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

By: Reggie Middleton | Thu, Oct 22, 2009
Print Email

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

EnterPNC 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).

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.

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).

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.

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).


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
PNC plus CRE = Doo Doo hitting the Fan
The difference between a professional investor and a professional reporter is...
PNC stress test write up - public lite 2009-07-27 02:37:11 995.30 Kb

More Intense Subscriber Analysis
PNC Report 050508 revised 2008-08-30 06:38:42 711.95 Kb
PNC Report_update final - Pro 2008-10-15 13:21:22 590.98 Kb
PNC Report_update final - Retail 2008-10-15 13:21:38 337.21 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Pro 2009-05-15 07:31:21 455.37 Kb
PNC SCAP Results recast using FDIC and NY Fed data - Retail 2009-05-15 07:30:25 395.18 Kb
PNC Simulated Government Stress Test 2009-05-01 13:09:19 664.87 Kb
PNC Stress Test Pro 2009-04-13 02:10:17 3.11 Mb
PNC Stress Test Retail 2009-04-13 02:11:08 323.51 Kb
PNC Stress Test update - Professional 2009-04-21 15:55:56 3.00 Mb
PNC Stress Test update - Retail 2009-04-21 15:53:52 777.50 Kb



Reggie Middleton

Author: Reggie Middleton

Reggie Middleton

Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Copyright © 2007-2017 Reggie Middleton

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com