Alphabet Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 15, 2024

There are 13 speakers on the call.

Operator

Please note that this conference is being recorded.

Operator

I will now turn the conference over to Brian Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

Speaker 1

Well, good morning. 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 and CEO, Bill Demchak and Rob Relli, 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.

Speaker 1

These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of October 15, 2024, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Speaker 2

Thank you, Brian, and good morning, everyone. As you've seen, we had a very good Q3. We executed well and saw strong momentum across our franchise. We generated $1,500,000,000 in net income or $3.49 diluted earnings per share. Rob will take you through the details shortly, but I wanted to highlight a few points.

Speaker 2

First, we generated positive operating leverage for the 3rd consecutive quarter and as an aside, our strong performance has positioned us to deliver positive operating leverage for the full year of 2024. Inside of the 3rd quarter performance, NII grew 3% as we continue our growth trajectory towards expected record NII in 2025. Our fee income grew 10% with a very strong quarter in capital markets and we remain disciplined on the expense front. 2nd, we continue to see strong growth and activity across our franchise. CNIB continues to have great momentum as new loan production and commitments increased this quarter.

Speaker 2

While overall loan utilization has remained soft, the recent Fed actions to lower interest rates and the expectation of further cuts is likely to spur greater demand as we move ahead. Importantly, we are well positioned to serve our customers when loan growth returns. Within retail, we continue to invest heavily in our branch network to build density in our most attractive growth markets and we are seeing success. We continue to grow customer households and checking accounts with the highest customer growth being realized in the Southwest markets. AMG is accelerating growth in high opportunity markets and benefiting from favorable equity markets.

Speaker 2

3rd, our overall credit quality remains relatively stable, reflecting our thoughtful approach to managing risk, customer selection and long term relationship development, while we expect additional charge offs in the CRE office segment were adequately reserved. Lastly, we continued to strengthen our capital levels during the quarter and with the ongoing improvement in AOCI, our tangible book value per share increased 9%. In summary, we delivered strong results in the quarter and we remain well positioned to continue our momentum. In fact, we're in the middle of our strategic planning and I can't recall a time when our organic growth opportunities have ever been more attractive. Now, before I turn it over to Rob for more detail on the financial results and outlook, I'd like to say thank you to our employees for everything that they do for our customers and our company.

Speaker 2

And with that, I'll turn it over to Rob to take you through the quarter.

Speaker 3

Rob? Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans of $320,000,000,000 were stable, investment securities increased slightly by $1,000,000,000 or 1 percent and our cash balances at the Federal Reserve were $45,000,000,000 an increase of $4,000,000,000 or 10%. Deposit balances grew $5,000,000,000 or 1% and averaged $422,000,000,000 Borrowed funds decreased $1,000,000,000 or 2%, primarily due to the maturity of FHLB advances, partially offset by parent company debt issuances.

Speaker 3

At quarter end, AOCI was negative $5,100,000,000 an improvement of $2,400,000,000 or 32% compared with June 30. Our tangible book value increased to approximately $97 per common share, which was a 9% increase linked quarter and a 24% increase compared to the same period a year ago. We remain well capitalized and our estimated CET1 ratio increased to 10.3% as of September 30. Regarding the Basel III endgame, while certain aspects of the proposed rules are likely to change, we estimate our revised standardized ratio, which includes AOCI to be 9.2% atquarterend. We continue to be well positioned with capital flexibility and we returned roughly $800,000,000 of capital to shareholders during the quarter through common dividends and share repurchases.

Speaker 3

Slide 5 shows our loans in more detail. Average loan balances of $320,000,000,000 were flat compared to the Q2 as well as the same period a year ago. And the yield on total loans increased 8 basis points to 6.13% in the 3rd quarter. Commercial loans were stable at $219,000,000,000 linked quarter as utilization rates remained low and well below the historical average of roughly 55%. We continue to have confidence that commercial loan demand will return in the coming quarters as our loan commitments continue to increase and we expect business investment to return to historical levels.

Speaker 3

Consumer loans averaged $101,000,000,000 and were stable with the 2nd quarter, as growth in auto loans was mostly offset by a decline in residential real estate balances. Slide 6 details our investment security and swap portfolios. Average investment securities of $2,000,000,000 increased $1,000,000,000 or 1%. The securities portfolio yield increased 24 basis points to 3.08%, driven by higher rates on new purchases and the full quarter impact of the securities repositioning. As of September 30, our securities portfolio duration was approximately 3.3 years.

Speaker 3

Our active received fixed rate swaps pointing to the commercial loan book totaled $33,000,000,000 on September 30 and the weighted average rate increased 58 basis points to 3.08%. Our forward starting swaps were $15,000,000,000 with a weighted average receive rate of 4.26%. Importantly, with our forward starting swaps, we've locked in the replacement yield on the majority of our 2025 swap maturities at levels higher than existing swaps in current market rates. Turning to Slide 7, we expect considerable runoff of lower yielding securities and swaps, which will allow us to continue to reinvest into higher yielding assets over the next couple of years. Accumulated other comprehensive income improved by approximately $2,400,000,000 or 32 percent to negative $5,100,000,000 on September 30, compared to negative $7,400,000,000 on June 30.

Speaker 3

The linked quarter improvement in AOCI was primarily due to lower rates, which benefited our swap and available for sale portfolio valuations. Going forward, AOCI related to these securities and swaps, as well as our held to maturity portfolio will accrete back as they mature and prepay, resulting in further growth to tangible book value. Slide 8 covers our deposit balances in more detail. Average deposits increased $5,000,000,000 or 1%, reflecting an increase in interest bearing commercial balances, as well as higher time deposits. Regarding mix, non interest bearing deposits were stable at $96,000,000,000 and remained at 23% of total average deposits.

Speaker 3

Our rate paid on interest bearing deposits increased 11 basis points during the 3rd quarter to 2.72%, reflecting growth in commercial interest bearing deposits. We believe our total rate paid on deposits has reached its peak level and with the 50 basis point cut in September, we've already begun to reduce deposit pricing. Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 basis points at both the November December meetings, which will accelerate deposit repricing, particularly within our high beta commercial interest bearing deposits. Turning to Slide 9, we highlight our income statement trends. 3rd quarter net income was $1,500,000,000 or $3.49 per share.

Speaker 3

Comparing the 3rd quarter to the 2nd quarter, total revenue of $5,400,000,000 increased $21,000,000 Net interest income grew by $108,000,000 or 3 percent and our net interest margin was 2.64 percent, an increase of 4 basis points. Fee income increased $176,000,000 or 10 percent. Other non interest income was $69,000,000 and included negative $128,000,000 of Visa related activity. Non interest expense of 3,300,000,000 dollars decreased $30,000,000 or 1%. As a result, PPNR grew 2% linked quarter and we generated positive operating leverage for the 3rd consecutive quarter.

Speaker 3

Provision was $243,000,000 reflecting portfolio activity and our effective tax rate was 19.2%. Turning to Slide 10, we highlight our revenue trends. 3rd quarter revenue increased $21,000,000 driven by higher fee and net interest income, partially offset by lower other non interest income. Other non interest income included negative $128,000,000 of Visa related activity. Net interest income of $3,400,000,000 increased $108,000,000 or 3%, driven by higher yields on interest earning assets.

Speaker 3

Fee income was $2,000,000,000 and increased $176,000,000 or 10% linked quarter. Looking at the detail, asset management and brokerage income grew $19,000,000 or 5%, reflecting favorable equity and fixed income market performance. Capital markets and advisory fees increased approximately $100,000,000 or 36%, driven by higher M and A advisory activity as well as broad growth across most categories. Card and cash management decreased $8,000,000 or 1% as higher treasury management revenue was more than offset by credit card origination incentives. Lending and deposit revenue grew $16,000,000 or 5% due to increased customer activity.

Speaker 3

Mortgage revenue was up $50,000,000 linked quarter, driven by a $59,000,000 increase in the valuation of net mortgage servicing rights. Other non interest income of $69,000,000 included Visa derivative fair value adjustments of negative $128,000,000 primarily related to Visa's September announcement of a $1,500,000,000 litigation escrow funding. Notably, we continue to see strong momentum across our lines of business and throughout our markets. And year to date, non interest income of $6,000,000,000 grew approximately $400,000,000 or 7% compared to the same period last year. Turning to Slide 11, our non interest expense of $3,300,000,000 declined $30,000,000 or 1%.

Speaker 3

Excluding the Q2, a $120,000,000 contribution expense to the P and C Foundation, non interest expense increased $90,000,000 or 3 percent linked quarter. Personnel expense increased $87,000,000 or 5%, reflecting higher incentive compensation related to increased business activity. Importantly, all other categories declined or remained stable. Year to date non interest expenses increased by $80,000,000 or 1%. Excluding the $130,000,000 FDIC special assessments and the $120,000,000 foundation contribution expense in 2024, non interest expense is down 2% compared to the same period a year ago.

Speaker 3

We remain diligent in our continuous improvement efforts. We increased our CIP goal last quarter from $425,000,000 to $450,000,000 and we're on track to achieve that goal in 2024. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 12. Non performing loans increased $75,000,000 or 3% linked quarter, primarily driven by an increase in CRE office loans.

Speaker 3

Total delinquencies of $1,300,000,000 were stable with June 30. Net loan charge offs were $286,000,000 The $24,000,000 linked quarter increase was driven primarily by lower commercial recoveries and our annualized net charge offs to average loans ratio was 36 basis points. Our allowance for credit losses totaled $5,300,000,000 or 1.7 percent of total loans on September 30, stable with June 30. Slide 13 provides more detail on our CRE office credit metrics. We continue to see stress in the office portfolio given the challenges inherent in this book and the lack of demand for office properties.

Speaker 3

CRE office criticized loans were essentially stable linked quarter, but NPLs increased due to the migration of criticized loans to non performing status. Net loan charge offs within the CRE office portfolio were down slightly. However, going forward, we expect additional charge offs on this book, the size of which will vary quarter to quarter given the nature of the loans. As of September 30, our reserves on the overall office portfolio were 11.3% and inside of that 16% on the multi tenant portfolio, both up slightly from prior quarter. The modest increase in reserves reflects the continued valuation adjustments across the portfolio and specific reserves for certain credits.

Speaker 3

Furthermore, CRE office balances declined 4% or approximately $270,000,000 linked quarter as we continue to manage our exposure down. Accordingly, we believe we are adequately reserved. In summary, P and C reported a solid Q3. Regarding our view of the overall economy, we're expecting continued economic growth in the 4th quarter, resulting in real GDP growth of approximately 2% in 2024 and unemployment to remain slightly above 4% through year end. We expect the Fed to cut rates 2 additional times in 2024 with a 25 basis point decrease in November and another in December.

Speaker 3

Looking at the Q4 of 2024 compared to the Q3 of 2024, we expect average loans to be stable, net interest income to be up approximately 1%, fee income to be down 5% to 7% due to the elevated Q3 capital markets and MSR levels other non interest income to be in the range of $150,000,000 $200,000,000 excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be stable. We expect total non interest expense to be up 2% to 3%, and we expect 4th quarter net charge offs to be approximately $300,000,000 Importantly, considering our year to date results and 4th quarter expectations, we're on track to generate full year positive operating leverage. And with that, Bill and I are ready to take your questions.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of Erika Najarian with UBS. Please proceed with your questions.

Speaker 4

Hi, good morning. Good morning. Rob, if we could just unpack a little bit of the commentary you made on the swap. So I guess first part of this question is, I noticed that the received fixed rate on your asset on your active swaps went up quite a bit quarter to quarter, implying that what's rolling off is well sub You went from $250,000,000 to $308,000,000 So I'm wondering if you could confirm that. And looking forward, I think you said something in your prepared remarks about replacing expiring 25 swaps at a higher fixed rate, received fixed rate than you thought to maybe just clarify that statement as well?

Speaker 3

Sure. Good morning, Erica. So yes, you're right. And again, all of this in terms of your question that points to what is occurring, which is that our repricing of our fixed rate assets, including our securities loans and swaps is occurring at higher rates. So that's all of what we've been talking about for a while.

Speaker 3

True in terms of the swaps, new swaps are at a higher rate than the old swaps. And then as you recall back in the spring, we did execute some forward swaps that locked in rates for maturing assets in 'twenty five that contribute to our statement, which we might as well confirm upfront, our NII being at record levels in 2025, we're sticking to

Speaker 4

it. Got it. Okay. And just the second part of my question, that's the mechanical side now on the strategic side. Bill, it's been such a long time since the market has seen a neutral rate of not 0.

Speaker 4

Everybody has talked about deposit betas, but as we think about what the natural deposit cost is for P and C, how should we think about what the spread is? Let's say we settle at 2.75%, 3 percent in terms of Fed funds, what's the spread in terms of Fed funds versus your funding costs naturally? And additionally, just as a quick follow-up to Rob as we're in the liability side of the balance sheet, Is there what drove the strength in deposits? And was that mostly corporate? And is that permanent balances?

Speaker 4

Or is that sort of some corporate balances just parked for now given the uncertainty in the market?

Speaker 2

I can't give a specific answer to where we might end up if rates front rates kind of hold it free and change, which I expect they will. Practically, you can do it most of that yourself, right? So the zero cost deposits are obviously worth a lot more if there's any steepness to the curve. We get that benefit with our fixed rate assets. So maybe inside of your question is all else equal if we end up in an environment where front rates are 3 and change and back rates are somewhat higher than that, that's the really attractive environment for banks, ourselves included.

Speaker 3

Yes. And then the second part of that, Erica, was the outperformance in our deposit balances came on the commercial interest bearing side. As commercial clients continue to build cash on their balance sheet, Our expectation is that will hold for the most part through the end of the year.

Speaker 4

Got it. Thank you.

Operator

Thank you. Our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.

Speaker 5

Good morning.

Speaker 2

Hi, John.

Speaker 5

On the loan side, still balances are clearly still pressured and you flagged line utilizations down a bit to 50.7% and below your historical. Can you maybe talk about the demand, the underlying demand trends that you are seeing? And what do you think is going to be the biggest catalyst to get borrowers off the sidelines in borrowing? Is it continued rate cuts confidence in that front? Is it the election?

Speaker 5

If you could just maybe give us some thoughts there? And what do you think a growth rate is reasonable as you enter 2025? Thanks.

Speaker 3

Hey, John, it's Rob. So, yes, all year we've yet delivered the loan growth that we thought was coming at some future point and for all the obvious reasons that you've seen utilization is low. And there is a bit of a pause feeling obviously with the election coming up and the rate environment. What we point to in terms of on the constructive front is we do continue to add customers, we do continue to add loan commitments quarter over quarter. So our commercial clients are putting those lines in place with the anticipation of borrowing.

Speaker 3

So that's a constructive sign. And then you've seen the low inventory levels, the low CapEx to sales levels. So it does feel as though we're at the point of the cycle to where loan growth is not too far off.

Speaker 5

Okay, got it. Thanks, Rob, for that. And then separately, capital markets clearly has been a point of strength. Can you maybe just provide us a little bit of color on the pipeline there? And do you expect a pullback in the Q4 off these high levels?

Speaker 5

Just how should we think about that? Thanks.

Speaker 3

Yes, we do. I'll expand that a little bit in terms of our fee guidance for the Q4. So we're pointing it down 5% to 7% and all of that decline is being driven by the elevated MSR levels and the elevated capital markets level that we achieved in the Q3. So for the Q4, the MSRs is pretty straightforward. We don't expect to have those levels in the Q4.

Speaker 3

And then on the capital market side, the short answer is we probably pulled a little bit of the 4th quarter activity into the Q3. A lot of that is in our Harris Williams M and A advisory businesses that had a really strong Q3, as well as some of the other broader capital markets story. So it's a little bit lumpy. The pipelines though are strong, the momentum is strong, capital markets year over year is up north of 23%. The back half of 24%, including our capital markets guidance for the 4th quarter is up 20% over the first half.

Speaker 3

So the momentum is there. It's just not necessarily going to fall linearly quarter to quarter.

Speaker 5

Got it. All right. Thanks, Ron. Sure.

Operator

Thank you. Our next questions come from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.

Speaker 6

Thanks for taking the question. I guess I wanted to follow-up just a little bit on sort of the lending and deposit discussion. I guess first just kind of qualitatively, do you have a sense for what a lending recovery might look like when it does come back? And I guess the context in that is I recall a time when bank loans used to grow at some multiple of GDP, but it's been quite a while since we've seen that. So maybe just some top level thoughts there.

Speaker 6

And then on the other side of the balance sheet, just maybe your sense for how deposit costs behave if lending does come back better? You all and I think a lot of the industry are great from a liquidity perspective. So curious how much competition factors into your thinking as well?

Speaker 2

We can come up with 10 different theories on why loan growth hasn't been there and why it might come back, but all of them are being making up theories. It's been below trend on utilization. There's a bunch of uncertainty, not the least of which is the election and rates and all the other things that may impact it, but it's one of the reasons why we kind of said, look, we'll produce growth for our shareholders without having to rely on some made up story as to why there might be loan growth. If there is, it's terrific and at some point it will come back, but I've given up trying to forecast it personally. On the funding side, we are very liquid.

Speaker 2

So we have an opportunity should it arise. We have a lot of capital and cash and that would be a great thing for us.

Speaker 3

I'd have to balance at the Fed this 35 spot, 45 average.

Speaker 2

So I don't know that it's going to impact our funding costs whatsoever.

Speaker 7

Perfect. Okay, good. All right. Thank you very much.

Operator

Our next questions come from the line of Matt O'Connor with Deutsche Bank.

Speaker 7

Any updated thoughts on where you think your net interest margin normalizes? I think at one point a couple of months ago, you said it could approach 3%. I think it was by the end of next year. But updated thoughts on that given the forward curve and your outlook for the mix of the balance sheet? Thanks.

Speaker 3

Yes. Hey, Matt, it's Rob. I do recall you asking the question before and the answer is going to be the same, which is our NIM is increasing. We don't manage the NIM, it's an outcome. We've operated close to 3.

Speaker 3

My expectation is that we'll approach those levels. I don't remember saying by the end of 'twenty five, but maybe that's something that you added in, but we're on our way up and 3 is reasonable through time.

Speaker 7

Okay. And actually maybe it was by the end of 'twenty six, I had my no trouble read. And then just separately, you've always been very strong in commercial lending and some of the few businesses that come from that. The consumer side has always been a little bit less of a focus, but I think you've been leaning in some areas like credit card around the edges. And just any updated thoughts in terms of what could be growth drivers as we think about consumer lending, consumer fees next couple of years?

Speaker 2

Thanks. Look, we've historically we have under invested in it and we are under penetrated with our existing clients. On consumer. On consumer, yes. And that's our opportunity set.

Speaker 2

I don't know that we need to be heroic and be go beyond that, but we ought to have the same penetration rate that our peers do with respect to our consumer lending. And there's fairly material upside if we can pull that off and we're investing to be able to do so.

Speaker 3

And we've introduced a new credit card and plans to continue to do that along those lines.

Speaker 7

Okay. And when do you think you'll start we'll start seeing some of those efforts kick in? I mean, we are seeing pretty good credit card volume growth in the industry and at most peers. And obviously, there's a little bit of a lag, but what do you think some of those efforts will be a little bit more evident?

Speaker 2

I don't know that I have a timeline on it. I would tell you that we're investing in people. We're investing in our credit management capabilities and our marketing and our product delivery, all of the above that will hopefully through time allow us to get the penetration we should have. I don't know what the timeline is on that, but I know it's a journey and I know we need to start it. And we're

Speaker 3

at we're beginning now.

Operator

Our next questions come from the line of Bill Carcache with Wolfe Research.

Speaker 8

Following up on your loan growth commentary, you've had a lot of success over the years in taking share within C and I. If we do get a reacceleration in loan growth over, say, the next year or so, how does that influence your ability to continue to take share and perhaps outpace industry growth, recognizing your competitors are obviously not willingly ceding share?

Speaker 2

Well, I think that will show up. We are growing DHE and winning new clients at a record pace, I think. So when utilization comes back, we ought as we have in the past, my best guess is we would outperform.

Speaker 3

Well, THE is our loan commitment. They're unfunded at the moment, but they've been put in place. And I think the most of the momentum that we see is in our Southwest markets where we are achieving record levels and would expect to be above average if it all plays out as we expect.

Speaker 8

Thanks. That's helpful. And then separately on non interest bearing deposits, you expect rates on your interest bearing deposits to decline starting next quarter, but how long before you'd expect to see the effect of lower rates relating to compensating balances?

Speaker 3

Yes, I don't know. That's a tough one to answer. I mean, what we're encouraged about is we've clearly stabilized now for a couple of quarters at the levels that we are following several quarters of pretty substantial decline. So we've stabilized. There's a lot of theories in terms of what sort of the magic short term rate is that picks that up, but no one has a definitive answer.

Speaker 8

Right. But is the credit that you give customers on compensating balances a sort of lever that you'd expect to use or be willing to use as you look to grow non interest bearing deposits? Just trying to think through whether that's a potential something that could spur growth?

Speaker 2

You should assume that crediting rate is below market versus open deposit rate. And so it's not going to have a moving beta for some period of time relative to rates coming down.

Speaker 3

It's relatively constant and we're fine with that.

Speaker 2

Okay, great.

Speaker 8

And if I could squeeze in one last one, if the NII trajectory that you laid out for 2025 plays out as anticipated, is there any reason why the positive operating leverage commentary that you laid out is very helpful, but any reason why the efficiency ratio wouldn't get down into sort of that high 50% range? It seems like the math would suggest that that could get there, but would appreciate your thoughts.

Speaker 3

We'll have to see. We're in the process of doing our budgeting for next year right now. So we'll have more for you on that in our January call.

Speaker 8

Thanks for taking my questions.

Operator

Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.

Speaker 9

Hi. I think Bill, your prior comment that you expect record NII in 2025, do you feel more, less or just as confident as before? And what sort of loan growth do you kind of assume for next year?

Speaker 2

We wouldn't have said it if we didn't feel confident to begin with. So I don't know levels confidence, but we feel pretty good about that. That's confident. That's what's fair. And we don't have any pro loan growth in there whatsoever to get to that number.

Speaker 9

So no loan growth for next year?

Speaker 2

We have something, but it's Well,

Speaker 3

we will have something, but that record NII level is not reliant on.

Speaker 2

Yes, it's not dependent on loan growth.

Speaker 9

Okay. And then back, I know I think last quarter you used the word befuddled as to why loan growth wasn't coming back. I guess number 1 could be the election. Number 2 could be private credit. Number 3 could be disintermediation in capital markets.

Speaker 9

Number 4 companies could just be managed differently today or number 5, you could have a weaker economy or it could be all of the above. Just give us your best stab at why loan growth remains just so weak in the economy that's still growing?

Speaker 2

I think all of your reasons other than 34. I don't think private is causing utilization rate on middle market companies to remain low for the businesses we play in. And I'm not sure, I mean, at the margin public markets being wide open has caused some of our larger clients to pay down outstanding balances and hit the capital market. So that's probably true at the margin. But this basic notion of people just aren't using working capital the way they used to and maybe that's the way they run the company post COVID, maybe that's the uncertainty.

Speaker 2

It's going to play out over time and we can all guess about it. I just don't know the answer, so I'm still befuddled.

Speaker 9

Okay. And then lastly, your reserves on office CRE were taken even higher, especially multi tenant. Last quarter, you said the industry in the first inning. I think a lot of people disagree with that. I'm not saying yes, I'm not sure.

Speaker 9

We're 2 years into this at least and it's still a big question mark, I think, in a lot of people's mind. So when you said the industry is in the 1st inning and clearly your reserves are higher than others, what's why do you say it's only the first inning? What's your reasoning?

Speaker 2

I think we're just now starting to clear buildings in sales, right? We've had some extensions. We've had maturities hitting. We have a whole slew of term loans in the CMBS market and with small banks that will be out there 3, 4, 5, 6 years. So I just think this plays out through over a long period of time.

Speaker 2

Office vacancies, pick your market are quite high. And we're just now realizing the mark to market value of that as we resolve properties. That's why we're reserved where we are and that's why I'm not worried about it per se from P and C standpoint, but now this is going to be noisy for a while.

Speaker 3

I might remind

Speaker 4

you that a little while. Early

Speaker 3

innings.

Speaker 2

But we're not I mean importantly, we're not in early innings with respect to how we're reserved. I mean, you love our hate, but to the best of our ability, we've taken all that upfront.

Speaker 9

And then sneaking one more last one. As far as acquisitions, I know you'd like to buy them on the cheap. I mean, National City, you go down the list. It's getting tougher for you to buy things on the cheap. Maybe if you a bank does have a office or CRE problem that you swoop in there.

Speaker 9

But am I right in thinking it's a lot less likely you do an acquisition now that some of these stocks have come back or what's your thinking?

Speaker 2

Yes, you're right. We don't see value in an acquisition at the moment.

Speaker 7

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions. Hey, good morning. I guess maybe

Speaker 10

just one Rob for you as a follow-up on deposit pricing.

Speaker 5

I

Speaker 10

think fair amount of uncertainty around how much banks will be able to flex deposit costs lower. We got the September cut. Remind us, 1, around your beta expectations and any early proof points on how customers, especially commercial customers, have received the lower rates over the last few weeks?

Speaker 3

Sure. So we're early on just a couple of weeks out from the rate cut, but now we're in a down beta cycle. We've said that we think that our terminal beta will be approximately 50%, And we will reduce rates paid through the balance of this year and maybe we get a little bit less than half of the way there by the end of 'twenty four. But that's going to play out. It's early, but that's sort of our thinking.

Speaker 3

So rate paid will be coming down, particularly in the higher interest bearing commercial deposits, some wealth deposits, and that's underway. And we'd expect that to continue.

Speaker 10

Got it. And on commercial clients, so heard you around loan growth and all the reasons why loan growth may or may not pick up. If you don't mind just speaking to the health of the commercial customer base and whether like some of the macro data around jobs could be a bit misleading like when you talk to your C and I customers, are they like are the balance sheets healthy like do they if the Fed were to pause rate cuts after a cut or 2, does that increase the risk for these customers and how they might approach investing, hiring, etcetera? Would love any color you can share.

Speaker 2

I guess maybe it varies by industry, but a simple notion is companies at the margin are losing margin. They can't pass on prices where they once could, they're not making it up in volume. So the discussion of how do I cut cost has at least entered the dialogue. But we haven't seen that show up in layoffs. Right.

Speaker 2

The data remains strong and as long as the data is strong, consumers are spending and the economy is strong. So everybody is staring and watching and looking and there is margin pressure on corporates, But there's no we don't see in conversations some pending big layoff spike hitting the U. S. Economy. There are specific industries that are in slumps, whether it's transportation, healthcare struggling, consumer stay at the margin, but that's it's just at the margin.

Speaker 2

And nothing new. Yes.

Speaker 10

Got it. And if one last one, just following up on Mike's question on M and A, bank transactions usually stock for stock. Now what I mean, your stock has done well, why would a deal given your history and track record on deal integration, like is it just completely ruled out at this point? If there's a willing seller acquiring a good franchise, does it no longer make sense just because of pricing?

Speaker 2

Yes, it's I mean, the fact that we have a multiple advantage, our stock is worth the money it trades at. I'm not sure where other stocks are. So straight up financial math saying it works doesn't mean it's a good deal. And when we look at potential targets, it would be interesting from certain geographies and so forth. They just don't pencil out when you look at their balance sheet and the amount of investment we'd have to put in the franchise and just the time sink it takes to do it.

Speaker 2

And by the way, we look at everything. I don't think the market is anywhere close where we'd find something attractive.

Speaker 3

Or pay a premium on top of what you think is already a premium priced in.

Speaker 2

Yes.

Speaker 10

That's fair. Thank you.

Operator

Thank you. Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

Speaker 11

Hi. Thanks so much. Okay, great. Just to follow-up on the last question. So, right, it doesn't make sense M and A right now in this environment given, well, whatever, I won't go there.

Speaker 11

But just the underlying question is organic growth. How do you see your organic growth progressing over the medium term? Are there legs to acceleration or are we what we're seeing today is a good run rate?

Speaker 2

No, there's legs on acceleration certainly in C and I as we continue to build out these new markets. What you're going to see us do is more aggressively invest into our retail distribution franchise, very targeted and high volume branch builds in particular markets. At the moment, go back to somebody's question of, hey, what if rates are 3.25% at the front end and what do you earn on deposits? The breakeven on a branch has become a lot easier to achieve. And my historical comments on the need for scale are still true.

Speaker 2

It just looks like the way we're going to have to get there, at least in the near term is through investment and organic growth and we're good at it. We've been executing on it and we'll just continue on.

Speaker 3

Particularly in the Southwest markets where the momentum is very strong across all

Speaker 2

our

Speaker 3

businesses, CNIB, retail and the private bank.

Speaker 11

Okay. Thanks so much.

Operator

Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

Speaker 8

Hi, Rob. Hi, Bill. Hi, Tim.

Speaker 12

You guys have done a very good job in managing credit over the years and it shows up again this quarter. Can we take a look at in the C and I portfolio, what are the trends that you guys might be seeing in your the SNC portfolio or the asset backed portfolio or the leverage portfolio? Are the trends pretty benign or what are you guys seeing there?

Speaker 2

Not much. At the margin, we still have more downgrades than upgrades, a very simple ratio across that whole book. Much of that is driven by margin compression as opposed to anything fundamental with the underlying company. But now the economy is healthy and company in our portfolio is healthy. We'll have lumpy one offs.

Speaker 2

There's always some story that happens and we have one of those this quarter actually.

Speaker 7

But

Speaker 2

overall, the portfolio feels pretty strong.

Speaker 3

And just to clarify with those

Speaker 12

Go ahead, Russ.

Speaker 3

Yes, they're still very acceptable bookable credits. They're just not as strong as the ultra strong they were the last time we raised them.

Speaker 12

Got it. And I know you touched on this on commercial loan growth about companies might be stronger. Have you seen any evidence that because of the pandemic, because of what companies went through, your long time customers that you've talked to for years, do you actually see them better managed or stronger because of what happened during the pandemic?

Speaker 2

I think that almost has to be true. It certainly part of the answer to the utilization question by the way has to be the notion that basically working capital was free for a bunch of years, and all of a sudden it got expensive. So you're looking at places where you can improve margin and you're trying to cut your borrowings and be more efficient at what you're running in inventory and investment. So companies did without a lot of stuff during the pandemic and you learn from that and you try to keep to it. So we'll see.

Speaker 2

But broader message is the economy is fine, companies are fine, labor still feels strong, a lot of things in the geopolitical horizons that could disrupt that, but those are exogenous variables to the basic economy we operate in.

Speaker 12

Great. And then just a final follow-up. You gave us some good data, of course, on the commercial real estate office portfolio. What kind of impact or I guess if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help you help the values of those properties?

Speaker 12

I know each property is different, vacancy rates are critical, but is there any kind of point that you guys look at, the cap rates fell 100 basis points or 150 that would help the valuation process?

Speaker 2

Look, lower cap rate at the margin needs to help. I think what you're running into though is you'll have office buildings that if they're 50% vacant, they'll hit the market and the question will be can they ever get to normal occupancy through historical absorption rates and if the answer to that is no, then the value of that building we just saw 1 in New York is next to 0. If there is a tail on absorption where yes, I think I can rehab it and get this thing back to my normal 90%, 95%, then it has value as a going concern and it's worth something. The cap rate almost is irrelevant in those two scenarios. If the thing is never going to be occupied, it doesn't matter what the cap rates worth, it's worth land.

Speaker 12

Very good. Good insights. Thank you.

Operator

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Brian Gill for any closing comments.

Speaker 1

Okay. Well, thank you all for participating on the call this quarter and feel free to reach out to the IR team if you have any follow-up questions.

Speaker 2

Thanks a lot everybody. Thank you.

Operator

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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Earnings Conference Call
Alphabet Q3 2024
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