Basel III Compliance To Trigger New Preferred Stock Offerings – Our First Case

PNC Financial this week introduced a new bank acquisition funding model that, if it comes to fruition, will generate a wave of new high quality traditional preferred stocks for your consideration. The PNC model, for the first time, clarifies how preferred stock investors are likely to benefit from the new Basel III capital requirements placed on banks.

While much has been written about how the Wall Street Reform Act, signed into law in July 2010, will likely lead to a wave of new high quality traditional preferred stocks from our Big Banks over the next two years, it has not been as clear if the new international Basel III capital requirements would trigger a similar result.

With the passage of the Wall Street Reform Act in July 2010 we’ve known that our Big Banks are going to have to replace their trust preferred stocks (TRUPS) with other forms of capital in order to meet new reserve requirements. Under the Act, while traditional preferred stock can still be counted toward bank reserves, TRUPS cannot be beginning January 1, 2013.

Since many will favor introducing new traditional preferred stocks to replace their TRUPS, preferred stock investors were already looking forward to a nice crop of new high quality traditional preferred stocks from banks over the next couple of years as we approach 2013.

Then earlier this week, PNC Financial Services Group introduced a second reason that such a wave could be on the way. On Monday, June 20 PNC announced that it was acquiring the U.S.-based branch banking operations of the Royal Bank of Canada (RBC), allowing PNC to expand into the southeast with 424 bank branches. The deal is scheduled to close in March.

While regional bank acquisitions are not all that newsworthy, the method that PNC is using to fund the acquisition, and the reasons behind that method, could be very telling about such acquisitions in the coming years.

In a probable nod toward Basel III compliance, among other sources PNC will be financing the acquisition by issuing $1 billion in new preferred stock. What makes doing so unusual is that PNC has the cash on hand without the new preferred stock issue. With Basel III’s emphasis on cash holdings, PNC improves its compliance position by issuing new preferred stock rather than depleting its substantial pile of cash.

Prior to Basel III, it is unlikely that PNC would be issuing a new preferred stock to generate cash for this acquisition since it already has plenty of cash on hand.

If bank acquisitions going forward follow this week’s PNC model, preferred stock investors should plan for a smorgasbord of new, high quality traditional preferred stocks from our Big Banks over the next couple of years – courtesy of new domestic and international reserve requirements.

Many Happy Returns.