All right, guys, onto the next presentation of a very bank-heavy day at today's conference. We have the venerable Rob Reilly.
Venerable.
Venerable.
Oh, thank you, Erica.
Yeah, I called Jeremy charismatic, so you get to be, you're charismatic.
Okay, yeah, I was going to say. I've never chosen that one.
Of course, you're CFO of PNC, so welcome.
Thank you. Great to be here.
Before we go more into how the company is doing, could you please maybe address the recent departure of Mike Lyons of Fiserv? What does it imply for how the company's run, if anything? And what could it imply about succession and succession timing?
Yeah, sure, Erica. So, well, one, great to be here again with you. Yeah, on the Mike Lyons news, you know, a couple of things there. You know, one is Mike joined us about 12 or 13 years ago from Bank of America.
Yeah.
He did a lot of great things at our bank. You know, he was presented with an opportunity that he decided was best for him and his family. He took it, and we wish him well. You know, the good news is when these things happen at companies, it opens up opportunities for others. We've got a deep bench of talented executives, many of whom you'll be meeting.
Yep.
So, you know, that part feels good. The approach to market is unchanged. You know, Mike was promoted less than a year ago, so he wasn't real deep into that position.
Got it.
So, yeah, we're covered. And then in terms of sort of the CEO implication or succession, you know, this is me speaking. Bill may need to speak for himself, but I work very closely with Bill, and I can personally attest there's a lot of gas left in the tank. You know, Bill's going to be around for a while. So I think we're in good shape.
Good. So let's pivot maybe into talking about business sentiment now that we're 22 days into a new administration, moving fast.
Yes, yeah. Very fast.
Very fast. Has business sentiment changed at all? Because clearly there are cross currents of positives and, you know, more negatives like tariffs.
Yeah, I think, you know, I mean, we see what you see and what you read about. There's definitely a bullish tone that we expected following the results of the election. We thought we'd see some pickup in loan growth as a result of that and some of that activity, which we haven't seen yet, particularly around the utilization.
Yep.
Possibly some of that delay is these tariffs and sort of the uncertainty following the certainty of the election. But, you know, underpinning that, we're constructive. And we think we'll see the growth. You know, we'll get into loan growth and the expectations there. We haven't seen it, but there's a lot of things pointing to it.
Great, so maybe I'll dial back to November because you had such a great update on your national expansion plans.
Yes, yes.
So first, can we talk about the momentum you're seeing in your newer Sunbelt markets acquired from BBVA?
Yeah, Erica, you know, it's been a success from the start and it continues to be. You know, double-digit sales across all of our business lines. C&IB, 25% CAGR growth. Half, about half of our legacy sales are now coming through these new markets. Same with AMG. Then in retail, DDA production up 30% and about a third of our total. If anything, it's accelerating.
Okay. Wow. So in that vein, how are you thinking about rolling out the branch buildout through 2029 that you mentioned in November? And will you initially focus on a certain market or two, or will it be more broadly executed?
Oh, no, it'll be, well, it'll be in the growth market, so it's part of the last question. In terms of all the success that we're seeing, what we're able to do sooner than we thought is sort of the second wave of investment on top of the success.
Okay.
We're not going anywhere new. We're going to places where we're established, but in a bigger way. We'll be building over 200-plus branches over the next four or five years in all the places you'd expect, the Southeast and in the Southwest, but particularly in Miami, where we are today.
Yeah.
You know, we see great opportunity there. So the important part about that is we are investing aggressively into the success and the momentum that we're experiencing.
Miami's definitely a growth market.
Just look around.
In the past few days.
Yeah, just look around, right?
Absolutely. So you have been pursuing this new market expansion for a number of years.
Yeah.
Recently you've talked about organic market buildouts in places like Dallas, Kansas City, Minneapolis, Denver, Houston, and like you said, many other higher growth areas.
Right.
Walk us through how the economics work in terms of realizing a return on your investment, and how much time does it take to build a meaningful client book and deposit presence?
Yeah, no, it's a great question. You know, the backdrop to that is if you go back to 2012.
Yeah.
You were covering us. We purchased RBC's Southeastern U.S. operations.
I remember.
In 2012. In 2011, so right before that, PNC was in nine of the top 30 MSAs and zero of the 10 fastest growing MSAs. Fast forward to today, we're now in all 30 top MSAs, and we're in all the top 10 fastest growing MSAs, which is a remarkable transition if you think about that over a relatively short period of time. We did that through acquisition, obviously, with BBVA, but we also did it with a lot of organic growth in those markets that you were talking about. And the short answer is, generally speaking, it's about a three-year payback.
Got it.
So we did do in those commercial openings. The first vintage was Kansas City, Nashville, Minneapolis. Then the next year, three new markets, three new markets. And then by year three, those first ones are paying for the third. That was the whole approach, and it's worked out really, really well.
So you got into these markets with RPOs. It's relationships.
Yes.
Production offices, for those not familiar.
Right.
Talk to us about how you seek to build talent in each of these new markets, and maybe talk about how many senior bankers you've hired since the de novo efforts have begun?
Yeah, so this is important, and it's unique to PNC's model, where we have a regional president in each of these markets. So we start with the regional president, and then we hire, in this case, commercial bankers, because that's what these were, commercial relationship officers, some of whom are legacy PNC that moved to those cities, and then some of those bankers that are established in those cities that join us from other banks. And it's worked really successfully. You know, through the time, we've hired over 200 bankers from these other shops, and our retention rate's been 90% plus, which is really important, as you know, because a typical C&IB relationship prospect to, you know, meaningful client is probably about a three-year average.
Where are you going next?
Interesting that you should ask that. Salt Lake City, there are not many places left, but Salt Lake City, which is one of the fastest growing, as you know, we've gotten underway there. Just to give you a sense of sort of the growth and what makes us so excited about it is Salt Lake City MSA alone has over 3,000 C&IB prospects. Probably at least 10% of those really meaningful in our wheelhouse. We're, you know, we're going to do in Salt Lake City what we've been doing for the better part of the last 15 years, and we're excited about that too.
So, Rob, I wanted to double-click on something that you said.
Sure.
How much are these expansion markets, both acquired and organic, contributing to PNC's growth versus your legacy markets? I just wanted to pull up a very staggering stat that you shared last November, which is that Texas and California are closing in on Pennsylvania as your largest growth states, and you've been Texas for eight years and California for four, which is like five minutes.
That's right.
Right? And you've, of course, been in Pennsylvania for 160 years.
At least. Yeah, at least. No, you're right on it, Erica, so in the new markets, we're growing compound annual growth sales of 25%, which represent about half of the overall sales. That's not total revenues, because there's obviously an existing big book in the legacy markets, but this is new sales, new activity in terms of that top line, and it's true for AMG, and as I mentioned too, in retail as well, so the momentum is accelerating, and, you know, we expected to do well, so when you were on the call when we announced the BBVA acquisition, BBVA USA acquisition, we expected really good things, but I'd say it's exceeded our expectations in all the businesses, both in terms of the amounts and the time that we've achieved the success.
If I was in front of a Bloomberg Terminal, I'd be anticipating getting lots of chats saying, "Why then is loan growth only expected to be 2%-3%?
Yeah, yeah.
I mean, C&I lending, it's 56% of your book.
Right.
You've received the same investor feedback as I have in terms of that number potentially being conservative.
Yeah, you mentioned that to me.
Yeah.
Yeah. Well, that's part of our guidance for the full year. So a couple of things about that. One is we don't control loan growth, but nobody does.
Yeah.
Other than our customers, obviously. So it's an estimate. You know, the reality is whatever the H-8 data is, we'll probably be close to it or maybe even a little above it because of the growth markets.
Yeah.
But it's really, really hard to precisely time when that's going to occur. I think what's interesting for PNC, though, that we wanted to make sure that we emphasized in the guidance was even though our loan growth is on the lower end of peers, our NII guidance is at the higher end of peers.
Yeah.
Up 6%-7% because we're not reliant on that loan growth for that kind of growth. We're unique, somewhat unique in terms of the shortness of our duration of our security. So we are repricing our fixed-rate assets meaningfully into 2025. That's not reliant on loan growth to generate that kind of NII. So I think that's important to point out.
Yeah. And we'll get a little bit more into that. You know, in terms of commercial line utilization, which you and Bill have talked about, are there any leading indicators that we should look at in terms of what could indicate higher commercial line usage?
Like I said, yeah, there's a number of indicators, you know, all of which we've talked about in terms of sort of the average utilization, in terms of the bullishness. I think probably the best indication of loan growth, you know, more sooner rather than later is we are growing committed lines. So in the new markets in particular, companies are establishing lines of credit that they pay for, but they haven't drawn on. So that's probably the best indication of intent to borrow, because you wouldn't obviously pay for something you have no intention of borrowing.
Right.
I think it's going to be one of those things that when it gets going, it'll get going pretty good. Like I said, it's just hard to tell when it's going to start, because if the economy does well and there's bullishness, sooner or later there'll be capital expenditures, mergers and acquisitions, even higher working capital levels by definition that goes with that environment.
Yeah.
That's what drives up utilization.
Just to complete the circle on the loan growth discussion, you know, of course, consumer credit card is not going to contribute or.
Yeah.
Total loan growth for the industry. And maybe give us an update on how you feel portfolio trends will shape up for the year in resi, home equity, auto.
Yeah, we don't have a lot of expectation for loan growth on the consumer side. You know, we think resi will probably be down a little bit. Home equity may be flattish. We'll see some growth in card, as you know, we've got some new initiatives going there.
Yeah.
Maybe some in auto. But, you know, we would expect commercial loan growth to outpace consumer loan growth in 2025.
Got it. Moving to the other side of the balance sheet, another part of your forecast that investors thought was conservative is the slight deposit growth average of 1%-2%. You know, we talked about your expansion efforts, the DDA centricity of it. And you mentioned previously that since 2011, your expansion markets have produced $110 billion of deposits away from your legacy footprint.
Right.
Your money-centered peers have all seemed to be particularly excited for deposit growth for acceleration in 2025. Again, could you unpack this expectation?
Yeah, I think it sort of goes with our loan guidance and the same sort of mindset in terms of our outlook.
Yeah.
And that'll be defined, obviously, by that. What we see right now within the strength of our deposit base, which is, of course, strength of PNC. We've seen growth in commercial interest-bearing accounts pretty much for the latter part of the last six months, and we've seen that continue into this quarter, and we'd expect that to continue. And then consumer may be down a little bit. Even though we have new production, our consumers are still running balances higher than pre-COVID levels. So we think we'll see some spend there. And then, obviously, in terms of the funding need for it, you know, anybody can grow deposits. All you need to do is raise the rate.
Raise the rate.
Yeah, raise the rate a little bit, and we saw a lot of that.
Yep.
PNC didn't need to do that, even though we grew deposits on a spot basis back at the height of the crises and following the failure of some of those banks, so, you know, we feel good about our deposit franchise, and, you know, we'll grow it.
To that end, if we do start settling into a neutral rate, when does non-interest-bearing deposit growth return?
A lot of debate about that. You know, the good news is that it's stabilized. So the non-interest-bearing as a percentage of interest-bearing has stabilized as we went through the cycle there. So we've averaged out around 22%, 23%, and we're pretty steady there. There's some debate in terms of our shop, when would we see growth? What do you need on the short end? Some people say 3.5%, some people say 3%. I don't know. Obviously, lower the better.
Yeah, yeah.
But I would expect that we'll see core growth in NII in terms of the growth that we have in the expansion markets, because, Erica, if you think about it, they're operational deposits.
Yep.
treasury management, which is a big, big part of our offering, as we grow treasury management, we'll grow non-interest-bearing, not necessarily percentage, but in absolute amounts.
It's been a while since we've had a neutral rate that's not zero.
Yeah, right.
How should we think about PNC's natural cost of deposits, especially since so much has happened in the bank?
Yeah, yeah, yeah.
Since that time.
We pretty much stay 50%, you know, short Fed Funds Rate. That's where that feels about right.
To that end, you've talked a lot about normalizing net interest margin or NIM towards 3%.
Yeah.
What's the rate backdrop that's ideal for achieving this normalized level, and could you approach this by year-end?
The ideal backdrop, obviously, is a steeper yield curve.
Yeah.
So, our NIM, you're good, Erica. You know, we don't give NIM guidance, but since we're here at your conference, we'll talk about NIM, you know.
Thank you.
You know, it's obviously an output in terms of what we have. And then the NIM's going to expand, principally driven by the fixed-rate repricing. So we finished the year at 2.75. Our average in terms of where we've operated has been between 2.60 and 3.00 historically. So we'll see some expansion in 2025, not necessarily in the first quarter, but I could see 10 to 15 basis points through 2025, which starts to approach 3.00. And then probably some expansion beyond that if the curve's steep and, you know, conditions stay the same.
That's great. Thank you for that.
You're welcome. Yeah, you're welcome.
Bill has talked about the importance of treasury management and treasury management technology for a very long time before that was a thing.
Yeah, right.
Even when rates were zero and nobody wanted to hear about deposit growth.
Right.
So could we talk about TM growth and how that business is helping you penetrate clients in new markets?
Yeah, well, sure. So I touched on that a little bit earlier.
Yeah.
treasury management's a very important business for us. It's a big business. It's $4 billion in revenue. High growth. We grew treasury management 15% in 2024. We'll do probably double digits, maybe not quite 15% in 2025. We'll see. But it is our principal, core sort of platform product that justifies our relationships in terms of loans and extensions and the full return. Everybody knows we're best in class. Everybody wants PNC's to be able to replicate PNC's treasury management products and services. All you have to do is go back to when we started 50 years and, you know, invest in it. It's, like you said, even at times when it wasn't vogue to invest in it, like you referenced, Bill, we were.
Yeah.
And we are. So it's a differentiation for us, hugely important in terms of our prospecting efforts and a central role in our corporate banking relationships. In fact, it's so good that prospecting, when we go and meet these prospects and they're willing to take PNC because they know us in terms of a call, but they're a prospect, treasury management is usually the first step because there's something in our suite of products that a company could use right away without having to switch banks, without having to do some big conversion, something that's good for them, maybe save them some money. And then that's the beginning of a relationship. A prospect goes to a relationship, and then that starts that three-year sort of buy cycle to something more meaningful.
And that's helpful, actually. Thank you for that.
Sure.
So, capital markets momentum for 2025.
Yeah.
Harris Williams was, of course, a nice standalone franchise when you bought it a while back.
Right.
How integrated would you say the capital markets and advisory arm is within the rest of the commercial bank, especially given all the new clients that you're adding from international expenditures?
Yeah, no, it's very, you know, obviously the answer to that is integrated to the extent that we can.
Yeah.
The Harris Williams is the biggest component, but also within our capital markets group, our loan syndications, asset-backed financing, interest rate risk management for our clients, caps, swaps, which tends to go along with loan value, loan volume rather. Capital markets had a good year in 2024, as you know, bounced back from 2023 principally through Harris Williams. We expect that to continue into 2025. Our guidance points to high single-digit growth there. You know, the pipeline also suggests.
Okay. Since you and Bill began your tenure, PNC has been excellent at using continuous improvement to reinvest back to the company.
Yeah.
As we think about 2025, what are those investment priorities?
Yeah, so a couple of things there. The continuous improvement program is something that we put in place a number of, is it now, what, 12 years or what?
Yeah.
What is your question? Say there. It's at least that.
At least that.
So $4 billion plus in expenses that we use when we harness those expenses and realize we can reduce them, we use those to fund investments. That's what the continuous improvement's all about. And it's been really successful for us because it's allowed us to generate positive operating leverage, which is important to us in just about every year that we've been doing it, including last year. You know, at the beginning of 2024, in January 2024, we thought because of the rate cycle we were staring at NII that looked like it was going to go down $800 million, we thought, hey.
Yeah.
No chance at positive operating leverage, but it turned out we outperformed. Fees were a little better. We did some securities restructuring.
Yep.
But we delivered positive operating leverage through our continuous improvement. To answer your question, most of those dollars now are going toward the branch build that we talked about in technology, you know, which is something that we've been on for some time and that will continue for some time.
Speaking of technology, clearly AI is a huge.
Yeah.
Topic of conversation.
Right.
And avoid it. What are the use cases now within the bank, and what are the best use cases for the future?
So, you know, yeah, AI, yeah, I've heard about it.
Have you?
Yeah, yeah, I've heard a little bit about it. We always say, you know, we were doing AI before AI was cool.
Yeah.
And, you know, we've got a lot of pilots. We use it on the operational side, you know, typically in terms of compliance, you know, vast data sets where you're looking for, you know, individual variances. On the client side, sales and service, you know, all the places you would expect. I would say, you know, we're seeing some benefit, but we're not at the place where you're reading about it, you know, in terms of where it's an automatic department doing whatever it's doing all on its own.
Yeah.
You know, we'll stay at it. We'll continue to invest in applications, but, you know, I might succumb to the hype a little ahead of the reality, at least in the banking industry.
Got it. So everyone's favorite question. You've not been shy about the importance of scale.
Yeah, right.
So what's your mindset today in terms of build versus buy?
Well, yes. So we've said, and we're on the record in terms of that we do believe we need more scale. We have sufficient scale to do everything that we're doing now. We're growing our scale, but we think we need more through time. Two paths to doing that. One is acquisition and organic, and the other is organic. On the acquisition side, you know, we're an accomplished acquirer. We've done that. I mentioned that since 2012. We did acquisitions even before that. So we know how to do it. The issue with acquisitions is, you know, there are windows that appear through random variables that happen to line up. You know, Jim Rohr, who is our CEO, you know, prior to Bill, had a great saying in terms of banks are sold, they're not bought.
You know, in our case, we just have to be ready if and when those windows open, which at the moment we don't see them as open. You know, Bill was pretty clear about it on the call. Nobody's really selling because they have a constructive outlook similar to ours. And the valuations are a bit high, but, you know, those things can change. In the meantime, we're so excited about the growth that we have and the ability that we have in terms of our resources and our scale to be able to effectively, you know, reinvest into these momentum markets at a greater level where we're already having success. It's another way to scale, meaningful scale in terms of the organic path.
And, you know, pursuing that, it's a pretty easy bet to, you know, bet on what's already winning and you know what you need to do. So, you know, that's plan A at the moment. And, you know, the two don't preclude each other.
And how conscious would you be of, you know, not allowing the organic momentum to be disrupted? So going back, I remember when you were expanding into those new markets pre-pandemic.
Yeah.
Before you bought BBVA.
Yeah.
And then you bought BBVA, and it seemed seamless. Like, we don't know where it's coming from.
Yeah, that was meaningful.
Yeah.
Yeah, no, that was meaningful. You know, you're hitting on it. You know, the BBVA USA acquisition was obviously really great in terms of the return on the numbers. But what it demonstrated was our technology in action.
Yeah.
Where we were able to lift and shift a $100 billion bank onto our platform and fully convert that within four months of closing, which had never been done before, and I'm not sure it's been done since at that scale, so that gives us a lot of confidence that we are a competent acquirer, and obviously, technology is, you know, essential.
Deregulation has clearly been another theme that we can't avoid.
Yeah, yeah.
What's on the docket for change that could benefit you guys the most? And where do you guys think Washington should focus?
Yeah, I, you know, so we get that question a lot, obviously, since the election. You know, one of the things about PNC, which shouldn't surprise you, is there was nothing about the old rules or the proposed rules or all the activity that was occurring that was necessarily a game changer for PNC because of our business mix. You know, that said, you know, it did take a lot of energy, a lot of time, a lot of management calories to understand the new rules, anticipate the new rules, implement the new rules, and even prove that you're compliant even though you were like compliant by a mile.
Yeah, yeah.
So I think, you know, our hope would be is that there'd be some recognition that the banking industry is sound. You know, capital levels are at an all-time high, liquidity solid, credits under control, stress tests work. So, you know, maybe we can spend our energy on more constructive things rather than, you know, new rules coming over the fence at odd times for us to figure out and then send back and say they don't make sense, which, you know, unfortunately has been the case.
You know, in general, what would move the needle, speaking of capital, on your buyback cadence of $100 million-$200 million a quarter? You gave this number with your loan growth guide.
Yeah.
If we see better loan growth, do we toggle it back or would you still buy back?
Loan growth would be our highest invested use of capital. That's, you know, top of our mind.
Yeah.
You know, in terms of PNC and our business model, and we've said this many times, you know, we have the ability to generate more capital than we can deploy intelligently. So we always sort of have this capability to build our capital, which is what you're seeing. We did that in anticipation of some of the rules that were in flux and are still in flux in some respects. So we're at a good level now. But because we're able to generate capital, as I said, we were able to reinstitute a share repurchase program earlier than most, and some still haven't. So at the current level, that feels about right. And as things sort of clear up, if it's loan growth or we get some more firm ground around the rules, you know, we can address that in pretty short order.
Just as a reminder, if anyone has any questions in the room, you could scan your QR code on the table, and I'll get it in this iPad, which does need to be charged. As you think about the opportunities ahead, which seem plentiful, your two closest peers, Cat 3, recently drew lines in the sand on medium-term ROTCE targets.
Okay.
One at the mid-teens with lots of capital.
Yeah.
One at the high-teens with less excess capital.
Yeah.
Where do you think PNC falls?
This is going to be a shocker. You and I were talking about this at the beginning. We don't have a target. We don't like targets because, and we took a lot of flak for that in the beginning, Bill and I. I think our model, you know, proved that we knew what we were talking about. The reluctance around targets is that they can often lead to short-term behaviors that are destructive to long-term value. That said, you know, our returns are good. We've got high-teen businesses that we talked about. You know, we've operated in the ROTCE category, you know, mid-teens to high-teens in the past. That seems like the right place. You know, depending on how some of these rules play out and where all that goes, you know, we could go on the higher or lower end of that.
But again, that would be an outcome up and above growing our franchise, delivering positive operating leverage, and growing EPS.
We haven't talked about commercial credit much during this conference.
Yeah.
You guys in particular have a lot of reserves on your CRE portfolio relative to peers.
Right.
What would cause you to start releasing reserves in this book?
Yeah, so our credit quality is good.
Yeah.
In commercial. The one exception is within the CRE book and specifically the multifamily office book where we have the highest amount. We have close to 20% reserves, which is driving up our total CRE reserve. You know, so that's a lot of reserves. I would say, we're still probably in the first half of, we use a, you know, sports metaphor.
Right.
In terms of working through all of those deals. It has been a little bit of a surprise that it's taking longer, you know, back a year. When that first surfaced, we all thought we'd have a whole bunch of maturities and it would all sort of get rinsed and washed.
Yeah.
But it's gone longer as most things do. So, you know, still a lot to work out. We think we've got the reserves around that. And then naturally, as it is worked out, we'd release those reserves.
Finally, Bill has stated that he's never been more excited about the opportunities ahead for the company.
Yeah.
So do you think PNC has any unique positionings moving forward that could result in differentiated growth and performance?
Yeah, I think, well, we've done that historically, so you know, a lot of the plan, we have a five-year strategic plan that we update annually with our board of directors, and part of Bill's excitement in terms of that quote was looking at that plan, which is constructive. It's constructive for the industry, but particularly PNC. You know, we're going into the right side of the rate cycle with a steeper yield curve. We definitely are, you know, in a place where credit problems aren't imminent.
Yep.
That looks good. Then in PNC's case, with this national expansion that we have that's going, that could, you know, will by definition drive more activity. If we stick to our, you know, philosophy, which we will have positive operating leverage, you know, those are the things that get us excited.
Yeah. That's great.
That's why Bill has never been more excited.
That's great. Any questions in the room?