For a well-run bank, PNC (NYSE:PNC) is not shy about taking on other banks' troubles in the name of market expansion. Having expanded into the Midwest and Florida with the acquisition of National City in 2008, PNC is moving into the Southeast region of the U.S. with the acquisition of Royal Bank of Canada's (NYSE:RY) U.S. banking operations. While a curious deal in some respects, it could represent a toe-hold for a firm quickly become a super-regional player.

TUTORIAL: 20 Investments To Know

Terms of the Deal
PNC will be paying $3.45 billion to Royal Bank of Canada for its U.S. operations, a regional bank with $25 billion in assets and 424 branches in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia. PNC will have the option of paying up to $1 billion of the deal price in its own stock, a move that would prospectively represent about 3% of the bank's stock. To raise the cash for the deal, PNC will likely need to issue instruments like debt and trust preferred securities (a form of preferred stock).

What PNC is Buying
While PNC reportedly beat out another major Southeastern bank for RBC-USA, PNC is still paying a bit less than 1 times tangible book value. That may sound like a bargain, and it would be for a well-run bank. Unfortunately, RBC's U.S. banks were not doing so well. The company has been hit hard by credit losses and the recession and has reported 11 straight quarters of losses. What's more, while RBC began building its U.S. business about 10 years ago, it has not built much share in most of its markets - Georgia and North Carolina are areas of strength, but PNC already has more share in markets like Virginia and Florida.

PNC shareholders may also want to ponder how it is that PNC beat out the regional bank rival that would have had significant cost synergies in an RBC deal and likely a high internal rate of return on this deal. It may have been the case that overlapping credit risk or regulatory issues kept the rival from bidding up. It may also be the case, though, that the assets just were not worth the sacrifices. Remember, there are increasing limitations on banks doing deals as they grow, so PNC's rivals may have determined that RBC-USA wasn't worth expending one of those limited shots on goal.

What Happens Now?
With PNC's money in hand, RBC seems likely to retrench in Canada - an odd move, perhaps, considering that Toronto-Dominion (NYSE:TD) and Bank of Montreal (NYSE:BMO) are moving further into the U.S. By the same token, while it seems highly unlikely, it could be possible that RBC will enter the U.S. again at a later date - perhaps focusing on markets like the upper Midwest or New England.

For PNC, the job now is about cleaning up the remaining credit problems at RBC-USA and bringing these banks up to the operating standards of PNC. By the way, investors should note that PNC is writing down RBC-USA's loan book by 12.5% - a good reminder that the U.S. banking system still has credit issues.

Outside of these two participants, it seems likely that there will be still more deals in the banking space. Florida, Texas, and even Chicago remain areas with a lot of chatter about potential deals. Likely targets could include Regions (NYSE:RF), Synovus (NYSE:SNV) and BankUnited (NYSE:BKU) in the Florida region, and perhaps privately-held Everbank or even HSBC's (NYSE:HSB) branches. In Illinois, Privatebancorp (Nasdaq:PVTB), MB Financial (Nasdaq:MBFI) or Taylor Capital (Nasdaq:TAYC). For Texas, probable targets may include Cullen/Frost (NYSE:CFR), Prosperity Bancshares (Nasdaq:PRSP) or Texas Capital (Nasdaq:TCBI).

The Bottom Line
PNC has made a widely-expected but still somewhat odd move here. RBC's Southeast branches represent some good footholds (and definite expansion in Florida) in attractive faster-growing markets, but PNC will have to do a lot of its own work. RBC's U.S. branches need to operate better and PNC will have to roll up its sleeves and fight for share with entrenched competitors like Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), and the regional rival that PNC reportedly beat out in this deal.

If PNC is overpaying, it is not by much but the bank will likely need years to really turn this acquisition into a big winner. Long-term PNC shareholders should be satisfied with this ongoing expansion and reasonably confident that the bank can continue to acquire troubled assets and bring them up to PNC's higher standards. (For related reading, also take a look at How To Analyze A Bank's Financial Position.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!