Okay, so I'm delighted to be joined by Bill Demchak. Bill is the CEO and Chairman of PNC. On my calculations, I think it's the 10th time that you have presented to this in a row, although I would say we've both lost track, but I think it is number 10. So, Bill, thank you so much for coming back. Look, we always start with a discussion about the macro. This year is particularly interesting, so maybe we can just start off with your views on the economy as it currently stands. What are you focused on from a macro perspective as we head into 2025? And obviously, given that we've just had the election, it would be really useful if you could just put the election into some sort of context in terms of how important that is as you think about the economic trajectory for next year.
That's a long question.
Yeah.
You know, I don't know that our forecast is going to be wildly different than others. We have them going by 2025 in December, and then recently cut the amount of cuts they would do in 2025, partly because of the election, to two, so we see funds sort of troughing at 3.75, 4, which is a bit of a change and a reflection on the fact that inflation appears to be more sticky than we thought, and with the new administration and the deficit and some of the stuff that might be happening, I think inflation is a bit more of a fear than we had before. The economy is strong, right? We still have, while labor has loosened a little bit, it's still strong, driving consumer spending, driving the economy, and I think that remains until something cracks in labor, and we're not seeing that yet.
So all else equal, we're looking for a reasonably strong 2025 and stronger than we were believing post the election. We haven't seen any change in behavior to date as it relates to corporates. Our utilization rates are down at the margin, which is kind of what you're hearing from everybody. But the sentiment amongst corporations is really positive. The talk of M&A coming back, the talk of investment, some degree of certainty is what they're going to face on regulation is causing a little bit of amped-up energy, if you want to call it that, inside of corporate America that we hope will play out next year.
Okay, so maybe we can talk about what you're seeing within the business. Let's start with deposits, and then we can segue to loans. We've had a few rate cuts. What have you seen in terms of repricing? What are you seeing in terms of flows and yield-seeking behavior as we kind of go through this rate cutting cycle? And then if you take a step back, how do you think we as investors should think about deposit betas relative to other rate cutting cycles we've seen? What do you think the key differences, if any, are going to be?
Yeah. So at the margin, over this quarter, deposits have behaved better than we had expected. Noninterest-bearing doing better. It's actually up relative to last quarter. And the mix of interest-bearing.
Just on that, what's driving that, the increase?
I don't know. It's a little bit all over the place. I asked Rob this question, and it's swinging around a couple of billion a day, but it's normalizing slightly higher. There's more deposits in the system simply because RRP has been driven down to next to nothing, and it's greater than the QT was. So maybe it's that, but anyway, so non-interest bearing up at the margin, interest bearing mix better at the margin. We've let a lot of the higher-priced CDs roll off and replace with lower-yielding money market. So I feel pretty good about what we're seeing in deposit flows and the pricing. Going forward, if you talk about beta, the C&I deposits and the wealth deposits are behaving on the way down the same way they did on the way up.
I think it was like an 80% beta on the C&I that's happening on the way down. It's maybe 70% on wealth, same thing. Retail will be a little different. So, consumer-based deposits, we would expect that that beta will be lower on the way down than we saw on the way up, largely because we didn't move that much. So, all else equal, I think with a lot of assumptions in here, where our cumulative beta hit 50% on the way up, we think it'll hit 45% on the way down, and that's kind of what we're seeing.
Okay. And then on loan growth, what are you seeing there? I mean, have you seen any change post the rate cuts? I know there was some debate about whether or not the election was holding up loan growth. So post the election, have you seen any change? And then I guess, more importantly, as you think about next year, are you expecting some sort of normalization of loan growth, especially on the commercial side?
Yeah. No, we've seen, and it seems to be the trend across the industry, utilization at the margin is still falling, a handful of basis points in the quarter. So balance is roughly flat. We're originating a lot. The lines are out there. People aren't borrowing under them. If you ask 10 bankers why that is, you'll get 10 different answers. I think some of it has to be just with the higher cost of rates and carrying working capital, and some of it has to be uncertainty going into this election. So all else equal, if we're slightly lower in rates and a little more certainty, particularly with less regulation, you ought to see growth. But I'm done forecasting loan growth at this point.
Okay. So when you were here last year, you gave a really hopeful slide, I think, on fixed asset repricing, which a lot of your peers then copied to some degree. So maybe you can talk a little bit about your updated thoughts on the outlook for next year in terms of repricing and maybe just help us think through your sensitivity to a steeper curve.
So at this point, 2025 is more or less a lock, ± 0.5%. It's not much move with rate moves where we make a little more money if they cut more in the front end. We make a little more money if the term rates are a little bit higher. But for the most part, we have locked that performance in. Much more interesting to us is not just what happens in 2025, but what happens in 2026 and 2027, which is our focus now rather than just 2025. I think we were having this conversation earlier. One of the ways to think about this for the industry as a whole, but for PNC, was at one point in time we had 50% of our assets were fixed rate, and they were locked in at a yield of maybe called 2%.
We're going to reprice $275 billion of 2% assets in the 4+ , which is an incremental run rate over time of $4-$5 billion. Because our book was short, it all matures in three and four years. We'll have that benefit over that period of time versus somebody who had the same net interest rate exposure, but spread over 30-year mortgages or 30-year bonds. So assuming this yield curve plays out, we're in a really good place to be for the next couple of years.
Okay. And you mentioned 2026 and 2027. So how should we think about the asset repricing in those years relative to?
I would say it this way. In our planning process for the next five years, you would otherwise expect us to have record NII again and again and again.
2026 and 2027.
Now, I've never once had a five-year planning cycle where something didn't blow it all apart in the middle of the planning cycle. So that's the caveat. But all else equal, where things sit today, that would occur.
Okay. So nearer to, perhaps you can just give us an update on Q4. How are things tracking? And has anything changed relative to when you last spoke on NII fees, expenses, or credit?
Yeah. Everything, for the most part, is based on our guidance. We're there. NII is going to be a bit better. I think we guided up one, Rob, and we'll be somewhere around two, maybe a little better.
What's driving that increase?
Mostly the deposit behavior. We haven't seen the loan growth. We were kind of locked in on what we were doing on rates. So it's largely coming from deposit behavior.
Okay. Great. So let's talk about some of the strategic initiatives. I think one of the more interesting ones is you recently increased the investment in the branch network from $1 billion, I think, to $1.5 billion. So maybe you could talk a little bit about that. What drove that? Why are you doing that now? And then you've also talked about the 7% market share that you would like to get to, which represents critical mass where you see this inflection in terms of profitability. So does that $1.5 billion get you to where you need to be from a market share perspective in those markets?
Long story short, no, but it's a start. We're in a position, and it's a great position to be, where we have an ability to grow our C&I franchise and compete in any market and win, and we have an ability to grow that and the balances that come with that at a pace faster than our current ability to grow retail deposits. Long, long term, we don't want to be wholesale funded. We want to grow our retail franchise at a pace that will keep us basically core funded against our C&I franchise. Historically, we have done that through acquisitions where you'll buy a deposit base, shrink the asset side, transform the balance sheet to what you would have it be, and go on. Tough to do in this environment, particularly in the markets we want to be in.
And so rather than sit and wait for something to happen that might not ever happen, we're just going to invest into it. It's easier to do that today, both because of higher rates, so the break-even is shorter, and also because we already have branches in these markets. So we've been building in these markets, and we can see off of the pro formas that we have in the branches we've built what we can expect from the 200 we're going to build. So it's a high-return investment, solves part of our problem, doesn't solve the 20-year issue, which we have. We'll have organic and inorganic ways to do that. But we weren't going to sit around and wait for history to pass us.
We have a big tailwind right now in terms of business momentum, the ability to grow clients in these new markets, the rate environment, the credit environment, real belief in our franchise, and it's time to invest into it.
Okay, and then on the CIB side, you've got this really good long-term track record now, both in terms of geographic expansion, but you gave some really interesting data on what's been happening to productivity, both in new markets and in existing markets, so maybe you could talk about both of those. On the productivity side, how much more of an improvement is there from, say, the BBVA client base, and when we look at the new markets that you've moved into, what do the incremental margins look like in those markets, and how should we expect those to evolve over time?
So start with the basics. We are fully invested in the resources we need in these markets on the C&I side. So we have product people, relationship people in the market. We always staff ahead of the volume, and then we call on the clients that we think are the A-quality clients you have to cover in that market. And as you saw from Mike's presentation, it takes a lot of patience and persistence to ultimately move those clients to our book, which we do. So investment is done. Acceleration of revenue is kind of occurring, and you've seen that in his charts where you're basically starting to see kind of an exponential growth in revenue curves coming largely out of the Southwest, Southern markets, new markets. Part of that on the back of monetizing more of the BBVA relationships, but part of that on just building new relationships.
Specifically to your question on BBVA, their clients on average had, or 43% of their clients had a TM-related product with them. We've moved that to 70%. The norm would be 80%. But inside of the movement we have, there's still a smaller wallet than what we would have in our legacy markets. So in other words, TM is not one product. TM is hundreds and hundreds of products. And so I'd expect our wallet share to continue to grow. There's a lot of momentum and revenues in the new markets.
Okay. So you mentioned treasury management. Obviously, that's one of the products that's really differentiated you over a period of time. Unsurprisingly, a lot of your peers have been talking about investing in that product, growing that product. I mean, what have you seen on the competitive landscape? Have the economics in that business changed? And is it getting harder at the margin to win the TM relationship with new clients?
No and no. I mean, it's a great business, so everybody wants to grow it and be in it and talk about it. It's a $4 billion business for us. It grew at 16% last year. It's an embedded client base. Basically, they tend to build on products that you start with. In our instance, we're integrated into most of the enterprise accounting systems, so they can simply add through APIs the next product they want to choose from us. We compete against one or two other banks. And I suppose, I mean, if you have a DDA relationship with somebody, I guess you have a treasury management relationship. I think the distinction leaping from there to some of the more AI-based payment mechanisms and FX netting and other things is just a pretty giant leap.
We've been at this for a lot of years and invested a ton of money over the years into product capability and talent.
Okay. On the capital markets side, can you just give us an update on pipelines and activity? The market's clearly taking a very optimistic view on what the election means, in particular for primary capital markets activity. Are you seeing a change either in pipelines or dialogues? And how are you thinking about the outlook for that business relative to where we were, say, three months ago?
Yeah. No, the pipelines are strong across Harris Williams and our debt syndicate, debt underwriting, loan syndication volumes. But I'd remind you, those businesses are up 40% year- on- year. I think the total of our capital markets business, which is $1 billion ± a year in revenues, is up 29% year- on- year. So it'll grow. But it's off of a real strong tailwind that kind of occurred in the last couple of quarters here. But we're bullish on it. And you're right. I mean, everybody's making this assumption that M&A is back and so financing is back and the market has high levels. So we're going to see IPOs and all the related activity. And of course, if that occurs, we'll benefit from it, particularly on the advisory side with Harris Williams.
I mean, if you look at M&A and ECM, they are tracking below, I think, the five-year averages and in some cases, the 10-year averages. Do you think the momentum that you're seeing in those businesses is enough to get you back to those averages or maybe even above in 2025?
Harris Williams didn't see that drop because they play on kind of private equity client middle market space. So they fell and have come back and will increase from here. But they didn't really have the massive large-cap M&A kind of just was shut off for the last handful of years. So we'll see that on the financing side, but we won't necessarily see that on the advisory side.
Okay. So let's talk about operating leverage, everyone's favorite topic. How are you thinking about the ability to self-fund some of the investments that you're making? And how should we think about the trajectory of some of the broader expense categories heading into 2025?
Yeah. So let me start with the basics. We have run a continuous improvement program to help self-fund investments. I think this year we did $450 million of cost savings to help invest and keep our expenses basically flat. We'll try to do that again and again and again in pursuit of positive operating leverage, which, by the way, we'll pull off this year against a backdrop at the start of the year. We thought that was going to be tough, but we'll manage to do it. We would expect to do it next year and so forth. All else equal, we plan with expenses kind of up, low single digits in revenues, hopefully up, mid-single digits and higher.
We've never starved the place for investment, so we don't have to have this big foot on the gas jump in expenses to catch up with investments we should have made in past years. So I think, look, I think the environment's going to be great for a couple of years. Rates are working out our way. We're positioned for that. Credit is good. Our credit book is good. We have momentum and new clients. It's going to be a good environment.
Kind of a year into adoption of AI, I mean, how important is that proving to be from an efficiency standpoint relative to what you would have thought, say, a year ago?
I think of that whole process as automation, not just AI, but using technology to automate processes, some of which will involve AI, and just a sound bite on that, we're the same headcount that we were when we were half the size, so automation is clearly having an effect on the banking industry, but is it AI? Is it because I have a language? No. I mean, it's the whole process of making people's jobs easier to do and having more self-service for clients, not just on the retail side, but on the corporate side that takes costs out of the game.
Okay, so let's talk about the regulatory side. And look, I know there's a lot in flux here, but how are you thinking about the potential for changes on the regulatory front post the election? Basel III, obviously, something we've been talking about for two years. Do you think it's going to get finalized? Do you think pieces of it could be finalized, like the inclusion of AOCI? And just given all the uncertainty, how are you managing capital for the firm, given that this is going to be in flux probably for at least two years?
Two different questions. The regulatory side, I mean, in the immediate term, I would expect that we'll see perhaps the elimination of some of the more frivolous lawsuits and charges and changes to fees and other things. I think that may fall behind us if you think about credit card caps and other things. The actual supervision of a bank and the related regulation, I don't know that there's going to be much relief on that. Silicon Valley did happen. They are focused on liquidity. I think there's going to be change in liquidity requirements with some debt issuance requirements. Basel III will happen. It's required to happen. Whether it causes an increase in capital for people or not, who knows? We don't even know who. There's two players yet to be named who will have a vote on that.
Supervision at the margin may be a little easier, but I think people are a little bit too excited about that they're just going to let everybody run free here with the change in regulation. I don't see that at all.
You mentioned liquidity. I mean, what are you now expecting on the liquidity front in terms of either a rule set or the long-term debt requirement? What's your basic thinking there?
There's going to be a long-term debt requirement. I suspect they'll tone it back from the 6% they suggested at first to something smaller than that. They are clearly going to rework LCR, the way that inside of LCR, the way certain deposits behave, how the discount and pre-positioning at the discount window counts as it relates to your liquidity. So there's a lot of work that's going to go into that. I think this whole notion of having liquidity to cover some percentage of your uninsured deposits is going to be a core requirement of the system going forward, and we're prepared for that.
Okay, but so it shouldn't translate to any significant changes to how you manage the balance sheet in aggregate from a liquidity perspective, is that correct?
Not for us, no. But I do think that that requirement will get pushed down to levels where people haven't historically been active in the capital markets and issuance.
Okay, so let's talk about inorganic growth, M&A. I know you were very clear on the last call that you don't see a lot of value out there. Since you last spoke, though, a lot has changed.
Yeah, we've gotten more expensive.
But against that, maybe the outlook's a bit brighter. So how are you thinking about just acquisitions, M&A broadly? And maybe you can talk not just about bigger deals, but about smaller bolt-on deals and asset acquisitions and how much of a pipeline there could be on those.
Yeah. Nothing has really changed. I shouldn't look at, first of all, everybody out there thinks they're a buyer now. So nobody's a seller. Everybody's a buyer. The industry has a tailwind. Assuming rates play out the way they are and the economy plays out the way they are, there's going to be real growth in earnings for the industry, whether you're a good player or a bad player, unless you really did something wrong over the next couple of years. And management looks at that and says, "Well, I don't need to do anything because I'm going to grow earnings." So I don't think anybody's for sale. And they're all trading at 2x book. And what we would look for is somebody with a, think about what our strategic need was, right? Core retail deposits in the right markets.
Many of these institutions have lost a lot of their core retail franchise, and their deposit base is heavily related to real estate and assets we don't want to own. It's just the math doesn't work. You never say never, and I think through time, you'll see a differentiation in earnings that will become pretty extreme, and that financial equation may change.
From a regulatory perspective, do you think M&A is going to be easier under this new administration? And do you think you'll see a shortening of the timeline it takes to get a deal approved?
I do on both of those. I think the sentiment around if a deal happens that there has to be a clear acquirer and somebody who has the capacity to run the larger organization, both in terms of management expertise and technology and infrastructure and risk, is going to be necessary to get approval. So in other words, I think MOEs are tough. I think well-run banks will have an ability to buy other banks, and I think you'll see that activity. This issue of scale hasn't gone away. And as much as people want to say they can hide in their little part of the country and do their business, you just heard Marianne 's presentation where she's going to build branches everywhere where they're not. And there's going to be activity because scale matters. And I think people are going to chase it.
I just don't know that we're going to be in that game at those prices.
Okay, so let's talk about credit. Give us an update in terms of what you're seeing in terms of delinquencies, both across the consumer and C&I books, and look, is there anything that you are monitoring more closely today from a credit perspective than, say, three or six months ago?
Yeah. The consumers actually, our delinquencies have been steady. They've been ticking up in the industry. I think ours are steady largely because we had made some risk adjustments going back now a vintage ago. So nothing going on in consumer, nothing really happening in C&I. There's some pockets of weakness in transportation, consumer goods, smaller, higher ed, little pockets, healthcare, but nothing that shows up as any sort of worry. And then, of course, you have real estate, which by and large is fine with the exception of office.
Yeah. So maybe let's talk about office. I mean, Midland Servicing gives you a really interesting insight. So what are you seeing in terms of trends, both in office, but also in other components of the commercial real estate complex? And I'm curious, are you seeing more distressed capital coming in to buy some of the defaulted loans today relative to, say, six months ago? And how broadly would you characterize financing conditions within the office market in particular?
In Midland, we've seen, by the way, their total balances are maybe $6 billion. Compare that to $10 billion post-COVID. They haven't really shot up that high. They've had $1.5 billion of inflows, 50% of that ± is office. The vast majority of that has been cured by the BPS owners. So fix it and extend it, pretend and extend it, whatever you call it, back into the securitization because the BPS holders don't want to be wiped out. Bank portfolio assets, we're selling some properties, we're extending some properties, we're extending smaller notional based on a paydown. You haven't seen a transaction market in buildings trading. There just hasn't been enough. So nobody knows where the market is for an underutilized office building that may or may not ever get back to full occupancy.
The few trades that we have seen, to give you an idea, if a building is 60% or 70% occupied and they don't think absorption rate will get you back to the 90s, it trades at the present value of the lease cash flows, so that's a 20 cents on the dollar bid, and that seems to be the marker. And I'm not so sure until we see a lot of stuff trade, it really distressed levels. In other words, you can't pretend anymore. I don't know that you see large capital formation that comes in and tries to catch that falling knife.
Do you think lower interest rates is going to change the dynamic?
No.
Not at all?
No. I think, look, you're starting with an inherent vacancy absorption issue that, with the exception of maybe some markets in the south, which built into it, I just don't know that you're ever going to use that office space. The cost to rehab it, move it up to an A-quality building, and then drop lease rates to get people into it, it doesn't foot, it doesn't cash flow, so you've got a lot of dead properties out there.
Outside of office and commercial real estate, anything else that?
No. People talk about multifamily, but remember, our properties are 90%+ occupied. They're cash flowing. We've downgraded some of them because of debt service coverage, just on the cost of rates. But there's no real loss content inside of that book.
Okay. And outside of credit, what's top of mind from a risk perspective? I mean, what are you focused on outside of credit as you think about the next couple of years?
Yeah. Assume that the fear factor on geopolitical stuff and I'll just call it resiliency issues, either cyber or just system down issues, those I'm always terrified of. We have concentrations in cloud providers and service providers that with one outage of one person can take a lot of banks down at the same time. We're all concerned about that. Beyond that, the thing, if I look at this economy and the behaviors and the expectations of the Trump administration, if they did what they say they're going to do, the thing that I would fear is kind of the Fed losing control of the back end of the yield curve and just a real spike in back end rates.
So some premiums going up.
Yeah. Yeah. Size of deficit, potential tariff spike on inflation, just uncertainty. And then just raw technicals, if it kind of breaks this foreign exchange handle, it could go up a lot.
Okay. So I think we've got a couple of minutes left. So let me ask you kind of a rapid-.
By the way, we make a lot of money if that happens. But I think the economy is.
If the economy goes up?
Yeah. Yeah. But I think it'd hurt the economy a lot. Yeah.
So look, there's been a lot of exuberance around bank stocks post the election. Do you think the exuberance is rational or irrational? Do you think it makes sense when you look at it, not just PNC, just for the industry, just broadly?
Yeah.
What are you telling the board about the next couple of years in terms of PNC's opportunity side?
Yeah, so I think we're in a very good environment for banks. I think we're going to be in a yield environment that's three or four on the front end and five or six in the back end, at least four in the back end, and that's a really good place to operate if you're a bank, particularly if you have an economy that's performing, and I think we will have that for the near term. Eventually, something's got to give on the deficit, but I think it's a really good operating environment for banks. Inside of that, and for PNC, I think we will clearly differentiate ourselves with the speed at which we monetize the repricing of fixed assets. We will differentiate ourselves with the continued client acquisition that we're getting in the newer markets that we've entered.
As loan growth comes back, it'll show up in loan growth. It'll show up in related fee income growth. When we put our plan together, which we just recently did for the board, it's all based on real assumptions. It's as bullish as anything I've ever seen. Now, I'll tell you, we've never gone through a five-year planning period where something didn't blow up around us. The potential for our growth over the next five years is higher than anything I've seen since I've been in the seat.
So we should put this in the bucket of rational exuberance?
So for an industry, yeah, I think so. Now, what I don't understand is I think there's inside of the everybody just traded up. And I think there'll be people who are worthy of that and others who won't be. And it's up to you guys to figure out which or which. I have a view. But.
Okay. With that, we're out of time. So Bill, thank you for joining us. We'll see you again next year.
Thank you.