The PNC Financial Services Group Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 16, 2024

There are 17 speakers on the call.

Operator

Good morning, and welcome to today's conference call for the P&C Financial Services Group. I am Brian Gill, the Director of Investor Relations for P&C. And participating on this call are P&C's Chairman, President and CEO, Bill Demchak and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward looking information. Cautionary statements about this information as well as reconciliations of non GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials.

Operator

These are all available on our corporate website, pnc.com under Investor Relations. These statements speak only as of January 16, 2024, and P&C undertakes no obligation to update them. Now I'd like to turn the call over to Bill.

Speaker 1

Thank you, Brian, and good morning, everyone. During a challenging and volatile operating environment for the banking industry. P&C performed well during 2023 and delivered a solid finish in the Q4. For the full year 20 23 adjusting for the Q4 impact of the FDIC special assessment and expenses related to a staff reduction initiative that we completed in the Q4, We earned $14.10 per diluted share compared to $13.85 per diluted share in 20 Importantly, we generated record revenue and controlled core expenses, which allowed us to deliver a modest amount of positive adjusted operating For the Q4, we reported $883,000,000 in net income or $1.85 diluted per share and 3 point $0.16 per share on an adjusted basis. Rob is going to take you through the financials in a moment, but I'd like to highlight a few points.

Speaker 1

First, as we announced in early October, we closed on the acquisition of the capital commitment loans from Signature, which is immediately accretive to earnings. Secondly, as we expected, we saw meaningful growth from non interest income during the Q4, driven primarily by a rebound in capital markets and advisory fees. 3rd, we completed the actions to reduce our workforce and we are positioned to realize $325,000,000 of expense savings in 2024. This is in addition to our CIP savings target for 2024 that Rob will discuss in a few minutes. Expense discipline remains a top priority for us and accordingly we are targeting stable expenses for 2024 even as we continue to invest in key growth initiatives.

Speaker 1

4th, our credit quality remained strong during the quarter, reflecting our thoughtful approach to growing our balance sheet. While we continue to That credit charge offs to increase over time, particularly in the CRE office segment were adequately reserved. Finally, during the Q4, we increased our Capital position saw solid improvement in our AOCI intangible book value and repurchased a modest amount of shares. In summary, we run our company with a focus on delivering through the cycle performance and feel very good about our strategy, our capabilities and the strength of our balance sheet as we enter 2024. And we believe we are well positioned to drive growth and deliver shareholder value in the coming year and beyond.

Speaker 1

As always, I want to thank our employees for everything they do to meet the needs of our customers and make our success possible. And with that, I'll turn it over to Rob.

Speaker 2

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis and compared to the Q3. Loans were up 2% and averaged $325,000,000,000 which includes the acquired Signature Capital Commitment Loans. Investment Securities declined $2,000,000,000 or 2%. Cash balances at the Federal Reserve increased $4,000,000,000 to $42,000,000,000 and deposits increased $1,400,000,000 and averaged $424,000,000,000 Borrowed funds increased $5,000,000,000 to $73,000,000,000 driven by higher FHLB borrowings and parent company senior debt issuances.

Speaker 2

At year end, P and C was fully compliant with the proposed holding company long term debt requirements. And we expect to reach compliance with the bank level metrics through our normal course of funding well in advance of the phase in period. AOCI improved $2,600,000,000 to negative $7,700,000,000 atquarterend, primarily reflecting the impact of favorable interest rate movements during the quarter. Accordingly, tangible book value increased to $85.08 per common share, up 9% linked quarter and 18% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.9 percent as of December 31, which increased 10 basis points linked quarter.

Speaker 2

Our estimated fully phased in expanded risk based CET1 ratio based on the new proposed capital rules would be approximately 8.2% at year end, which is well above our current requirement of 7%. We continue to be well positioned with capital flexibility. During the quarter, we resumed modest share repurchase activity of approximately $100,000,000 or roughly 500,000 shares. And when combined with $600,000,000 of common dividends, we returned a total of $700,000,000 of Capital to shareholders. Slide 4 shows our loans in more detail.

Speaker 2

To the Q3, average loan balances increased 2%, driven by higher commercial loan balances and modest growth in consumer. Commercial loans were $223,000,000,000 an increase of $5,000,000,000 driven by the acquisition of the Signature Capital Commitment portfolio. Excluding the $8,000,000,000 full quarter average impact from the Signature loan portfolio, commercial loans declined $3,000,000,000 or 1%, driven by lower utilization and soft loan demand. Consumer loans grew approximately $130,000,000 driven by higher residential mortgage balances, partially offset by lower home equity and credit card balances. And loan yields increased 19 basis points to 5.94% in the 4th quarter.

Speaker 2

Slide 5 covers our deposits in more detail. Average deposits grew $1,400,000,000 to $424,000,000,000 during the quarter. A seasonal growth in commercial deposits was partially offset by a decline in consumer deposits. In regard to mix, consolidated non interest bearing deposits were 25% in the 4th quarter, down slightly from 26% in the 3rd quarter and consistent with our expectations. We continue to expect the non interest bearing portion of our deposits to stabilize near current levels.

Speaker 2

Our current rate paid on interest bearing deposits increased to 2.48% during the 4th quarter, up from 2.26% in the prior quarter. As of December 31, our cumulative deposit beta was 44% and in line with our expectation for the quarter. As we stated previously, we expect betas to drift modestly higher while interest rates remain at current levels. And our current forecast calls for the 1st rate cut to occur in mid-twenty 24, at which point we believe the rate paid on deposits will begin to decline. Slide 6 details our investment security and swap portfolios.

Speaker 2

Average investment securities of $137,000,000,000 decreased 2% as curtailed purchase activity was more than offset by portfolio pay downs and maturities. The securities portfolio yield increased 2 basis points to 2.59%, reflecting the runoff of lower yielding securities. As of December 31, the duration of the investment securities portfolio was 4.1 years. Our received fixed swaps pointed to the commercial loan book totaled $33,000,000,000 on December 31. The weighted average received fixed rate of our swap portfolio increased 3 basis points to 2.1% and the duration of the portfolio was 2.3 years.

Speaker 2

AOCI improved by $2,600,000,000 in the 4th quarter reflecting lower interest rates. Importantly, As lower rate securities and swaps roll off, we expect a continued meaningful improvement to tangible book value from AOCI accretion. Turning to the income statement on Slide 7, 4th quarter net income was $883,000,000 or $1.85 per share, which included pre tax non core expenses of $665,000,000 or $525,000,000 after tax related to the FDIC special assessment and the workforce reduction charges incurred in the Q4. Excluding non core expenses, adjusted EPS was $3.16 Total revenue of $5,400,000,000 increased $128,000,000 or 2% compared to the Q3 of 2023. Net interest income declined modestly by $15,000,000 and our net interest margin was 2.66 percent, a decline of 5 basis points.

Speaker 2

Non Non interest income increased $143,000,000 or 8%. Non interest expense of $4,100,000,000 increased $829,000,000 were 26% and included $665,000,000 of non core expenses. Core non interest expense was $3,400,000,000 and increased $164,000,000 or 5%. Provision was $232,000,000 in the quarter and our effective tax rate was 16.3%. Full year 2023 revenue grew 2% compared to 2022.

Speaker 2

Core non interest expense was well controlled and grew 1%. Importantly, our disciplined expense management and CIP savings allowed us to deliver modest positive operating leverage and PPNR growth of 2% on an adjusted basis. Turning to Slide 8, we highlight our revenue trends. 4th quarter revenue was up $128,000,000 or 2% compared with the Q3 driven by strong fee income as net interest income of $3,400,000,000 was down modestly. Fee income was $1,800,000,000 and increased $99,000,000 or 6% linked quarter.

Speaker 2

Looking at the detail, capital markets and advisory fees rebounded as expected and increased $141,000,000 or 84%, driven by higher M and A advisory fees. Asset Management and Brokerage revenue grew $12,000,000 or 3% reflecting and residential and commercial mortgage revenue declined $52,000,000 or 26% primarily due to a decrease in the valuation of net mortgage servicing rights. Other non interest income of $138,000,000 increased $44,000,000 or 47 percent and included favorable valuation adjustments and gains on sales. The Q4 also included $100,000,000 negative Visa fair value adjustment compared to a $51,000,000 negative adjustment in the 3rd quarter. As a reminder, at December 31, P&C owned 3,500,000 Visa Class B Shares with an unrecognized gain of approximately $1,500,000,000 Turning to Slide 9, Our 4th quarter non interest expense of $4,100,000,000 was up $829,000,000 and included $665,000,000 of non core charges.

Speaker 2

Core non interest expense of $3,400,000,000 increased $164,000,000 or 5% linked quarter, reflecting higher business activity, seasonality and asset impairments. During the quarter, we incurred $42,000,000 of impairment charges, which were largely related to building write offs. Notably in 2023, we reduced our non branch footprint by 2,000,000 square feet or approximately 17%. For the full year, core non interest expense of $13,300,000,000 increased $177,000,000 or 1%. Expense growth was well controlled due in part to the $50,000,000 mid year increase in our CIP goal to $450,000,000 which we exceeded.

Speaker 2

As a result, we generated 41 basis points of adjusted positive operating leverage for the full year. Looking forward to 2024, our annual CIP target is $425,000,000 This program funds a significant portion of our ongoing business and technology investments. And as of year end, we completed related to the workforce reduction that will drive $325,000,000 of cost savings in 2024. Taken together, we're implementing $750,000,000 of expense management actions, all of which are reflected in our 2024 guidance that I will cover in a few minutes. Our credit metrics are presented on Slide 10.

Speaker 2

While overall credit quality remains strong across our portfolio, we did see a slight uptick in NPLs and delinquencies. Non performing loans increased $57,000,000 or 3% linked quarter and included a $12,000,000 increase in CRE. Total delinquencies of $1,400,000,000 increased 97,000,000 or 8% linked quarter. The increase included seasonally higher consumer delinquencies, the majority of which have already been resolved. Net loan charge offs were $200,000,000 in the 4th quarter and came in at the low end of our expectations.

Speaker 2

Our annualized net charge offs to average loans ratio was 24 basis points. And our allowance for credit losses totaled $5,500,000,000 or 1.7 percent of total loans on December 31, stable with September 30. The CRE office portfolio is where we continue to see the most stress and 4th quarter net loan charge offs were $56,000,000 We continue to expect future losses on this portfolio. However, we believe we've adequately reserved for those potential losses. As of December 31, our reserves on the office portfolio were 8.7 percent of total office loans and inside of that 12.9% on the multi tenant portfolio.

Speaker 2

Importantly, our overall CRE office portfolio declined 6% or approximately $550,000,000 linked quarter, reflecting a higher level of payoffs. Criticized office loans were flat and non performing loans increased 2% linked quarter. Naturally, we'll continue to monitor and review our assumptions to ensure they reflect current market conditions. And a full update of this portfolio is included in the appendix Slides. In summary, P&C reported a solid Q4 and full year 2023.

Speaker 2

In regard to our view of the overall economy, we're expecting a mild recession starting in mid-twenty 24 with a contraction in real GDP of less than 1%. We expect the federal funds rate to remain unchanged between 5.25% and 5.5% through mid-twenty 24 when we expect the Fed to begin to cut rates. We a reduction of 75 basis points in 2024 with a 25 basis point decrease in July, November December. Looking ahead, our outlook for full year 2024 compared to 2023 results is as follows. We expect spot loan growth of 3% to 4%, which equates to average loan growth of approximately 1%.

Speaker 2

Total revenue to be stable to down 2%. Inside of that, our expectation is for net interest income to be down in the range of 4% to 5% and non interest income to be up 4% to 6%. Core non interest expenses to be stable and we expect our effective tax rate to quarter of 2023 is as follows. We expect average loans to be stable, net interest income to be down 2% to 3%, fee income to be down 6% to 8% due to seasonally lower first quarter client activity as well as elevated 4th quarter Capital Markets and Advisory levels. Other non interest income to be in the range of $150,000,000 $200,000,000 excluding Visa activity.

Speaker 2

Taking the component pieces of revenue together, we expect total revenue to be down 3% to 4%. We expect total core non interest expense to be down 3% to 4%. We expect 1st quarter net charge offs to be between 200 and $250,000,000 And with that, Bill and I are ready to take your questions.

Speaker 3

Thank One moment please for the first question. Our first question comes from John McDonald with Autonomous Research. Please proceed.

Speaker 4

Good morning. I wanted to ask Rob and Bill about the loan growth outlook for 2024, the spot guidance of up 3% to 4% seems a bit better than what we're seeing in H8 currently. I thought you could give some color on the drivers of your outlook there. Thank you.

Speaker 2

Sure. Hey, John, good morning. It's Rob. Yes, on the outlook. So average loans up 1%, spot 3% to 4%, as you mentioned.

Speaker 2

We see most of that being on the commercial side and most of that being on the Commercial side and most of that being on the back end of the year. Consumer, we do have some growth throughout the year, but Yes, pretty modest.

Speaker 4

Okay. And Rob, on the net interest income guidance, it Sounds like you're assuming 3 rate cuts, a little bit less than what the forward curve has. Just kind of wondering what would be the sensitivity if the forward curve played out and we saw more rate cuts Than what you're assuming. Is that helpful to the NII outlook, all else equal or relatively neutral? Could you update us on the sensitivity there, please?

Speaker 2

Sure, John. Yes, the short answer is it's relatively neutral because as you know we've worked hard to get our balance sheet into a She didn't do a neutral sensitivity position. So not a lot of variance in terms of the forwards and our own expectations in terms of the impact on NII. The big question obviously is going to be on deposit pricing and how that behaves as the year plays out, but we don't expect a lot of variance.

Speaker 5

Okay. Thank you. Sure.

Speaker 3

Our next question comes From John Pancari with Evercore. Please proceed.

Speaker 6

Good morning. On the capital markets revenue, the numbers certainly came in really solid this quarter. As you look into 2024 and in the context of your up 4% to 6% non interest income guidance for the full year. How are you thinking about capital markets trajectory through the year off of this level? Thanks.

Speaker 2

Yes. Hey, John. Good morning. Yes, so with capital markets, we did get the rebound that we were expecting in the Q4 and the bulk of that is in our Harris Williams, our M and A As far as 'twenty four guidance goes, we expect The pipelines are good. We expect sort of the Q4 and the Q1 of 'twenty three to be the range of what we would see on a quarterly basis going Drew in 2024.

Speaker 2

The anomalies were the soft quarters of Q2 and Q3 in 2023. So take a look at the Q1 of 'twenty Q4 of 'twenty three and that's the range of what we would expect the quarterly run rate to be through 'twenty four.

Speaker 6

Got it. All right, Rob. Thanks for that. And then separately

Speaker 2

I'll even help you there, John. It's up about 20% year over year. I I'll save you the math

Speaker 7

there. Yes.

Speaker 8

All right.

Speaker 6

Thanks for that. And then on the your guidance for 2024 implies About 100 basis points negative operating leverage using the midpoint of the guidance, which actually screens relatively well versus your peers. How sustainable is that if the rate environment does not pan out as you're modeling and or better put if your revenue outlook is worse.

Speaker 9

Do you think you

Speaker 6

can sustain at that expected negative 100 basis points operating leverage or could it be worse? Thanks.

Speaker 1

We're fairly neutral to the And for our NII forecast toward as a function of rate cuts or not. So the outcome ought to be the same.

Speaker 2

Yes. Well, I would add to that, John. So we worked hard. We took some actions to position ourselves to have stable expenses Year over year. So that's a lot.

Speaker 2

And then as Bill pointed out on the revenue side, the NII is fairly predictable on a relative basis outside of rates and then the fees we feel good about the guidance. So I yes, that's what we think is going to occur.

Speaker 1

I think if there is variance anywhere, it's going to be on our assumptions as it relates to Deposit paid is the continued shift to interest bearing versus non interest bearing and ultimately the steepness of the yield curve, that The rates at the long end of the curve as opposed to the front end of the curve. We've tried to be to the best of our ability a little bit on the conservative side of all of those things. And we feel pretty good about where our forecast is.

Speaker 6

Great. All right. Thank you.

Speaker 3

Our next question comes from Scott Siefers with Piper Sandler. Please proceed.

Speaker 9

Good morning, everybody. Thanks for taking the question. I was hoping you might be able to share just some updated thoughts on sort of where and when NII, Mike Bottom. And I think perhaps more importantly, magnitude of rebound that it might see thereafter. I know you'd sort of suggested last month that And I ultimately could be a record in 2025.

Speaker 9

I guess I'd just be curious for any updated context around your thoughts there.

Speaker 2

Yes, sure, Scott. Good morning. Yes, so as we pointed out, we do see NII going down in the first half of the year, troughing around the time of the cuts and then growing from there and beyond. Think about where we are now, go down a bit and then grow back to where we are now. And then in 2025, What gives us a lot of confidence around record NII is we will get the compounded effect of the repricing of our fixed rate assets as that continues into 'twenty five.

Speaker 2

So that's what we laid out a month ago and that's still what we think.

Speaker 9

Perfect. Okay. Thank you, Bill. And then I guess just on the notion of deposit pricing, it sounds like you're expecting deposit cost to ease right around the time the Fed starts Cutting. What's your sense for the sort of the pace of deposit betas on the way down visavis what they were on the way up?

Speaker 2

Well, I would say on the commercial and high net worth side fast. And then we talked about on the consumer sort of the core consumer, we could then and this is what Bill was alluding to there earlier. We could continue to see some drift up in rate paid even though we get some cuts. So that's a big variable obviously and we'll have to play it out.

Speaker 9

Perfect. Okay. Thank you very much.

Speaker 3

Our next question comes from Manan Gosselia with Morgan Stanley. Please proceed.

Speaker 10

Hey, good morning. Thanks for outlining the macro assumptions behind the outlook and appreciate your comments on loan growth being more back end loaded. But can you give us some more color on how you're thinking about it? Because you also mentioned a mild recession midyear. So is it really a big uptick in C and I in maybe like 4Q as rates begin to come down and as we come out of that mild recession.

Speaker 10

So I was hoping you could give us some more color on both commercial and consumer there.

Speaker 2

So I would just say Just a follow-up on that. So yes, back half of the year. On the commercial side, we see the uptick in the 3rd and the 4th quarter. A big part of that being expected increase in utilization, which is a little bit lower right now and then just some pickup in general economic activity. Not a lot, 3% to 4% spot to average up 1%.

Speaker 2

And then on the consumer, just sort of slow steady growth, Nothing big there, maybe a little bit more in card and auto and a little bit less in resi.

Speaker 10

Got it. And then just on the credit side, last quarter you had some CRE loans move from criticize into NPLs And it looks like things have been pretty steady this quarter on both criticized and NPLs. So do you think at this stage You guys have scrubbed the books and it should remain steady over the next few quarters with just NCO is sticking up or is it likely to be lumpy? The question is more given the new outlook for rates to Down, do you think that the worst is behind us?

Speaker 1

Well, not on charge offs. We think we're reserved Correctly. But you have to remember that as these loans go to NPL and eventually if we have charges against them, we'll charge them off. It won't run through P No, because we've already created a reserve for it, but the work set on actually maturing the loans and dealing with the outcome is See up to come.

Speaker 2

Yes. And I would just add to that, the key number to look at there is the criticized percentage, Which has not changed much. To Bill's point, that's the first bucket. The movement of that to non performing or charge offs will occur, But it's that criticized number that's the key number.

Speaker 10

Got it. Thank you.

Speaker 3

Our next question comes from Jared Cassidy with RBC. Please proceed.

Speaker 11

Good morning, Bill. Good morning, Rob.

Speaker 2

Hi, Gerard.

Speaker 11

Can you guys share with us You talked, Rob, about the commercial loan growth in the quarter when you ex out the Signature purchase was down slightly. I know you have prospects for growth here in 2024 as you pointed out. But can you share with us, Do you guys see much competition from the private credit market, the private equity guys that have been much more aggressive recently in lending? And second, on part of that, do you have them as customers as well? So do you have to balance in them as competitors as well as customers?

Speaker 1

We don't compete with them head to head with the types of loans they're typically in because we don't play that much In the unsecured leverage space. Most of the decline at signature we saw was in utilization. Yes, sir. And some seasonal. As we go forward, more and more of the lending markets Are moving into private hands and longer term that is of a concern if they kind of move upscale on what they do.

Speaker 1

We do serve them. I would say that our client base with just call it private equity or Private managers at large, they're probably our largest clients between what we do with and for them from Harris Williams and Sulberry and Business Credit and Treasury management with their portfolio companies and on and on and on. So they are good clients and I guess at the margin we could end up competing with them in Certainly. But not so much today.

Speaker 11

I see. Okay. Thank you. And then Rob, the follow-up with your comments, You gave us the Visa ownership and the unrealized gain. If I recall correctly, I think Q1 of 'twenty four, The owners of those shares are permitted to monetize that.

Speaker 11

Can you give us your updated thoughts on what you guys are thinking with your position in Visa?

Speaker 2

Yes. Sure, Gerard. So our position is we have $1,500,000,000 in unrealized gains, dollars 3,500,000 B shares. As you pointed out, there's a vote by the Visa shareholders at the end of this month to approve an action to enable the B holders To monetize maybe up to 50%. So we don't control that.

Speaker 2

We see when the vote is scheduled, Should it be approved, then we'll move forward with our monetization plans that would be allowed under whatever is approved.

Speaker 1

Great. Thank you.

Speaker 3

Our next question comes from Bill Kirk Kasci with Wolfe Research. Please proceed.

Speaker 12

Thank you. Good morning, Bill and Rob. Following up on credit, if we play out what the soft landing scenario could look like and the Fed starts cutting rates In mid-twenty 4, would you expect to be in a position to possibly start releasing reserves or are the There's sort of likely to still be late cycle concerns that would lead you to want to maintain the reserve levels that you've already established?

Speaker 2

Hey, Bill, it's Rob. So first, our reserves are appropriate for what we expect to occur. So that's number 1. Number 2, if things should substantially improve, yes, sure. We're running at 1.7% right now, which historically is on the high side.

Speaker 2

So if things normalize out and your definition of normal, we could be lower.

Speaker 12

Got it. And then Bill following up on your comment about feeling good about your reserve levels, but that we Haven't necessarily seen peak charge off rates yet. If we were to go down the mild recession scenario path, Should we expect there to be some lag between when those charge offs would actually hit the P and L and when the corresponding reserves would get released Or would the releases kind of occur concurrent with the increase in charge offs?

Speaker 1

So remember the charge offs don't Hit P and L. There seems to be a lot of confusion on that. The provisions we take hit P and L and we've provided for our best expectation of future charge offs, in a scenario that The future charge offs in a scenario that assumes a mild recession. So if our scenario comes true, we're fully reserved for everything that might happen to us. Charge offs will flow through, but not hit our P and L because they're effectively neutralized against the debit to the provision.

Speaker 12

Understood. I guess I was I'm sorry.

Speaker 1

That's worth pointing out. There's always seems to be some confusion on that, but does that make sense?

Speaker 12

Yes. No, I understand. I guess where I was going with that is that some have sort of alluded to you allowing as if the credit environment does indeed deteriorate, allowing Some of those losses to flow through without necessarily releasing reserves. And Even though they've established reserves, they would kind of maintain those reserves and allow the higher charge offs to flow through before ultimately releasing and I was just Hoping to get your thoughts on kind of the timing of those different pieces.

Speaker 7

So it's

Speaker 1

a mechanical calculation that's dependent on calculation that's dependent on our view of the economy at the time. So if you got to a place where the charge offs Kurt, somehow we thought the economy was worse than our current expectation. We would be providing for the remainder of the portfolio at a higher level than we are today, Right. But right now, we don't expect that to happen. So if the economy is worse, simply put, if the economy is worse than a mild recession, then you would expect Our total reserve to increase.

Speaker 2

Because it's forward looking per CECL.

Speaker 12

Understood. If I could squeeze in one last one on capital return, I appreciate Slide 19. Can you speak to how you're thinking about that 150 basis point impact from Basel III Endgame in light of some of the pushback that it's received? And Is that 8.2% a level you feel comfortable running at or would you target a slightly higher buffer? And then sort of underlying all of that, Are you thinking how are you thinking about buybacks in light of all the moving pieces?

Speaker 1

We'll answer the Easy question first. 8.2 would be too low I think in this new environment assuming Basel III Endgame goes through. So we'd run it Some higher number than that for certain. There does appear to be Substantial commentary on the proposal such that I would expect that if it isn't reproposed, there Still would be some relief in certain asset categories and risk weighted assets and maybe on operating risk capital, we'll see. Having said that, we don't know.

Speaker 1

So at the moment, what we know is we're going to continue to grow earnings. We're going to accrete AOCI back into our capital base and we're going to pull that 8.2% up. We think we have flexibility inside of that to be active in the share repurchase market Between now and then and the more certainty we have, the more certain we'll be and explicit on what we might buy back during a given period of time.

Speaker 2

And I would just add to that. You saw we did we bought just under $100,000,000 of I'm sorry, and share repurchases in the Q4. In the Q1, we would expect to do at least that maybe a little bit more Depending on market conditions.

Speaker 12

Very helpful. Thank you for taking my questions.

Speaker 3

Our next question comes from Erika Najarian with UBS. Please proceed.

Speaker 13

Hi, good morning. I just wanted to ask one follow-up question on NII, if I may. A lot of investors were really Excited about the graphic that you put together at Goldman, the Nike swoosh, if you will, that had sort of the first rate cut embedded under the Nike swoosh, 25 basis points in 3Q 'twenty four. And I completely understand this is Stracked Art in a way, but I just wanted to put together everything that you guys said. I think it surprises investors that When you overlay the forward curve that it is neutral to this outcome, at least for 2024.

Speaker 13

But just looking back at the slides, Rob, on Slide 6 of this earnings season, it does seem like a lot Your received fixed swaps don't really meaningfully mature until 4Q 'twenty four. So I guess In terms of like the mechanical repricing that you keep talking about, the way that I really ask this question is, it sounds like it is Possible to have potentially a lower trough than people expected in 'twenty four and still have that record net Interest income in 25 because of those fixed rate dynamics and who knows what can happen on the liability side and the deposit repricing side if the Fed Cut sooner, but it feels like that swap maturity is part of why that Nike swoosh could be steeper. Am I thinking about it the right way?

Speaker 1

I don't know that we expect it to be deeper. We purposely drew the line to be a little bit thick because we don't know exactly when that trough might occur. I think all of the Commentary on 25 is in some ways mechanical. It's simply taking our fixed rate assets and repricing them at market. And we know what the maturities of those assets are.

Speaker 1

So in short form, one of the reasons we highlight that and also Show the steepness of the curve is our balance sheet, the fixed rate assets on our balance sheet are shorter And virtually all of our peers and at a yield level, that is somewhat lower. So we have a big pickup in fixed rate Earning yields sooner, than I think the market expects, which is in turn what gives rise to that the slope of that curve, whether it troughs In the Q2 or the 1st week and the Q3 or the 4th week and who knows, But still

Speaker 13

I don't think it's the perfect timing though that investors are worried about in terms of Q2 and Q3. It's just that your new guidance would imply Sort of after the Q1 that your average NII would be like 3, 3.7 or something like that, right? So to get to Accurred net interest income, it would have to be a pretty significant progression from there. So that's sort of I'm trying to set the stage for you guys to build that bridge because I think that investors really believe that you can reach that.

Speaker 1

I think that, that I call it the swoosh. I think the swoosh is still accurate. What else to say, it's consistent with our guidance and it's still accurate.

Speaker 3

Our next question comes from Ken Usdin with Jefferies. Please proceed.

Speaker 14

Hey, guys. Good morning. Just a follow-up on that swaps book on Page 6 of the deck, a couple of $1,000,000,000 decline in the received fixed. Any Changes this quarter, whether terminations or new adds and any thoughts in terms of like how you'll Change and utilize that in terms of the last answer of trying to move that forward. Thanks.

Speaker 1

I don't know that we had changes this quarter.

Speaker 2

Going into Q1 'twenty four. That's the question, Ken.

Speaker 1

No, just did you

Speaker 14

terminate any swaps this quarter and add any new and just kind of to remind us of the understanding of what Yes, no

Speaker 2

we did. Yes, no we did. Yes, we terminated some, we added some, net down, but that's all in the Yes, normal

Speaker 1

course. I think we're missing your question. What are we what are you trying to get at?

Speaker 14

Yes, I was just trying to get at just what changes you've made inside of the portfolio outside of the normal maturity schedule, which I think we see in the disclosures quarterly. Just wondering, did you terminate swaps? Did you add some new ones? And then just remind us about

Speaker 1

the forward We terminated 3.6 and added some. And I'll just remind you, when you terminate, you basically lock in that loss to the life to the original contract. And we'll do that at times simply to reposition where we have exposure.

Speaker 14

Yes, exactly. Okay, got it. Second question just on the fee outlook. Good to see first of all in 4th quarter of the capital markets improvement that you saw. Just wondering how much of a driver is that of your expected fee growth next year, your pipeline Harrison Harris Williams, etcetera and what other pieces do you expect to see growth in this year?

Speaker 14

Thanks.

Speaker 2

Yes. Hey, Ken. Just as I said earlier on the capital markets, nice rebound in our Harris Williams activity. Pipelines are good. They support year over year growth of close to 20%, which is what I mentioned earlier.

Speaker 2

In terms of the other fee categories, asset management flattish up a bit, that will be market dependent, Card and Cash Management up low to mid single digits. Lending and Deposit Services that will be down mid single digits and that's reflective of anticipated lower service charges on deposits. There was a number of items that did in 'twenty three to reduce overdraft charges for our clients, so that's good for our clients, but that will be some lower fees about mid single digit down. And then mortgage outside of hedge gains flattish down if you include the hedge gains.

Speaker 5

All right, Rob. Thank you for that.

Speaker 3

Our next question comes from Mike Nao with Wells Fargo. Please proceed.

Speaker 15

Hey, Bill. December 5, your ardent words, I quote, scale matters today more than it ever has prior to March and the mini crisis, We knew the technology mattered, we knew scale and brand mattered, we just eliminated tailoring and regulation for all intents and purposes, etcetera, Etcetera, you just go on to say that this will never be reversed, scale is more important than ever. I could give the whole speech, but it was it seemed like a passion speech more than I've ever heard you say before. So Why now? And along those lines, I mean, if you had better scale, would you get positive operating leverage in 2024, which You

Speaker 10

could do that, but I

Speaker 15

think you're talking further out. I think you're talking about organic and maybe inorganic expansion, but help me out there

Speaker 5

if you could.

Speaker 1

Yes, no, I was. Look, if you just look back at what happened this year on top of Kind of 8 or 9 years of history post the financial crisis. We've seen your words Goliath win In terms of organic deposit share growth, that trend line has accelerated as a function of the mini crisis This in March where corporates bluntly don't necessarily trust The regulatory environment to ensure that their deposits in a bank are safe. And so we've seen those deposits flow uphill. And if you are A primary relationship with that corporate easily embedded with treasury management and other services, you net net lose corporate deposits.

Speaker 1

I think when you combine that with the cost of technology, The removal of some of the tiering and regulation and capital requirements and liquidity scale matters. I think we are we are on net benefited From the Mini crisis, but just barely. And I think below us people struggle with that conversation with corporate clients. Above us, perhaps it's easy, but I think we need to move into that next level Such that we are seeing coast to coast as a ubiquitous Standard brand with the quasi support that the giant banks have in terms of times of crisis. I think it's critical.

Speaker 15

So what does that mean? Okay. So you identified The need and desire, so what does that mean? Does it mean naturally Yes.

Speaker 1

Yes. So naturally over time, we are gaining share on our newer markets at a rapid pace and we see that in client acquisition and Growth in all forms from deposits to loans to fees to so forth. I think Through time, you are going to see a clear differentiation of this dynamic played out across the market. I think there's going to be banks that are looking for strong partners and I think we are a strong partner. I'm not going to force that issue.

Speaker 1

But I think longer term we are a natural player in the consolidation of an industry where scale matters.

Speaker 15

And if you can't The deal is done and you've been opportunistic with National City and etcetera since then. Organic Ubiquiti, how could you get there? Do we start seeing you advertise during the Super Bowl? Do you double or triple your marketing spend? What do you do then?

Speaker 1

You just have to execute. I mean there's a Which simplifies the process. If you think about what's happening in the banking industry today, there's a couple Ignore some other issues with the large banks, but on the deposit share side, there's a couple of clear winners. There's one that probably should be over time. There's some people neutral and there's people losing.

Speaker 1

There's 5,000 banks in the country that I can take from and grow, Right. That's just a longer period of time, which we will pursue than what we might if there's inorganic opportunities when people come to the realization that they're kind of riding something In a deteriorating franchise. I can. Got it. I can see the trends.

Speaker 1

I know how we would react to opportunities and the trends. I know what we'll do to execute on our own and I'm confident in that. But I go all the way back, scale matters. We're going to have to play that game.

Speaker 15

I think just one follow-up, I got several emails from people saying, Well, I don't know if I want to own P&C stock because I'm afraid of what kind of deal they might do. What do you say to that?

Speaker 1

I think they should look at our history. It's my simplest explanation. I think somebody asked that question once before and I assure everybody I still know how to do math. And I I think the opportunities will come our way. I don't think we'll have to chase them.

Speaker 1

One of the reasons people Why am I as vocal about this as I am and part of the reason is to make the public aware, the public being regulators, And the need for consolidation. It doesn't mean I'm going to do something stupid in the pursuit of it. I just think it's going to happen.

Speaker 15

All right. Thank you.

Speaker 3

Our next question comes from Ebrahim Poonawala with Bank of America. Please proceed.

Speaker 7

Good morning. I guess just maybe one to follow-up on your discussion with Mike around M and A. I guess, do you think the regulatory backlog today is Conducive for doing M and A or do we need a very different sort of DOJ, just philosophical approach towards larger bank deals before we could see a pickup in deal activity?

Speaker 1

I don't think there's a simple answer to that Because I think if you listen carefully to the various Speeches that have been done that they'll talk about the recognition of the need for M and A, but they'll also talk About good mergers and bad mergers, good outcomes and bad outcomes along several metrics. So put differently, I think certain deals will get approved and others wouldn't. I think we have proven as an acquirer that we know what we're doing and that the resultant institution is in fact stronger Than the one we might acquire.

Speaker 7

Understood. And I guess just taking a step back around your view around the mild recession, I'm just wondering how much of that is just theoretical informing your Reserving model versus the weakness that you are seeing across your customers and that leads you to believe that we will have a recession the middle of the year, because once we go down that path, who knows how bad things could get. So just would love to hear whether the recession assumption is just your conservatism or Are you seeing weakness across your customers?

Speaker 1

It's not a I mean you see the credit metrics, it's not a concern in terms of customers. We've seen at the margin profit margins decrease with certain clients. If you look at soft inputs, surveys and so forth that are coming out of the Fed districts, The economy is definitely weakening, not at an alarming pace. It's kind of what We had expected given how tight the Fed has gone with monetary policy. We kind of see a mild recession.

Speaker 1

We actually see employment remaining strong through that, which ultimately is the thing that keeps the economy from going deeply into recession, just the strength of the labor market and consumer spending. So, this is kind of following the path of what we've thought for some period of time now.

Speaker 7

Got it. And one quick follow-up. Go ahead. Yes. Just a follow-up, Rod.

Speaker 7

Yes, go ahead.

Speaker 2

I was just going to add to that to Bill. So I mean, we can have a Slow down, continue and technically hit a recession without adding a whole lot of credit risk or increased credit structure.

Speaker 7

Understood. And just one thing, Rob, you mentioned that you expect non interest bearing deposits to stabilize from here. Just playing devil's advocate, why should they stabilize from here if rates remain, if we are in a 3% plus Fed funds world, Should we not expect the mix of deposits to move towards interest bearing, towards more CDs or is your view different?

Speaker 2

Well, I think obviously we've been watching that for the better part of a year here in terms of the decline in non interest bearing in absolute terms and relative percentages. Why we think it's largely happened is because it's been so long and much of that base is Our businesses and individuals that run on non interest bearing deposits. So they're not necessarily shopping for a higher rate. There's something around in terms of they pay for their services through deposits or on the consumer side small transaction accounts.

Speaker 7

Good. Thank you.

Speaker 3

Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed.

Speaker 5

Hi, guys. Just wondering your thoughts on Kind of medium term loan growth, a bit of a bigger picture question. You obviously gave details for this year. But as you think about like the next couple of years, Are you in the camp that there needs to be some structural deleveraging, so loan growth might be below GDP or where it normally would be or Just any thoughts that you have on that? Thanks.

Speaker 1

I mean, I don't think there's going to be any Structural delevering here. We're obviously seeing a lot of banks kind of on my prior point, coming to the conclusion that some of the ancillary lending activities they So, Khan, on the back of the big stimulus don't make sense anymore. So, there's deleveraging maybe across the industry by Certain groups, but not here.

Speaker 5

And I guess I meant from customers, right, even if rates go down a little bit, they're still Structurally a lot higher than they've been for the last almost 15 years. So if you just think about like the lending demand that's out there, honestly there's lots of factors, but Just thoughts on if higher rate structurally has a meaningful impact on that? Thank you.

Speaker 1

Sorry, on loan growth?

Speaker 5

Correct. As you think about corporate borrowers, they just can't afford potentially to borrow as much with rates higher, obviously, same for Consumer mortgage is the most obvious, so thinking more like on the commercial side.

Speaker 1

Well, I think at the end of the day that Our generic corporate client needs to redo their facilities and the price has gone up And that will occur. I think some of the activity that we saw on the back of just really low cost of capital in the Private equity markets where it kind of leverage is free. That's going to go by the wayside in a higher rate environment. If you look at the composition of our book, we're kind of the bread and butter of America. So I wouldn't expect That we would necessarily see a decline in loan growth simply because the front end of the so far rate is higher.

Speaker 5

Okay. Thank

Speaker 3

you. Our next question comes from Dave Rochester with Compass Points. Please proceed.

Speaker 8

Hey, good morning guys. Just back on the M and A discussion, I know you mentioned building in a bigger buffer And that 8.2% you have on your adjusted CET1 ratio today, but is the plan to also maybe retain more capital than you normally would to better Position you for taking advantage of any inorganic opportunities, which might keep the buyback activity more muted this year. Just curious to get your thoughts there, How you might balance that?

Speaker 1

Well, there I mean, both of those thoughts are consistent. 8.2 is too low, so we're going to grow. Whether we're growing to be in faster compliance or growing because maybe something shows up where we could use some, We're still going to grow and it's going to mute our capital return below what it otherwise might be absent the Basel III endgame changes.

Speaker 8

Okay. So you would expect buyback activity maybe to remain muted for the rest of the year, Not just the

Speaker 1

Q1. There's too much up in the air. I mean it's depending what the Fed does, look they could have to re propose It could go through the elections. They could change it materially. We don't know.

Speaker 1

All we know is All else equal, 8.2 is probably too low. We're still burning through our AOCI. We don't think that's going to change. So we stay the course and we'll adapt based on what we learn.

Speaker 8

Okay. And then back on your deposit betas you're assuming in the guide, Are you thinking you can move those commercial rates down materially more, like right out of the gate with the first cut or are you baking in some sort of a lag At least the first couple

Speaker 4

of cuts.

Speaker 2

It'd be pretty fast.

Speaker 8

Yes. Okay. Great. All right. Thanks, guys.

Speaker 3

Our next question comes from Vivek Juneja with JPMorgan. Please proceed. Vivek, your line is open. Please proceed with your question.

Operator

Do we have any more calls?

Speaker 3

We do have a question from Mike Mayo with Wells Fargo. Please proceed.

Speaker 15

Yes. Just a follow-up on your commercial loan growth, like why you're Punching your weight in the growth rate and which areas of commercial loan growth? And I know you've deployed Teams to all these cities near the National Main Street Bank and you're trying to gain share and all that. Is it that effort, the market share by city? Is it kind of smaller middle market?

Speaker 15

Is it that effect you talked about Scale versus the smaller competitors. I mean, how much we put in each bucket as far as your delta versus peer when it comes to commercial loan growth?

Speaker 1

Look, I would tell you that we're winning more than we're losing on pitches And that's more true today than it was pre March. We're winning At a higher percentage just because there's more shots on goal in the new markets than we are in the old ones. So the growth there is higher and that's those new markets And the fact that we have them fully staffed including products, Mike, differentiates us in a world where Total loan growth may be somewhat tepid. And importantly, we've said this for years as we go into new markets, We are not leading with credit in these new markets. Fee based growth actually outpaces our loan based growth in those markets as we cross sell into TM and other products and services.

Speaker 1

So We look at pipelines, we look at line of sight into what we have in each market. I don't know that there's any particular product that stands out as something that's growing faster than another one. It's It's just for winning clients.

Speaker 15

How much last follow-up, how much Faster would your commercial loan growth be if there were no private capital competitors right now?

Speaker 1

I think the only way that impacts us directly, I mean that the margin may be something in business Credit. And as you know, we partner with a lot of the private credit guys inside of that business. And then to the extent companies are Take it private, which I think is going to slow down given the cost of capital. We sometimes will lose a client To a leverage lender because they were taken private. But that's kind of And

Speaker 2

a structure we would want to Yes. That would be If that wasn't available that would otherwise be a conventional loan.

Speaker 15

Yes. All right. Thanks again.

Speaker 1

Thanks Mike. Vivek is back.

Speaker 3

And we have a question from Vivek Jean Asia with JPMorgan. Please proceed.

Speaker 1

Sorry about that.

Speaker 16

That I don't know what happened there. But Bill, question for you. I mean, When your deposits at the Fed keep growing, at what point are you thinking about putting Some of that are locking some of the yields on that. What's your thinking there, especially given all your other commentary about rates peaking, mild Session, loan growth, etcetera, triangulating all of those factors?

Speaker 1

Well, in the near term, we think the market has gotten ahead of itself. I think Until we're clear of the outcome here, we're clear Inflation and Fed actions, we're happy to kind of stay neutral. I think my own expectation here Vivek is not Outstanding what the Fed does through the course of 'twenty four with the Fed funds rate, my expectation is you're not going to See a lot of action in the longer rates simply because of the supply calendar and the fact that inflation will have a tail And while the Fed could ease somewhat, I think inflation is still going to be running against versus our goal, we'll have a lot of issues. So long story short, We don't see a burning desire to put money to work here because we think that opportunity is going to remain in the durations we typically invest in and probably get a little bit better just given how hot the market got post the last Fed meeting.

Speaker 16

Thanks. And second one, you talked about a lot of companies going into private hands and Obviously, that's creating competition from private credit for loans. But on the other hand, you've got increasing capital requirements, So which is translating into higher spreads so as to maintain returns. How do you balance That out on the one hand not losing share to the private market and on the other hand maintaining that. Do you see given that do you see Spreads staying high or do you think that turns course the other way?

Speaker 1

So again, we're kind of talking about 2 different universes of credit. But having said that, I'm sure you've heard this inside of your own shop. Lending money for the sake of lending money doesn't give us an adequate return on capital. Didn't before, it doesn't now. What gives us a return on capital is the relationship, the annuity like fees you get from TM, The additive fees you get from capital markets related activity and price is kind of a third order effect on the return on capital we With that client relationship.

Speaker 1

Private credit at the moment sees a return And private credit because they can put some leverage on it and there's not a big opportunity in private equity and yields are high. And I'll chase that for a period I don't know that that's a particularly great investment through the cycle and we don't try to compete with it in that lending environment.

Speaker 16

Thank you.

Speaker 3

There are no further questions at this time.

Operator

Okay. Well, thank you very much for participating in the call. And if you have any follow ups, Feel free to reach out to the IR team. Thank you and good luck this quarter.

Speaker 2

Thanks everybody. Thank you.

Speaker 3

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.

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Earnings Conference Call
The PNC Financial Services Group Q4 2023
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