1. Banking Industry
Financial Analysis
Nashville, April 5, 2012
Steven Guan, Alex Hardy Charlene Li, Martin Williams
2. Agenda
• Banking Industry Characteristics
• Business Strategy of Regions Bank and PNC Bank
• Earnings Quality and Accounting Issues
• Risks and Profitability
• Future Prospects
3. Banking Industry Characteristics
Retail Banking Industry
SUPPLIERS: High CUSTOMERS: High
Fed Interest Rate Numerous Banks
BARRIERS: Low SUBSTITUTES: High
Internet technology RIVALRY: Investment Vehicles
Competitive
Market
4. Agenda
• Banking Industry Characteristics
• Business Strategy of Regions Bank and PNC Bank
• Earnings Quality and Accounting Issues
• Risks and Profitability
• Future Prospects
5. Business Strategy
Business Strategy of Regions and PNC
Bank Strategy Regions PNC
Traditional Growth Innovation
Hold Southeast Market "Checking
Growth Share Relationships"
Risk Profile Conservative Moderate
Cost Control Lower "Cost of Deposit" Virtual Customers
Customer
Acqusition High Growth Cities Invest in Technology
6. Agenda
• Banking Industry Characteristics
• Business Strategy of Regions Bank and PNC Bank
• Earnings Quality and Accounting Issues
• Risks and Profitability
• Future Prospects
7. Earnings Quality and Accounting Issues
Income and Expense Recognition
• Income
- Interest income: revenue earned on interest-earnings asset like
loans and investment securities
- Non-interest income :fees and commissions from continuing
operations other than issuing loans
• Expense
- Interest expense: expense paid on interest-bearing liabilities,
principally deposits and borrowings
- Noninterest expense: salaries and employee benefits, occupancy
cost and FDIC insurance
8. Earnings Quality and Accounting Issues
• Provision for Loan Losses
- reflect management’s judgment of probable credit losses
inherent in the portfolio, and will adversely affect the bank’s income
- Regions and PNC earnings growth is driven by the huge decrease in provisions
for loan losses rather than core business operations growth
9. Earnings Quality and Accounting Issues
• Discontinued Operations:
- Regions bank agreed to sell its non-banking subsidiary Morgan
Keegan to Raymond James Financial, resulting in a non-cash goodwill
impairment recorded in the loss from discontinued operations in 2011,
while there was no major disposition for PNC in 2011
- One-time charge and should be eliminated
10. Agenda
• Banking Industry Characteristics
• Business Strategy of Regions Bank and PNC Bank
• Earnings Quality and Accounting Issues
• Risks and Profitability
• Future Prospects
11. Risks &Profitability－Loans
• Loan can by grouped into Commercial, Investor Real Estate
and Consumer Loans
• Commercial Loans:
-loans to normal business operations to finance working
capital needs, equipment purchases or other expansion projects
- collection risk in this portfolio is driven by the cash flow
from customers’ business operations
• Investor Real Estate Loans:
-credit to real estate developers or investors where repayment
is dependent on the sale of real estate or income generated from
the real estate collateral
• Consumer Loans:
-residential first mortgage, home equity, indirect, consumer
credit card, and other consumer loans
-sensitive to unemployment and other key consumer
economic measures
12. Risks &Profitability－Loans
• Regions 2011 Regions Loan Composition
Regions Loan by Type 2011 and 2010
40,000 Total
Total
Consumer
Commercial
35,000 40%
46%
30,000
25,000 Total
Investor
20,000 2011 Real Estate
14%
15,000 2010
10,000
2010 Regions Loan Composition
5,000
-
Total Commercial Total Investor real estate Total Consumer
Total Total
Consumer Commercial
40% 43%
Total
Investor
Real Estate
17%
13. Risks &Profitability－Loans
• PNC 2011 PNC Loan Composition
PNC Loan by Type for 2011 and 2010
80,000
Total Total
Consumer Commercial
70,000
45% 41%
60,000
50,000 Total
Investor
40,000 2011 Real Estate
14%
30,000 2010
20,000
2010 PNC Loan Composition
10,000
-
Total Commercial Total Investor real estate Total Consumer
Total Total
Consumer Commercial
47% 37%
Total
Investor Real
Estate
16%
14. Risks &Profitability－Loans
• Loans by Geographic
- Regions: Alabama, Florida, Tennessee, Mississippi and Georgia
- the value of real estate in the Southeastern United States in
particular declined significantly more than real estate values in the
United States as a whole
- PNC: Illinois, Michigan, District of Columbia and Pennsylvania
- less impacted by the “Great Recession”
15. Risks &Profitability－Loans
Classified Loan for 2011 and 2010
5 4.50%
4.5 4.00%
4
3.50%
3.5
3.00%
3
2.50% Regions
2.5 PNC
2.00% Regions Ratio
2
PNC Ratio
1.50%
1.5
1.00%
1
0.5 0.50%
0 0.00%
2011 2010
• Both banks have decreased classified loans in absolute amount as a
percentage of total loans, solidifying the fact than the credit quality if
improving.
16. Risks &Profitability－Loans
Allowance for Loan Losses for 2011 and 2010
6 4.50%
4.00%
5
3.50%
4 3.00%
2.50% Regions
3 PNC
2.00%
Regions Ratio
2 1.50% PNC Ratio
1.00%
1
0.50%
0 0.00%
2011 2010
• Allowance for loan losses to total loans ratio and the exact amount for both
banks have decreased from 2011 to 2010, indicating an improving credit-
worthiness of their loan portfolios
17. Deposits Structure- Regions
100%
5.39% 4.93% 4.13%
90%
• Transaction Accounts cover money
markets, interest-bearing, and
80%
39.52%
41.38% interest-free accounts.
70% 49.83%
• Transaction Accounts continued to
60%
be major contributor funding
50%
source.
40%
24.09% 31.92% • Money Market Accounts & Time
20.27%
30% Deposits further shrank.
20% 29.59%
24.50% 24.40%
10%
2011 2010 2009
Money Markets
Time deposits
Demand (Interest & non-interest) Deposits
Savings Accounts
18. Deposits Structure- Regions
Growth Rate 2011 2010
Transaction Accounts 5.87% 6.49%
Money Markets -16.28% 16.34%
Time Deposits -14.95% -27.60%
Demand Deposits 21.70% 0.41%
Interest 44.44% -15.00%
Non-interest 9.84% 10.90%
• Interest-bearing accounts go up substantially with 44% growth.
• Money Market Accounts experienced a roller coaster.
• Time Deposits slow down the downward trends.
19. Deposits Structure-PNC Bank
• Money Markets Accounts & Transaction Accounts increased
by 6% and 10% respectively.
• Time Deposits shrank by 24 percent.
• PNC had negligible interest-bearing accounts; so demand
deposits purely consist of non-interest bearing accounts.
90.00%
78.69%
80.00%
73.42%
70.00%
60.00%
50.00% 47.50% 46.12%
2011
40.00%
2010
31.19%
30.00% 27.30%
22.57%
20.00% 16.71%
10.00%
0.00%
Transaction Accounts Money Markets Time deposits Demand Deposits
20. Risks and Profitability－Profitability
Efficiency Ratio Net Interest Margin
70.00% 4.50%
68.00% 4.00%
66.00% 3.50%
64.00%
3.00%
62.00%
2.50%
60.00%
2.00%
58.00%
1.50%
56.00%
54.00% 1.00%
52.00% 0.50%
50.00% 0.00%
PNC 2010 PNC 2011
Regions 2010 Regions 2011 Regions 2010 Regions 2011 PNC 2010 PNC 2011
Banks headed in different directions?
21. Agenda
• Banking Industry Characteristics
• Business Strategy of Regions Bank and PNC Bank
• Earnings Quality and Accounting Issues
• Risks and Profitability
• Future Prospects
23. After-Presentation Events
Key Milestones 1Q12 Results
• No objection to capital plan • Net income available to
• Closed Morgan Keegan Sale common shareholders of
• Successful common equity $145MM or $0.11 per diluted
offering share
• Credit ratings upgrade • Income from continuing
• Redeemed $3.5 billion of Series operations $0.14 per diluted
A preferred stock share
Broad-Based Asset Quality Improvement
• Net charge-offs decreased $98MM or
23% to $332MM
• Lowest quarterly loan loss provision in
more than four years at $117MM
• NPLs declined 9%
• Inflows of NPLs down 32% to $381 MM
