Okay. Thanks, everyone. Good afternoon. We're happy to kick off the afternoon session here with PNC Financial. We've got CEO Bill Demchak joining us. Bill, thanks for being here today.
Great to be here.
As usual, in these bank sessions, I think we'll start off asking you about the broad state of the economy. Got the Fed, you know, maybe continuing to tighten, inflation still running high, yet unemployment's low, you know, a lot of uncertainty out there. What's your take on the macro, both what we're seeing now and your outlook for the rest of the year?
I don't know that we have a terribly different view than consensus. You know, we expect a shallow recession. I'm still waiting for somebody to define for me what exactly that means, but, you know, we're assuming, you know, 4Q, 1Q negative GDP. Unemployment, you know, will rise to 5% towards the end of 2024. The Fed may or may not be done. You know, we're less worried about what happens in the front end, than we are what happens in the back end of the curve here.
Mm-hmm.
No big credit surprises, no big dramatic changes in the economy, but a general slowdown, and the Fed does its job. It's kind of our base case.
Yep. Yep. We're gonna talk about a lot of bank fundamentals as we go through here, but just, you know, thinking bigger picture, bank stocks are priced in a lot of stress. You know, trends are getting tougher, but in a broad sense, the fundamentals still hanging in there. I guess when you look at the group and where things are trading, you know, are you in the camp that we're undervalued as a stock group? You know, what perspective would you share for investors that have a medium, longer term view?
Look, I have a strong view on our own company. I think we've all been surprised by some of the things we've seen in the market. You know, the couple of big banks that failed, you know, were almost in a different business than the rest of us. That's caused uncertainty in the market. You know, I can look at our own bank. I think of our forward earnings and the strength of our credit book and anything else we have. I feel great about it. The volatility day-to-day in stocks, I think, is keeping people out of the market.
I also think, the differentiation, between, you know, structurally damaged banks as a result of some of this recent turmoil and the push down of regulation, and the people who will ultimately win from this, there's not as much differentiation in share prices as there ought to be today. I think you'll see that play out. You know, That's only gonna be proven with forward earnings, when we print earnings and people see who does what.
Mm-hmm. Fair enough.
Right.
Let's talk about a bit of, you know, some of those fundamentals. Clearly, it's been a big focus on deposits across the industry.
Yeah.
In the 1Q, your deposits actually grew slightly, but I suspect that might be harder to do in the second quarter. We've got QT seasonality, and, you know, we can kind of see H8. What have you seen so far on deposits, and what should we expect from PNC as we look ahead?
Yeah. We're basically trending with large bank H8. You know, we pushed a bit in the 1Q, just to prove we could do it as much as anything else. We're incredibly liquid at the moment. You know, loan growth is somewhat tepid, and you know, the marginal dollar to grow deposits right now is coming in at, you know, full rate. We don't need it, and so we're not chasing it, so we'll decline. You know, QT itself is dropping deposits across the system, and my guess is we'll trend, you know, with a broader deposit line.
What are you seeing in terms of deposit betas and mix shift? In your 1Q deck, you were pretty detailed.
Yeah.
You laid out some specific thoughts on kind of the cadence you expected for both beta and mix. Are those trending in line with what you laid out?
Yeah, we're pretty much dead on. No change in the terminal beta of the 42 and, you know, slight tick in the quarter. That's what we expected.
Yeah
... and we'd, you know, otherwise expect, you know, therefore, net interest income to follow.
Yep.
Yeah.
There's a lot of debate, and we're hearing it this week, about where the industry, you know, non-interest-bearing mix shakes out. You know, whether we kind of go to pre-pandemic or back to that early 2000s. I know you've gotten that question. Maybe just some thoughts on whether that could continue to shift, and what differentiates your mix? Your NIB mix tends to be a bit higher. Just talk a little bit.
Yeah
about those factors.
We're, you know, today, I think we're at 27%, and we've been talking about maybe we'll get down to the mid-twenties, and then there's questions out there, "Well, hang on, some people were at 15 once upon a time." I think our low print, absent the middle of the National City integration, was probably in the low twenties, if you go back to kind of 2005 or 2006 or something. Part of that, and it's grown since then, is the amount of non-interest bearing we get simply through the growth in our treasury management business, some of our escrow businesses, some things that aren't generic non-interest bearing sitting in a consumer account, which allows our average perhaps to be a little bit higher. Right now we're assuming we'll trend down towards 25, and that seems to be holding.
Then how about on the loan growth side? Obviously, loan growth expectations have slowed. We can kind of see H8.
Yeah.
We see the Senior Loan Officer Survey. What are you seeing on that front, and, you know, what do you attribute to kind of demand versus supply?
Look, it's definitely slowed. It's, it's, you know, in its simplest form, you have a supply/demand imbalance, where the cost of lending because of the cost of funding has gone way up, and the market demand for loans, they just don't want to redo their, you know, revolver. They're gonna ride it out and hope things get a little bit better. You know, give you an idea, our loan growth is probably a little bit below H8 actually this quarter. Could change by the end of the quarter. Our spreads are 100 basis points wider for new originations than they were a year ago. That'll take a long time to cycle through the loan book, because big loan book, but you're finally seeing this price change that we'd expected.
... Has that helped you? Like, if you're not getting a lot of new loan growth, does it help on renewals and...
It helps. Yeah, you'll recycle the book, and it'll reprice. You know, one of the things, you know, our loan growth last year was off the charts, right? A big part of that was the new markets we entered with BBVA. We grew revenue in the new markets by, you know, 50% year-over-year. A lot of that through new relationships and lending. Now the play is, right, lending has gotten, you know, equity is more expensive, now you work cross-sell. It's the same playbook we executed with RBC. It's what we've been doing now. We have the clients, you penetrate with the fee-based businesses, and the bankers work on that for the next couple of years rather than try to grow the book.
Can you talk a little bit about balance sheet positioning? You know, how are you approaching the decision whether to add some swaps for duration and, you know, protect against the possibility that rates come down? I know that's not necessarily your view.
Yeah.
just kind of talk about how you guys think about it.
Well, I think, ignoring my view on rates, I've been on one direction on this, you know, it actually doesn't matter. The issue today is the downside risk to banking is rates go up, not rates go down. Choosing to get longer in this environment puts your firm at risk, right? We're. We see all the marks, we see in tangible equity. Rates have rallied, they're a little better than they were. There's nothing to say that, you know, if the curve becomes unhinged, the Fed loses control of the back end of the curve, the situation gets much worse. I'm not worried about rates falling. I'm worried about rates going up, even though I don't necessarily think that's, you know, the highest probability.
Yeah.
You always, in a world like this, you protect against the worst outcome, and that's if rates rise.
I think that from a balance sheet capital perspective, that's well understood. From an earnings perspective, I think investors are also confused from a net interest margin.
Yeah
income. Are we rooting for rates to go up, or are we rooting for rates to go down?
We're rooting for the curve to flatten or steep.
Mm-hmm.
Practically, I mean, NIM is going to be under pressure. you know, frankly, if the Fed goes either way, a little worse if they cut. you know, softened by a flattening curve, which I would otherwise expect to happen, and we're kind of positioned for that.
You mentioned this a little bit before, but, like, your incremental decisions on pricing of deposits, whether to let them go or go on. Like, how do you guys think through that? Give us a little color there.
Well, you protect your client base, and, you know, reprice as you need to. We've built technology that allows us, not perfectly, but at the margin, to find the consumer who wants to shop and either capture the money in the movement, or recapture the money post the movement. You know, we've retained, I don't know, three and a half billion dollars plus or minus of deposits simply through that repricing of the marginal customer. Chasing deposits, you know, the next marginal dollar beyond your average case consumer growth, which we're having, is, you know, coming through brokered money at the moment. Brokered money is kind of a, you know, bluntly, it's a fool's errand when you don't need the liquidity, that everybody sees as brokered money, and you're not doing anything for franchise value. We'll just...
You know, there's no reason to chase that.
Yep. I know this is a question that's come up to you, too. When you think about potential for Treasury issuance and debt ceiling negotiation.
Yeah
How might that affect bank deposits? You know, the interaction with RRPs is important, too, obviously.
Yeah. Well, Look, the Treasury is going to issue upwards of $1 trillion of bills, and if all else equal, you know, it drives into the money funds. What we're hoping to happen, and has been part of the dialogue, is that the Fed would change the price somewhat on IOR and on their reverse repo facility rate. You'd actually see the reverse facility shrink as the bills hit the market, practically, you end up with not much effect to banks. It's all part of a discussion. I mean, the one thing I can say is everybody's aware of this issue. It's not happening without, you know, Treasury and the Fed thinking about it and talking about it.
The Fed's concern about lowering that so far has been kind of the lower bound of Fed funds, I think, or?
I mean, you'd have to ask them. I think this combination of lower bound of Fed funds, coupled with the fact that there was no alternative issuance because Treasury wasn't going to issue bills in the face of a debt ceiling issue.
maybe with that, they'd be more open to it.
Yeah.
Yeah.
Yeah.
Turning to expenses a bit, you increased your target for continued improvement expenses this year, you know, from $300 to $400, your CIP program.
Yeah.
you know, expenses are still expected to grow a little bit this year. you know, how are you thinking about that? you know, if the rate of environment gets more challenging, is there more you can do to lean in on expenses?
Mm.
How does that tie with your investment fund plans?
Well, we're thinking about it all the time.
Yeah.
you know, the simplest way to put it, we upped the target, we outperformed in the 1Q. We're going to keep pushing on it. I don't know that we're going to make any big announcement on anything, but we're good at this. We're focused on it. Importantly, though, you know, I just remind you, the growth that we've seen, are seeing, and expect to see out of the new markets, like, I don't want to take out momentum from forward earnings growth, and importantly, not from our tech agenda, which we haven't had to do. If...
Look, if you back out the FDIC assessment from last year, not the new ones, we can talk about those, you know, we're showing 1.5%-2% expense growth this year, you know, in the face of 3% wage growth to our employee base. We're actually doing pretty well.
Yep.
Yeah.
Just maybe just touch on that topic in terms of the, you know, we've got a special assessment proposal and maybe some regular way assessments after that. How are you sizing that or thinking about that?
I mean, you can go through the machinations.
Yeah.
of the estimated loss in the end. You know, we think after taxes, $370 million or something, ± the one time and the assessment after that. You know, today we're paying $25 million a quarter on the one they did before. The next one after that, you know, we expect it would add $20 a quarter to that.
Mm-hmm.
Normal course, if they do what we expect. You have the $25, the $20, and the $370. The $20 and $25 are pre-tax, I think. Yeah.
Yeah, they, the $370. One time. Tax benefit.
Yeah. Yeah.
Sticking on expenses, you've invested a lot in tech infrastructure over the years.
Yeah.
You know, maybe talk a little bit about the core modernization that's gone on, and I know you're gonna kind of walk out of this year with some real new capabilities.
Yeah.
Can you talk a little bit about that, what it does for your processes, for customers, and on the expense front, too?
The core modernization is a cool buzzword, but that it actually isn't the winning end game, right? That's just saying now you have the capability to be 24/7 with real-time information on your clients. How you utilize the information and create connectivity and service capabilities for your client is what we've been investing all the money in. By the end of this year, early into next year, we'll roll out new online banking, new mobile, new seamless single-point service center for all our branch employees, care center employees, and anybody who, in the moment live, needs to solve a customer problem, including the customer. All of that's enabled by bringing everything to be cloud-native, microservice, API-based.
All sounds very boring, but practically what it means, in its simplest form, our existing online banking and all online banking, you know, systems historically were 10 million lines of code, that if you wanted to change it, you had to rewrite spaghetti from one system to another system, and you were terrified of touching it because it... You know, if you messed something up, and you didn't know how exactly it connected to something else, it's a disaster. Today, it's click and drag an API or a microservice. I need a checking account balance, I need a credit card balance, I need a whatever, and I can redesign the screen four times a day, then roll it back out. What used to take nine months can take an afternoon.
What it means ultimately, in terms of servicing clients and costs, is the ability in the moment for everyone who touches the client, including the client itself on our web or on their mobile, to solve their own issues real time, saves a fortune, ultimately, in the back office. Remember the conversations when AI first came out, it was going to save, you know, we're going to save 80% of the money in the back office through automation. That actually isn't what's happening. What's happening is you set up the servicing capacity at the front end, so you don't need the back office. You empower frontline employees to make the change and fix it right in the moment.
That's a long tail on what we're rolling out, but it's a big opportunity set, and I think it's a big part of our plan, ultimately, to be kind of a low-cost provider of what is going to be an increasingly frictionless ability of consumers to move money around. You're going to have to be cheap, and you're going to have to be good, and you're going to have to be simple.
Yeah. Yeah. I think you've mentioned before, we've learned about the speed and velocity of deposits.
Yeah.
That's gonna put more pressure on the industry's efficiency.
Yeah
The ability to deliver.
Yeah, the, you know, but the modernized core is just. That's kind of like, okay, I choose to run it on this computer instead of a mainframe. Everything else that goes around that is the multi-year build.
You're in that journey where you're.
We're at the end of the journey.
Yeah.
Yeah. Yeah.
It's been a couple of years, right?
Yeah. A lot of years, a lot of money. Rob knows how much money.
shift gears a little bit and talk about credit. Obviously, folks are mostly focused on CRE and office.
Yeah.
Just, you know, talk about your exposure, the manageability of, you know, potential losses there, given what you've done to kind of re-underwrite and scrub and take reserves.
Yeah. We, you know, we broke that out in the 1Q, and we'll give updates on that. Basically, in office, we have, I don't know, $8.9 billion of total exposure, which is a couple of % of our total loans. It's inside of the $8.9, there's, you know, there's four categories. There's basically government, which is great. There's single tenant, which is great. There's medical, which is great. There's multi-tenant, which isn't so great. You know, the multi-tenant is probably $5.4 billion or $5.5 billion. What we did with that book, we kind of went at it two ways. One way was just through the normal CECL process. We dropped NOI by 25% and values by 50% and ran it and reserved.
The other way we did it was building by building bottoms up, change in rent renewals, tenant improvement costs, cap rates, and all the other, and marked it, and it kind of met in the middle. Practically, through all the machinations, the way to think about it is our multi-tenant office properties are reserved to a level that the values of them can fall to 25% of their original appraised value when we did the loan and be wholesaled and we're whole. That's what we reserved for. It's like a 10%, 9% reserve against that whole book. Basically, remember, you appraise a building at $100. We did the loan at $55. We're assuming that the thing can fall to $27-
Yep
... and still get out whole, and that's what we're reserved for. It's, like we're gonna have charge-offs, but we think we're kind of covered against what's gonna come in a lumpy form over the next couple of years.
Mm-hmm. How about broader credit conditions, whether in commercial or consumer? Can you talk a little bit about that?
You know, not seeing anything as yet. There's, you know, we can talk about some of the manufacturers and the big box retailers. You can look at healthcare at the margin, you can worry about auto at the margin, but nothing that necessarily stands out or causes us worry. I think, you know, as we talk about our forward outlook here, where we get a, you know, a slight dip in GDP, still pretty strong employment and payroll numbers. I, you know, I think it's still gonna feel pretty healthy through the, you know, through the credit cycle here.
Mm-hmm.
We see that on our numbers.
Yeah.
Yeah.
Before we shift and talk about regulatory issues and capital, we did cover a bunch of fundamental trends. Any other updates you wanna share, you know, regarding the second quarter or your outlook?
No, I mean, we, you know, look, we took stuff down at the end of the 1Q. We're hitting those numbers. You know, I think importantly, NII is showing up exactly the way we thought it would. At the margin, maybe we did a little better on expenses, a little worse on fees, given the capital markets activities, a little better on credit, but we feel pretty good about what we said in guidance. You know, all of our assumptions are pretty much holding up.
For the full year, you made a strong commitment to generating positive operating leverage.
Yeah
At a healthy margin this year. You still feel good about that operating leverage?
Yeah, I mean.
-feasibility?
Yes. I mean, I think we pointed at, you know, 2% +. We ought to be able to hit that without much drama.
Okay. Onto the regulatory. You know, investors are focused on what's coming and, you know, whether we'll see higher capital, higher liquidity. What are your expectations for banks of your size, both in terms of what you'll have to take on in the time frame?
Yeah. So, think about it in three forms: liquidity, capital, and operational complexity, with perhaps moving categories. The operational complexity, we're largely ready for. You remember, we did Advanced Approaches before. We didn't do Advanced Approach. All the stuff that we necessarily need to do, which by the way, they might get rid of Advanced Approaches, but all the stuff we need to do at the margin, we're kind of already there from a risk management standpoint. We're gonna have to do TLAC. You know, I actually think it's right. We've seen through the resolution of the firms that failed through FDIC, that, you know, it's tough to get a bank when there is a value mark across the whole industry, to be able to do a transaction without help from the FDIC.
So we'll do TLAC. In the ordinary course, if you go back to how we funded ourselves in 2018 and 2019, we would have largely been TLAC compliant. QT causing deposits to leave the system, we're naturally building our wholesale funding, so we're gonna get there through our ordinary plan. You know, we expect, and have been given some amount of reinforcement that, you know, they'll do that either for us out of the bank level or maybe a mix of both, but, it'll be fine. Capital, you know, separate that out, I think, to the Basel III end game. My best expectation, you know, they're gonna increase our risk and cost banks. You know, in our, in our own planning, we're saying, you know, maybe it's a point we don't know, right? It's...
I know they're not gonna create more capital absent the end game of Basel III, which is separate from what they're gonna do as a result of the recent liquidity pressures on TLAC and LCR.
Mm-hmm.
On LCR, we're, you know, at the moment we're compliant, no matter how you measure it. You know, expectation would be that they're gonna push that far down the curve. TLAC as well. You know, my guess, all the way down to $50 billion banks, but at least down to 100. They're going to offer. I hope that they offer. They're talking about thinking about offering. You can count discount and capacity if you're operationally ready as part of your LCR requirement, which is what they would, what they should do. We're in a pretty good place. I'm not terribly worried about it. You know, you mentioned earlier this notion of, right, they're gonna, you know, you're gonna have to include AOCI in your capital ratios.
You know, to remind you, the end of the 1Q, we showed that number. I think we were 7.6% or something. We did some quick math, you know, just before we came in here. We'll build that ratio in the ordinary course by a point a year.
Mm-hmm.
Part of that from earnings, importantly, a big part of that, because of the short duration of that book and the pull to par, which is kind of $550 million-$600 million a quarter. The capital build on, and I want to get the ratio right, it's the CET1 ratio, assuming you included AOCI.
Yeah, fully loaded.
Yeah.
Yeah.
Yeah.
Yeah. Yeah, you know, you can get to 9.5 by the end of, you know, 2024.
I don't know that you need to go to 9.5. I mean, look, we operated, you know, we have to be at 7.5. We operate at 8.5 because we wanted a buffer, you know. If they say our 7.5 is 8.5, does that mean I go to 9.5, or I go to 9, or I go to... You know, my point is that we can pull it apart pretty quickly.
Mm-hmm
... you know, in a way that still affords us an ability to have a strong dividend, which is important to us.
Yeah
have excess capacity to run the bank. Yeah.
While the market might like to look at that forward, you know, fully loaded notion, you will likely get time to phase in that AOCI, right?
No, they've been very explicit that they're gonna phase it in.
Yeah.
You know, the market. You know, it's interesting. In, in a, in a period of time where we go back to the crisis and people said, they said, "All right, you're gonna have to build to this capital ratio," and the market just held you there immediately. Everybody was still at risk kind of in that moment, right? There's a risk factor associated with it. The issue today, to me, is less about, hey, are you gonna build to nine or are you gonna build 8.5? Are we over this risk issue that's happening in the industry right now today? You know, in our case, I feel really comfortable on credit. We're really well positioned on rates, whichever which way they go.
I feel comfortable about who we are and what the balance sheet is in our earning capacity.
Yeah. With those goals of building some capital, you still have some flexibility to grow the balance sheet. You're not looking.
Yes
do massive mitigation or RWAs.
No
Anything like that's part of your walk.
No, I mean, all of that, you know, if we had to do that, you could do that. There's an economic cost associated to doing that is window dressing on your RWAs and still leaving you with the residual risk that you started with, which is just destroying earnings. I don't.
Mm-hmm.
I mean, sometimes you're forced into that bucket, but I don't see us going there.
Yeah. You mentioned it, but just a reminder, how you think about the dividend payout and dividend growth and wrap that into your, you know.
Yeah. I mean, we've talked forever about a 40%-50% dividend payout, and, you know, we expect it to keep it there.
Yep. Okay. In terms of consolidation, what are your thoughts about whether we will see industry consolidation pick up? There's obviously some competing interests and dialogue out of regulatory circles, but it does feel like as an industry, we need to have more consolidation.
Yeah. I think... Look, you're hearing from different regulators and even politicians that M&A is back on the table, for a couple of different reasons. One is, you know, the basic notion that it'd be better to do open bank deals than FDIC deals, also I think the recognition that scale matters, in terms of risk management, in terms of regulation, in terms of technology, in terms of a lot of different things in there. As much as we would like to say it doesn't, it does, and I think people are waking up to that fact after some of the failures.
Is it feasible to do open M&A now, as a bank? You know, we've got rate marks, as a disincentive and maybe also an incentive to wait to see if there are assisted deals available.
Well, I mean, look, the assisted deals, they're recapitalizing your balance sheet, so they're great deals. Yeah, assuming you have the capacity to integrate them. Open bank deals today with rate marks aren't feasible, given, you know, for almost anybody. Given the lack of differentiation in share price, we'd have to issue additional shares against that base. If you wildly accrete them, but that'd be because I'm just pulling their balance sheet to par, so it's not real money. The math becomes, what can you take out in costs against if you had to do, you know, an extra share issuance to do it? That's, it doesn't work at the moment.
Mm-hmm.
I think through time, that opportunity is gonna exist because I think you're gonna see this real differentiation around share prices.
Right. Like you mentioned today, not enough differentiation between-
Yeah
stronger or weaker banks in valuation.
Yeah.
Let's talk a little bit about the, what differentiates PNC, some of the unique aspects of your franchise, and just kind of maybe reminders of where you might have some unique opportunities on the growth front, maybe BBVA and your expansion markets. What's the update there, the progress you've had, and where there's still opportunity to further penetrate your new regions?
Yeah. You know, it's a good question. All the doom and gloom, everybody kind of pulls back and says, you know, "What's gonna happen tomorrow?" Practically, we're set up with the new markets that we got with BBVA to have tremendous growth, you know, for the next 10-15 years. We grew revenue in those markets, we call them BBVA-assisted markets because we had some presence in some of them before, we grew revenue in those markets by 50% last year. You know, we grew transaction activity in the branches by 47%. You know, we pulled the branches from a 60% performance versus our legacy branches to, you know, 75 or something today, they keep growing. That's ongoing. Last year, as we talked about, we grew loans substantially.
We've planted the seeds, in effect, to go cross-sell and harvest, you know, the corporates, our Treasury Management capabilities, which, you know, we continue to be kind of one of three or four players in the, in the large TM space. We've got a defensive balance sheet. We've got a lot of liquidity. We're good on capital. We're indifferent to rates. You know, we're otherwise in a pretty good place to take advantage of what's going to be dislocation in the market, both with clients, and then, you know, potentially inorganically.
Mm-hmm.
Yeah.
All that growth last year, was that on the consumer side and the corporate side, both?
Mostly on the corporate side. I mean, we're more of a C&I franchise than we are consumer. We grew both. We grew AMG as well, I didn't mention. The C&I growth, you know, we did this with RBC, where you know, I talk about it in terms of advertising dollars. When liquidity is absolutely free, as it was for the last couple of years, it's easy to go and participate, provide credit to somebody, get a margin on it. Today, advertising's really expensive, funding is expensive. Now we have all this planted the field over the last couple of years. Now we go harvest. You know, we've done that repeatedly through our history, and that's what we're in the process of doing with all the new clients we onboarded last year.
Mm-hmm.
It was massive.
How about some of your fee businesses? Maybe just give us an update in terms of treasury management.
Yeah
... maybe corporate services.
TM corporate, TM is doing great. You know, cyclical, Harris Williams, capital markets activity, derivatives, FX and so forth, bond issuance, you know, is down.
Yeah.
We're, you know, following the trend that you'll hear from others, which is why I kind of said, you know, for the quarter, at the margin, fees are weaker. You know, our big gorilla fee is TM, which is doing great. Our smaller fees are, you know, off at the margin. I think that's going to play out.
You have expense offset, too.
Yeah, we have expense offset. I think that's going to play for a while. It doesn't feel like M&A is going to come roaring back anytime in the near future. I hope I'm wrong.
Mm-hmm.
That kind of feels right, too.
What about strategically? What's going on with Harris Williams? You've done some small acquisitions there, or?
Um.
Add on organic.
Yeah, no, it's all products and services related to private equity that aren't necessarily providing capital. We do, you know, everything from Harris Williams with advisory, Solebury on IPOs, and we do this for our own clients too, but the biggest targets are private equity guys. Fortress with escrow management for M&A deals.
Mm-hmm.
We actually do offer TM through concierge service to the portfolio of private equity companies. We'll market to one private equity company who will offer our services effectively in bulk to the clients that they have. We onboard them that way, and it gives them a single view into their company portfolio. There's a lot of stuff we're able to do there that isn't capital intensive. We do, you know, I shouldn't leave it out, asset-based lending, which is a high return business, and more often than not, has private equity clients.
Mm-hmm. That is an area that historically picks up a bit during trickier times, right?
Yeah
happening yet, or?
Spreads and fees are going up.
Mm-hmm.
You know, not enough to make a huge difference.
Yeah. Yeah.
Yeah.
What usually happens as things get tougher there on the asset?
No, I mean, it's a fascinating business, right? They're charge-offs. You know, they're risky loans from a default basis. They are high recovery loans. You know, we have very low loss content. You know, spreads are high, fees are high, restructuring workout fees are high. Traditionally, as you actually see losses, you end up making much more revenue that cover whatever charge-offs you might have in that period, because the rest of the portfolio is getting charged up on fees.
Mm-hmm
... and spread. It just grows because other forms of credit aren't available to corporates.
Yep. A couple of questions that came in, through the audience here. You mentioned loan growth maybe a little bit less than H8 this quarter. Is there any particular vertical you're pulling back from, or it's just kind of quarter-to-quarter?
Yeah, there's nothing special. I mean, look, we're not going to add to office. There's actually a lot of office deals I'd like to do, but the headline number of, "Hey, your office exposure went up," isn't worth it. You know, which is kind of the unfortunate truth about banking, right?
We've heard.
People are watching numbers.
Yeah. We've heard that this week from others as well.
Yeah.
Even if the spreads got wider, it's
Oh, they're really wide. Yeah. This private credit will have a fun time with the office.
While you don't have a lot of consumer credit exposure, what are your thoughts on what kind of consumer credit cycle we might see ahead?
It's got to get worse than it is. How's that?
Yeah.
I mean, look, it's been surprisingly good.
Mm-hmm.
Consumers continue to be in good shape. You know, you can find your pockets of worry in auto, if you want to, based on, you know, car prices. We've shrunk that book over the last year. It's just there's nothing that we're particularly worried about. We keep talking about some sort of normalization, but it hasn't really happened.
Yeah.
Yeah.
The other question that's come up here is, whether private credit, you know, is likely to play a role, both in kind of filling some of the bank lending and maybe, taking off some of the commercial real estate off the bank's hands.
look, there's a lot of money that's sitting on the sidelines in private credit. you know, they do well when capital and liquidity are scarce. they're, you know, both in primary lending in the near term or buying assets from people who don't have the capital or liquidity to support them. I think they'll do well. I think, you know, structurally, longer term, private credit shines when it is optically or through regulation, difficult for a bank to make a loan. they don't necessarily make better economic loans. they differentiate by having a capacity to do things that on a piece of paper you'd look at and say, "It's crazy." If you're a lender, you'll look at and say, "That's actually a good deal.
Yep. Talk about the incremental funding. You mentioned this earlier, but what are some of the incremental funding options if you don't like, you know, what you're seeing on deposit pricing? Just talk about the kind of overall panoply of other options for funding.
Well, I mean, I'll just start with the $30 plus billion.
Cash
... cash sitting at the Fed. you know, in an LCR, that's well over any requirement we might have. I mean, you know, you add to that the practical notion that we know we're going to issue into TLAC through wholesale. All of that's in our plan, by the way. That kind of obviates the need to worry about what's going on with deposits, to be honest with you.
Mm-hmm. In terms of kind of the overall impact on ROE for you?
Yeah
You know, if you have to run a point higher on capital, TLAC's manageable. You know, you already ran higher than your minimums for a long time on regulatory.
Yeah.
I guess kind of what do you see as the potential impact on long-term ROE, and what are the possible offsets or puts and takes?
Yeah. In the end, right, the mathematical outcome of having to hold a point more of capital is less return on equity, all else equal. You know, offsets, there's always offsets, gives and take. You know, today, ROE is very high because our capital's low because of marks.
Mm-hmm.
Right? Tomorrow, loan spreads will be wider. Our capital will grow because marks will, you know, today the curve is inverted, which means, you know, you have horrible carry on everything you own. Tomorrow, the curve will flatten and/or steepen. You'll get a positive curve. You'll get carry again. All else equal, all that I know in a given environment, if I hold a point more capital, I'm gonna have a mathematically lower total return.
Yeah.
I think the other variables so dwarf the amount of capital you hold in a given year that I don't particularly worry about it. The other thing, I just remind everybody, you know, we said, "Oh, you know, hey, banking used to make 15% return on equity, and, you know, now it's gonna be less because you hold more capital." Some banks made 15%, some didn't, as we're finding out, right? It is an industry where you can lie about your cost of goods sold until you blow up. So that, you know, that return on capital number is this fictitious number you guys stare at every year that actually has nothing to do with the reality unless you mature the balance sheet. As I, you know, be careful, you know.
Yeah.
-throwing that number around for some annual period, that here's your return on equity, 'cause a balance sheet's a long-living thing, as we've all discovered here in the last year. It's not about next quarter's NIM.
Yeah, and again, we haven't seen the proposals. We don't know.
Yeah.
you know, your thought is, you've run historically around 8.5%, and maybe you have to run a little bit higher than that, but you still produce a good return on equity if you're running at 9%, 9.5%.
Yeah. By the way, you know, the other issue, you guys are all staring at the CET1, you know, AOCI.
Yeah.
That thing pulls the par a point a year, is our rough math. You got to remember that the securities book basically is fairly short-dated relative to a lot of other peoples out there, so it's pulling $550 million or $600 million a quarter, plus our retained earnings, so the capital builds fast.
That's just without the burnout.
Yeah, that's just.
Maturities.
Yeah.
Yeah. Not relying on rates.
Yeah.
Yeah.
Yeah.
Just remind us, too, you've got a loan swap book, you know, that's currently depressing NIM. Like.
A lot.
How does that burn off? Yeah, just remind us on that.
Yeah, it's, I guess, a two-year average life. I mean, you know, it's a, I know it's a 1.5% coupon in a 5% world, so, you know, it's $42 billion or $40 billion, right? Whatever that math is, we're burning $1.6 billion, $1.5 billion pre-tax a year that'll, you know, will roll off over the course of the next couple of years.
Yeah. You've got NIM pressure from the environment, but as that burns off-
Yeah.
It helps a little bit.
A lot.
Yeah.
Yeah.
Great. Well, we covered a lot of ground, Bill. We appreciate it.
Oh, good to be here.
Thanks so much.