Here we go. Next up, very pleased to have PNC Financial. We could put up the first ARS question as everyone takes their seat. From the company, we have Bill Demchak, Chairman, President, and CEO. We got Rob Reilly, CFO, in the first row. Bryan Gill, Director of IR, next to him. You know, Bill, thanks for coming this year. Maybe to begin, we just talk, you know, big-picture macro expectations for the economy. You know, rates may be peaking, inflation may be starting to moderate. Just maybe talk me through your expectations, you know, this year, maybe even next year, soft landing recession. I always appreciate your views there.
Our official forecast at the moment, you know, that we run all of CECL and everything off of, still has a slight recession in there. Unemployment still pushing towards 5% towards the end of next year. Although, I would tell you that the team is starting to lean into this soft landing a bit, with the recognition that the tails, or at least the one tail off of this soft landing, could still be pretty severe, given some of the macro risks around the world. You know, our expectation, I guess, is, you know, rates have likely peaked here in the front end. Maybe there's one more move. I think we're still in the notion of kinda higher for longer, and I think the forward curve has finally caught up with that.
You know, on a rate view, I'm largely in agreement with what we're seeing right now on the front end of the curve.
Got it. And, you know, we've, we've been reading headlines from recent retailers that things are potentially softening from the consumer spending standpoint. Student loan payments resume next month. Can we just talk to just how you think about the overall health of the consumer and their ability to meet financial obligations?
Yeah, look, it's normalizing. It actually still isn't there, notwithstanding, we've seen growth in credit card balances. We've seen excess savings decline, but in all buckets are still appreciably higher than they were pre-COVID, if you measure that in terms of, you know, days of coverage of expenses and so forth. We've clearly seen a change in spend to, you know, which is showing up in some of the retailer numbers to more of the staple goods, you know, as opposed to the kinda nice-to-haves. With respect to student loans, you know, we've done a quick look at it. I think we have 10% of our retail clients who have student loans outstanding. Inside of that, we have more than half that have more than 12 months of payment coverage in terms of their normal outflows of their accounts, so I'm not sure we're sweating that at all.
Makes sense.
Yeah.
If we could put up the next ARS question, I'm gonna move capital earlier in the discussion, then maybe some other, just kinda make sure we kinda-
Yeah
... spend some time here. I'm sure you'll have some views. I imagine you read the 1,100 pages of Basel III Endgame over the summer. You know, any kind of initial thoughts, anything surprise you?
I actually did read it. You know, it, look, in the end, it's not a surprise to us in terms of the outcome. You know, I don't know if I'm allowed to answer this question, but were I to answer it, I would tell you it's number one.
Really?
Yeah.
So, the buy side thinks up 15-20, and you think it's more flat to up 5?
Yeah. You know, so in simple form, if we mark to market today, to the best of our knowledge, and we're digging through some of the details, we'd go from a 9.5 print at the under the old Basel to a 7.5 print. So a two-point drop. Inside of the two-point drop, it's probably 1.6 and change from AOCI, and the rest is a mix between SIN Bucket and a little bit of Op Risk up, offset by credit risk down. So it's not a huge deal. I mean, the basic proposal, I guess. You know, there's a lot of things you could tweak at the margin. I think they're gonna have to do something about mortgage. I think the assumption that you can't do investment-grade middle market without a public issuance is illogical.
I think that the biggest issue with the whole thing was, you know, they basically set a target to just increase capital for people and eliminate tailoring, and then shoved, in some cases, nonsensical formulas into something to cause an outcome. Then, you know, I think there's parts of that that don't need to be rethought. But if it isn't, we're fine.
All right. Actually, so a little bit better than I think people were thinking. Maybe just talk to against that backdrop then, you know, how do you think about your target CET1 level, and how, you know, you need to be there, and just how you think about share buyback?
Yeah. So, so many ways to answer that. We've operated, you know, call it between 8.25 and... As a target, we've kinda always never gotten down to our target. We're sitting at 9.5 today. By the way, with the phase-ins on this thing, we'll be over 9, our best expectation, absent a lot of buybacks the whole way through the phase-in period.
Okay.
Our presumption here is that we'll have to run at somewhat higher capital, haven't figured that out yet, at least for the near term, both because of rating agency reaction, and also just uncertainty in the market. Theoretically, we could actually run it lower, just because they put the Op risk capital increase stress test or draw down ALL, CECL should be somewhat less. We're not gonna do that.... basically, you could, I think. So, you know, we're in a period of time right now where I think you, because of the uncertainties that still exist, you build capital. We're in a position where we don't have to change a thing, in terms of our operating model to comply with these rules, which is a good place to be.
It's interesting 'cause one of the things that we've heard from some of the other participants is this RWA optimization. Does it maybe allow PNC to go more on the offensive or just, you know, how do you think about, you know, RWAs? Or is there stuff you still wanna do against that Basel proposal?
You know, look, we'll play it through, but I guess I would just say, if you were adding assets to your balance sheet simply because you had excess cash, that was probably a mistake, and now you're trying to subtract them. We've always kind of focused on client-based assets, so we're in businesses we like to be in. And yes, we can continue to grow them. I mean, you know, just give you an example, indirect auto, a lot of people have been getting out of indirect auto. Prices got really tight in indirect auto, so our balances declined for the better part of a year. Everybody gets out, spreads go a mile wide, and we're in there and making money. So we don't have to, nor do I want to mess with anything that we're doing.
We chose our businesses and our balance sheet carefully.
And then, long-term debt requirement, we got the, I guess, I don't want to say the final proposal, the, the real proposal, a week or two ago. Maybe just help us better out how that impacts you?
So first of all, it's one of the few parts of the proposal that I agree with. I mean, you know, is it tailored exactly right? Is it set up exactly right? I don't know. But we clearly saw in some of the failures that went through FDIC, this lack of debt impacted and increased the loss to the DIF fund. We're at a place right now where we're just under $2 billion short, which is kind of a rounding error for us, so we'll be compliant in the first quarter of next year at the holding company.
The bank level will take, you know, perhaps a year longer, simply as we repaper bank notes from the bank to the holding company, so they have longer maturities, and also as we take some of the bank-level debt down and replace it with holdco debt. But by and large, we're there, and I think, you, you know, you've heard us talk about the actual amount of debt we'll have being compliant with this, is below what we had as a total percentage of our liabilities pre-COVID.
Mm.
So in the ordinary course, we would run with wholesale liabilities that would be in excess of this amount. So nothing for our changes. Put all that into perspective, we issued $10 billion plus out of the Holdco so far this year. So it's fine. It landed. We're about, you know, about where we thought.
Got it. You know, you touched on loan opportunities earlier, but, you know, if we kind of look at the H.8 data loans trending-
Yeah
really down modestly, quarter to date, you know, just talk through kind of some of the supply-demand dynamics and, and also love to hear about spread trends this quarter.
Yeah. So the C&I's been soft, where, you know, some of that is just utilization decrease, some of it is simply people holding off under the assumption somehow it's gonna get better and cheaper, on, on, on rates. So we, we haven't seen the normal refi activity that we probably would. And some of it is, you know, at the margin, people being more selective, I suppose, in terms of being willing to take on new, cross-sell. The result of that is activity is a little lower, spreads are wider, you know, for our incoming new product. Problem is, the activity isn't high enough to, to cause that to have a material impact on the spreads of the entire portfolio, because it's churning less. Consumer, we've seen card balances grow. Actually, I think we've seen a growth in, in mortgages. Not sure about auto, but consumers remains okay.
Got it. I think on the July earnings call, Rob told us average loans would be down, like, 1% in the third quarter.
Yeah. That's about right.
Maybe on the deposit front, HA data, particularly time deposits, are definitely kind of lower quarter to date. Just maybe talk about what you're seeing from a balance perspective, pricing, mix-
Yeah
... all that fun stuff.
So from our guide, we're doing a bit better than we thought we'd do in terms of total deposits, so higher. Rate paid probably a little bit better than what we assumed. The end result of all that is, you know, get to sort of updates for the quarter, but likely to see NII, notwithstanding loans decline a little better than we thought.
Got it. Maybe we'll put up the next ARS question, but this asks about 2024 NIM. While the audience answers that, I guess on NII, we talked about. I guess your guidance called for down 3%-4% in the third quarter. Do you want to provide a specific update to that?
I mean, I would just say we're gonna be, you know, the lowest end of that range, if not a little bit better, maybe.
So we'll call it down two to three. Which the follow-up question, I think full year NII guide was up five to six, last we checked.... I'm looking at Rob here.
Yeah, about the same. Yeah, the better end of the range.
Got it. And then, I guess before we get into next year, just kind of any thoughts in terms of how beta expectations are? You mentioned kind of deposit trends a little bit better than-
Yeah.
Expected. How you think that plays out?
We haven't changed our kind of beta assumption. You know, we kind of said we'd go to 44, I think, and we're still holding with that. You know, remember, a big part of this is not just what the beta is, but how much is moving from non-interest bearing to interest bearing. We still believe we'll end up somewhere in the mid-20s, you know, right between 20 and 30, on non-interest bearing deposits, but that's where the largest impact on costs show up.
Got it. And then, you know, as we begin to think about next year, you know, from an interest rate perspective, kind of what—you know, if you had your druthers, is it Fed to lower rates, higher for longer? Like, how are you kind of thinking about managing a balance, you know, in such a dynamic rate backdrop?
So we've remained largely neutral here. You know, we, we haven't bought duration, for months. You know, with, with most of the impact on our balance sheet occurring from live shortening on deposits, you know, the convexity in the balance sheet. Just recently, we dipped our toe into forward starting, and we bought some floors and sold some caps. We hit a peak on kind of that, three-year rate a year forward, for this cycle, and it feels about right to me there. But having said all of that, this is still a time to be pretty neutral. You know, what we would wish for, is a continual flattening, steeping into the curve. I mean, it's been moving the way we expected, and I expect that there'll be more of that.
Got it. And then, just looking at the audience response question on, you know, 2024 NIM, call it, they have it at, you know, 2.55 at the midpoint versus 2.80 in the second quarter. You know, you talked about kind of your rate expectations at the onset. You know, maybe at what point do asset betas begin to outpace, you know, funding cost betas, and we start to see NIMs maybe bottom and improve, and just, you know, how does that play out during the course of next year?
I mean, there's so many variables in that question that, you know, as a function of what the yield curve looks like. But our presumption right now is kind of middle of next year, that starts switching. And then NII itself, you know, as a function of what we see in loan growth, you know, moving up as well. They did better on answering this question than they did on the risk-weighted asset.
I guess maybe moving on to fee income. On the earnings call, you talked about a meaningful pickup in capital markets activity in the back half of the year. Maybe provide us an update on that.
Yeah, it hasn't happened yet. You've heard this from others. I mean, the pipelines are larger than they have ever been, but all else equal, right now, our capital markets business would probably end flat to the second quarter, you know, with some time to go and big pipelines, so we'll see where that ends up. The actual guide was, I think, up 10% or so on total non-interest income, and that number, at least as we sit today, looks to be closer to 5% absent, you know, what pulls through the pipeline, you know, before the end of the quarter. The pipeline is real. You know, it literally, Solebury, at this point, has 134 IPO or secondary mandates. I mean, it's like four years' worth of work.
Harris Williams has a pipeline that's as large as they've ever had. We just need people to start to transact. So it's the value is there, it'll come. We assumed it would pick back up, as you've seen from everybody else's quarter, it's been pretty slow.
So, yeah, I mean, so certainly July and August, where I think we're softer than people have anticipated. It feels like September, though, there's, you know, a bit more optimism in the air and kind of getting those pipelines to revenues. Have you kind of felt that at all?
A little bit. I mean, we just were involved in a deal yesterday, you know, perfect PNC deal where covered the bank forever. We have all... Or the company forever. We have all their TM. They just did a big acquisition. We're, you know, lead on the financing. You know, so I, I—it'll be when it'll be. I, you know, I'm not trying to catch a calendar date. I'm more interested in the pipeline and the realization of the pipeline through time because the value is sitting there.
That's fair. Maybe just talk, we'll talk maybe bigger picture. Maybe just talk about some of the, you know, opportunities that you think you could drive the income forward.
Well, look, the absent the cyclical fee income that we're missing right now from capital markets, we'll talk about that in a second. You know, the biggest driver is what we've seen out of our TM business, just on its own, but importantly, in the new markets that we entered with BBVA. You know, I just remind you that the cross-sell ratio, TM products into BBVA clients was a fraction of what PNC's was, and we've closed that gap, but not entirely, nor have we upsold those clients. So I think, you know, the growth we'll see in our payments business in TM is pretty impressive. And then this, you know, we don't get-...
much credit for it, perhaps, but the quality of the franchise that we actually have in the advisory business between Harris Williams Six point, which is a capital fundraising business, and Solebury, is really powerful, and the pipelines are huge. So eventually that'll come online, and bring fee income up.
And then maybe just on expense management, obviously an area of focus, particularly maybe given some of the revenue pressures that banks are seeing in general. Just-
Yeah
Talk about how you're approaching that. I know you upped your CIP guide last quarter, how you're approaching that?
Yeah. So we upped our guide on continuous improvement from 400 to 450, and by the way, you'll see some of that in our expense numbers this quarter. In addition, you should expect to see us probably in the third quarter call give you some details on a more structural program that will have a direct impact to 2024 expenses.
Okay. Um-
No, I won't answer anymore.
You gotta give us more. We had-
I would just. No, I mean, the simple point here is we've been doing continuous improvement forever. A lot of that, as you know, gets reinvested, but it's what allows us to keep our expense growth as low as it's been. You know, you know, even in this year, we're, I don't know, up one or two-
Low single digits.
Yeah. This is something beyond that, is all I will say, and we'll give you some details in the third quarter. You know, it's an environment where we want to be able to invest into our newer markets and continue to grow them. To do that, we're going to have to save elsewhere, and save to the bottom line, just given the revenue pressures.
We had one bank yesterday announce a 5% expense reduction program.
Yep.
You want to give us a little bit more now?
Nope.
We'll wait. I guess when you think about this undefined potential savings that you're going to talk about-
It's really well defined. I'm just not telling you.
Undisclosed, undisclosed.
Oh, yeah.
Is that something we'd expect to see fall to the bottom line? Does that go to-
Yes
investing to new markets?
Yeah. No, that's the key point, is that this will fall straight to the bottom line in 2024. And we'll still have our continuous improvement and everything else. So it's-
Real and structural.
Yeah.
And I guess more near term, you were talking about stable expenses for the third quarter. Is there maybe a little bit better than that, given fee income's a little bit soft, or how do you think about that?
Yeah. No, so you know, expenses will come in a little better. Net interest income will come in a little better. Non-interest income will show up a little bit soft, and credit will be, I'll just say better. I'm going to say a lot better, but better.
All right. So you won't answer my expense questions. Maybe we'll try credit. We'll put up the next ARS question as we go there. But I guess, you know, PNC has always kind of been a good credit performer, at least the last decade or so. Maybe just talk to how you feel about current credit quality and just maybe how you think this cycle plays out.
You know, we keep talking about normalization, but we don't necessarily see any evidence of it, beyond what we're, you know, seeing in office, and we've talked a lot about what we have in office, particularly multi-tenant office. You know, at this point, we have, I think, over 7.5% reserves against our total office properties, but importantly, it's like 10.8 or something against our multi-tenant. You know, and structurally, we did kind of valuations and cash flow from the bottom up of every property in there. So we feel really good about our reserve. Charge-offs are going to be lumpy. We expect, and as we said, we would expect charge-offs to show up through the financial statements, but be fully reserved for upfront.
I guess the audience got, you know, 25 basis point issue of charge-offs in the first half of the year, only going to 30-35 basis points next year. So kind of a fairly modest increase. You want to grade them on this performance?
That's probably, you know, for what we know... By the way, we're, Rob will kick me for this. We're reserved for more than that, but that's probably pretty good guesses there.
Well, I'm not going to kick him, but I would say, yeah, we've always said, you know, 40, 40 basis points is normal.
But we've never been normal.
But we haven't been normal. So we might be in a new normal, but we're probably not far, between three and four, I think.
And then, I guess we're on the topic of credit. Obviously, Midland Loan Services, you see a lot of what's going on in the commercial real estate world from a different perspective. You know, we're kind of reading the journal every day, it seems like, you know, that that's all those loans are going to zero. But just maybe talk to kind of, you know, what you're seeing, what you're thinking, you know, not on PNC's balance sheet, but for the sector overall.
It's. I mean, there's been more news written about it than is actually happening-
Right
is I guess the simplest way to put it. Now, we expect that there's going to be a lot of pressure, but, you know, before they get there, you got to remember all the leases that were in these properties that may or may not renew, need to burn off, and some of that's happening.... Right, then you need to get to the end of the life of the loan, and then, you know, it needs to get put to special servicing in Midland. So this whole workout situation that's going to occur through office in particular, you know, in B and C properties and office, a lot of which are in CMBS, is just going to be a slow burn and take a long period of time. But we do expect there to be fairly material losses.
I guess-
Again, not for us-
I understand.
but in the CMBS market.
I guess, the income opportunity for you.
Yes.
Mm-hmm. You know, there's this notion that the industry needs to consolidate further. You know, I think the regulators are kind of holding up at the moment. But I guess on M&A, you know, do you think we'll see more deals? Or do you think it's difficult to get done, and how should we just think about that?
So, I mean, the regulators basically just said, told us this size wins, right? They've gotten rid of tailoring, and we saw a deposit flight, you know, after the March period of time. Having said that... Well, and I should also say inside of that, we think we are a good acquirer, right? We have, you know, proven ability to merge systems and do conversions and save money. However, the current market has gotten way ahead of itself in terms of assumptions about what we might do, and separately, the franchise values some of the people who otherwise might be attractive to us. So the economics, you know, just don't work today. And for anybody, I know there's a lot of people who are talking about whether Bill Demchak forgot how to do math.
You should assume I'm still really good at math, and were we to do something, it would be similar to the deals that we've done in the past that add value to our shareholders.
All right. So I guess assuming over the next few years, you know, the math becomes a lot more palatable, as you know, some of these marks, you know, dissipate just with the notion of time. You know, at what point do you think the regulatory environment will kind of allow you to do something?
I think the regulatory environment would allow us to do something right now. I think what happens over time, and I know everybody's a little hung up on the, quote, "the marks." If the marks are pure rate marks and not credit marks, those things pull apart. That's a different use of capital than spending as a, as a, you know, a franchise multiple. But I'm just buying bonds. I'm going to use capital to do it. They're going to pull it apart. They're going to give me the capital back. That's a simple thing to do.
Problem is, right now, the franchise value long term for somebody who basically needs to go through, you know, the elimination of tailoring and the risk management stuff and all the tech spend and the deposit flight, I just—I, you know, I think they're too high, independent of what the bond marks are.
All right, why don't I pull up there and see if there's questions from the audience? I see one in the back and one there. I'll go there first.
Thank you very much for your presentation. You mentioned your domestic strategy, but could you perhaps elaborate on any international strategy in Canada, U.K., Europe?
Sure. The simplest way to think about our international strategy is we need to provide all the products and services that our domestic clients need abroad. So think about that in terms of TM capability, deposit licenses, payments capability, and so forth. Canada is a little bit different because we will lend locally, and we have asset-based lending up there. In the U.K., we also have a small asset-based lending franchise, which is quite specialized and somewhat isolated. But beyond that, the U.S. is still really fragmented in terms of the C&I market here, and we have a proven ability to gain share with very good economics.
We don't have any intention to pick a fight internationally when the playground in the U.S. is wide open and we can win.
I think I heard you say that you agreed with the proposal for more long-term debt to be issued.
Yeah.
I mean, just thinking through Silicon Valley and, you know, just awash with cash, really nowhere to deploy it. I mean, if you have this wave of subordinated debt that gets issued, where, where would that go on a bank's balance sheet when you don't have demand for credit?
So you're conflating two different things. With Silicon Valley, they had a lot of deposits that they tied up in long-term debt, so really bad rate move. Had they simply taken the deposits and put them on deposit at the Fed, they had a real liquidity management structure, they would still be here and be fine. I think at issue, what we've seen, when there is, and we saw it particularly with a rate cycle, rates go up, everybody has a tangible issue when they bring balance sheets over to mark them. The hit to the DIF fund, because nobody has excess equity to be able to assume one of these defaulted banks, is severe, and I think debt provides that.
I also think in the ordinary course, Silicon Valley was a very unique animal in terms of the amount of operating deposits, uninsured deposits that they have. In the ordinary course, as we said before, our own debt structure would have us, just the way we would fund our balance sheet, would have us have this amount of debt or more, in the ordinary course of doing business, right? So were we ever to go into resolution in some way, shape, or form, that that would be there to protect the uninsured depositors.
Anything else from the audience? I guess while the audience is thinking of more questions, you know, Bill, you just touched on kind of, you know, we talked, we talked about Basel and long-term debt, and then, you know, maybe your kind of thoughts around changes to potential liquidity proposal, particularly the kind of Category Three Banks, just, you know, as you manage the balance sheet, does that kind of play into your thinking at all?
We are exceptionally liquid at the moment. Notwithstanding that, they're clearly looking at uninsured deposits, operating deposits within that, different forms of operating deposits and their live assumptions. They're looking at how federal liquidity programs might become more commonplace. You know, we've turned the home loan into sort of the lender of next to last resort. Maybe that's not a good place for them to be, vis-à-vis the Fed. So all those things are out there. We're set up for whatever it is they would otherwise have us do.
Got it. Any other questions? I guess, Bill, I always kinda like to get your thoughts on this. But, you know, what do you think will be the catalyst to get investors more excited about, you know, kind of large banks and kind of where do you think PNC will stand out over time?
I mean, look, some of the uncertainty, you thought it would have been settled with the new capital regs. We'll see that it's going to play out. But, you know, it's been a year of continual negative surprises for banks. Rate environment, deposit flight, capital rules, so on and so forth. We do fine through all that. The biggest thing that I would get excited about, I am excited about being PNC, is we're not out there deconstructing our bank right now. There's a lot of people who are completely having to change what it is they do and react to being undercapitalized or not have enough liquidity and focused internally as opposed to externally. We're outgrowing clients, and growing our business. We have great fee businesses.
We have this massive opportunity in the new markets that we're going into, TM cross-sell, and then a huge pipeline in the capital markets business that will show up. I just, just can't tell you when. So I, I mean, I love where we sit right now. And, and as I said, one of the, you know, whenever there's an issue inside of the banking industry, some banks can go on offense, and we're one of those. Other banks are on defense, trying to figure out how to optimize what it is they have to be able to survive to fight the next day. And we carry the momentum we had with us as we go forward.
Questions? I was hoping someone was going to ask him about his structural efficiency program, because I can't.
Stay tuned.
I guess, Bill, you, you know, with the BBVA deal, you know, you got the cost saves integration, I feel like record time with that. Obviously, revenue synergies come further out. Just maybe where are you in terms of kind of bringing those newer markets up to where you kind of think they could be? Is there, you know, what inning, what percentage, or kind of, you know, maybe put some numbers or flavor to that?
Well, so there, some of them were more developed for BBVA than, you know, our de novo markets. We always kind of talked about a three-year break even on a de novo market, putting bankers and everything in there. A lot of the, you know, we had a lot of clients that came with BBVA, and some of the markets we already had some people in there. So it's offering a meaningful contribution at the moment, and it's growing faster. You know, these "new markets" are growing materially faster than our legacy markets, on all metrics, and we're nowhere near penetration, notwithstanding that growth rate off of a good base, we're nowhere near the penetration that we are in some of our established markets. So it's, you know, it's part of what makes us great, right?
It's right there in front of us for years to come to continue to grow share in these newer markets, off of a strong, strong base that we're sitting on today.
Makes sense. Any questions from the audience? I guess, Bill, you know, as we sit here today, I'm sure you're kind of starting the, you know, 2024 budgeting process. I guess beyond your structural expense program, just how are you beginning to like, kind of think about, that, you know, in light of this kind of dynamic, macroeconomic backdrop?
Well, we're just now starting to think about it. I mean, a couple of things. We run our bank. We don't change our credit box. We grow new clients. We don't have to optimize anything. We'll grow into the new capital regs and liquidity regs without any structural change to how we run our company. So 2024 is just a planning exercise for us as a function of, you know, where are we going to put resources for the fastest growth rate. You know, we'll have macroeconomic drivers. Loan growth has to come back at some point just to even out and affect the stuff that hasn't taken place this year.
We're likely to stay rate neutral, you know, straight through whatever comes on rates next year, and build capital kind of straight through that as well, until we get rid of some of these externalities that are kind of beyond our local economy.
Awesome. Super helpful. With that, please join me in thanking Bill for his time today.