15.26% -3.79%

Asset Management Group Total Loans 4.63% -3.07% -5.47%

Residential Mortgage Loan Originations 33.33% 8.57% -45.03%

Improving Credit Metrics

Credit Metrics 2012 2011 2010

Asset Quality

PLL/Loans 0.53% 0.72% 1.66%

Non-Accruing/Loans 1.75% 2.24% 2.97%

Charge-Offs/Loans 0.69% 1.03% 1.95%

Loan Ratios

Loans/DD+TD 87.20% 84.60% 82.12%

Loans/Assets 60.92% 58.63% 56.98%

Scope

› 2,881 Branches

› 7,282 ATM Machines

› 18 States, Washington D.C.

Geographic Scope of Operations

Revenue Breakdown

Revenue Breakdown

Financial Services Industry

› Consolidating

› Changing regulatory environment

› Sustained low interest rates

› Projected 5.2% growth 2012-2017Industry Statistics ($ in billions) Industry PNC Share

Total Assets $13,070.00 $300.80 2.30%

Total Loans $6,901.00 $177.80 2.58%

Bank Net Income $34.72 $0.92 2.65%

Avg ROA 1.07 1.04

Avg ROE 9.46 8.22

Avg NI Margin 3.44 3.71

Consolidation

Regulatory Environment

› Basel III– Draft regulation published

› Implementation– Began 1 January 2013– End 1 January 2019

Low Interest Rates

› Current prime rate is 3.25

› Expected to remain low– Shrinking net interest

margin

Comparable Analysis

› Growth, risk, and products and services– U.S. Bancorp 22.5%– CIBC 22.5%– J.P. Morgan 20%– Toronto Dominion Bank 20%– Wells Fargo 15%

Comparable Valuation

Multiple Implied Price WeightP/B 108.70 10.00%P/TB 102.07 10.00%P/Loans 76.46 40.00%P/E 66.04 40.00%Price Target $78.08Current Price 62.39Undervalued 25.14%

› Values only the equity– No WACC– No Working Capital

› Reasons for not doing a DCF– Interest– Debt– Working Capital

Excess Return Model

Excess Return ModelNet Income Available to Commone Shareholders $2,003 $3,011 $2,998 $2,832 $3,473

% Growth 50.32% -0.43% -5.54% 22.62%

Equity Cost 3,572

Excess Equity Return -99

Cumulated Cost of Equity

Present Value

Beginning BV of Equity 39003

Cost of Equity 8.88%

Equity Cost 3572

Ending BV of Equity 39003 42380

Net Income $3,473

Dividined Payout Ratio 2.75%

Dividends Paid $95

Retained Earnings 3377

Excess Return Model Assumptions

Excess Return Model Assumptions Considerations

Tax Rate 24.50% Terminal Growth Rate 3.00%

Risk Free Rate 2.01% Terminal Value 2,685

Beta 1.21 PV of Terminal Value 1,612

Market Risk Premium 5.67% Sum of PV Free Cash Flows 80

% Equity 11.37% Excess Equity Value 1,692

% Debt 88.63% Total Liabilities 263,342

Terminal RFR 3.18% Current Book Value 39,003

CAPM 8.88% Market Capitalization 40,695

Terminal CAPM 10.06% Fully Diluted Shares 529

Implied Price 76.94

Current Price 63.87

Undervalued 20.47%

Final Valuation

Method Implied Price Weight

Excess Return $76.94 50.00%

Comparables $78.08 50.00%

Price Target $77.51

Current Price $62.39

Undervalued 24.23%

Questions?

Recommendation

› Based on my analysis I have found PNC to be significantly undervalued. Therefore I am recommending a buy for all portfolios

Appendix 1: Payout Ratio

Appendix 2: Dividend Yield

Appendix 3: Projected Dividend