Seats, we're going to get started. Okay, so good afternoon, everybody. I'm delighted to introduce our next panelist. He needs no introduction: Bill Demchak, CEO and Chairman of PNC. I think this is the 11th time you've been here, if I can count?
You probably.
Yeah, so. And by the way, I think that actually is a record. So thank you very, very much for your support. It's great to have you back. A lot to talk about, but let's just start off with your view of the macroeconomic backdrop. So a couple of things. The first is, what have you seen in the fourth quarter from a spending standpoint? Has anything changed? And then how are you thinking about the economic trajectory next year, both from a growth but also from an interest rate perspective, just given the fact that we will have a new head of the Fed next year?
Yeah. So, economy today still feels strong. Consumers are spending. Our average consumer balance continues to increase, actually, across all our cohorts, which is pretty interesting. Credit is good. Employment feels strong, notwithstanding the varying outputs we get. We track which of our customers on a static cohort going back 10 years receive unemployment, and that hasn't increased over the last year, a couple of basis points. We see GDP next year kind of like this year, close to 2%. No heroics one way or the other. We expect a couple of rate cuts towards the end of this year, and then we think they're probably going to sit there, independent, I would say, of next Fed chair. So, we're in a pretty good spot, not terribly worried about anything.
Okay, and then this whole K-shaped economy narrative, I mean, how do you see that tracking heading into next year? Do you think it's going to continue to diverge, or do you think it starts to narrow at some level?
K-shaped in terms of corporate winners or K-shaped in terms of consumers?
More on the consumer side.
Yeah. We actually don't see that in consumer largely because of who we bank. So as I said, even in our lower income, so think lower direct deposit number accounts that we have the bank balances are actually increasing. Spend is up. The change in spend, so the categories that money is being spent on, has changed, but we don't see distress there.
Okay, so before we talk about some of your strategic priorities, maybe you can give us an update on the fourth quarter. How are things tracking? Has anything changed on net interest income fees or expenses since you last spoke?
Yeah. No, you should assume that the guide is still good. At the margin, fees are going to be better than what we expected, and you'll have some commensurate increase in expenses against the guide. Markets came back. You think about all the way back to the first quarter, capital markets was a little light. We talked about fee guidance maybe being down. We've kind of captured that back in momentum this quarter, and pipelines into next year looks really strong.
Okay. But the change in fees is entirely capital markets, or are there other?
It's actually across the board, but largely driven by pickup. I mean, not surprisingly, right? Loan syndications, Harris Williams, some of the stuff we do in FX-driven, it's just really strong quarter in capital markets.
Okay. So let's talk about strategic priorities. Look, how have they shifted over the course of the year? I mean, it feels like a lot has changed relative to a year ago, but from your perspective, how have the strategic priorities changed, if at all? And look, how has the way that you spent your time evolved over the course of this year?
Yeah, so I don't know that our strategic priorities have changed in 10 years in the sense that it is our view that we are of such a size today that ultimately we need scale in the markets we choose to operate, importantly, retail scale to allow the rest of our franchise to continue to grow. I'm an old-school believer that you ought to have retail funding against your C&I growth and not rely on wholesale funding. We've been on that mission for a lot of years, and to succeed in that mission, we've invested a lot of money. Next year, and you've seen it in our announcements, so we just talk about what are we working on next year, right? We announced an increase in our branch builds. We're going to build 300 branches. We haven't been at that pace ever.
We are doing a complete refresh in our data centers for resilience and capacity. So we will always be on this notion you actually can't have downtime. We are continuing the journey of taking all of our code inside the company down to microservices. So we've done that with online banking. We're in the middle of rolling it out with mobile. We'll have it. We're going to redo all of our TM system, which is kind of state of the art, but break that down into microservices. All that means is the ability to plug and play and change and adapt and be fast at new products to market as faster. You might have seen just an example of that. We talked about in July or August that we're going to introduce crypto to our wealth clients through a partner with Coinbase. We took that live this week.
It's like four or five months because we can plug and play, and that's why it's important sort of to have that capacity. We have big investments into our credit card platform, not just in the form of people. We've redone models on underwriting and on line sizing and on front end and on marketing. We're rolling out rewards in retail. It's just going to be a busy year in terms of execution. Then, of course, First Bank comes online. The integration of that's pretty easy, but the incremental opportunity set, particularly in commercial, as we build into their markets, will go out pretty hard next year, so lots to do, a lot of momentum.
Okay. So let's talk a little bit about the momentum, and maybe we can start off with loan growth and your expectations around that. So you had very good growth in C&I in Q3. Maybe you could touch on what's driving that, maybe talk about the loan growth dynamics that you've seen in the fourth quarter. And then I think, look, one of the other things you've talked about is commercial real estate loan growth inflecting positively next year. Is that still your expectation, and how much of a tailwind could that be when we think about the loan growth picture for PNC overall?
So our guide for the quarter was, I think, 1%± on average, and we'll be there. Inside of that, right, we've actually been growing C&I loans. I think I looked at about 4% over the last couple of years. If you back out real estate, real estate has gone down 14%. And then in our total loan book, we've been purposefully, and we will continue to run off residential mortgages. We didn't have a lot of it, but in the end, even a little of it turned out to be a lousy holding for a bank balance sheet. We're going to inflect as we go into next year on real estate, which ought to cause the whole opportunity set to sort of increase. I think we had that jump in utilization in the first quarter, which has held kind of roughly there, hasn't moved either way.
We've had lots of production, so DHE has gone up inside of C&I, and the other thing that we're just recently seeing, which is a bit of a change, and this is just this quarter, is we're starting to see increased activity with strategic middle market buyers and M&A. They've really been on the sidelines all year because of tariffs. Private equity was transacting in large deals. We're getting traction. We haven't seen a lot of bank deal funding for middle market M&A, and that's kind of just picked up this quarter, which bodes well for next year.
The other thing I wanted to ask about is the OCC has just changed their guidance on leveraged lending. I mean, how significant is that?, and do you need the Fed to move as well?
My suspicion is the Fed will do it. Full disclosure, I spent a lot of time on trying to get that changed. The reason isn't that we want to do leverage lending. The reason is that we want to do smart lending that falls in the way they currently define it, and much of the big debate right now on private markets, private lending, private lending is different than leverage lending. It can be the same, but it can also be just investment-grade private lending. A lot of the stuff we'd otherwise like to do, our highest return businesses and asset-based, for example, were falling under leverage lending guidance. That was causing us not to do business we'd otherwise like to do.
So I think you're not going to see us enter into anything necessarily new, but you will see us expand some of the buckets we've held back because of the way they defined it, which is exciting.
So at the margin, it will make the banking industry, you think, more competitive relative to some of the non-financial?
Yeah, we can finally do smart business. I mean, a big part of why I think we're in the banking industry.
Can you give an example of something now that you could do that you?
We do a big business of first-out lending in our asset-based book where we were hired by a private equity firm to be a ranger of the loan, the auditor of the loan, and to run the intercreditor agreements between a senior-secured and a term loan, a B loan. We're fully secured. We have 150%, 200%, 300% collateral on our little 10% piece, but it's a criticized loan because by the OCC definition, it has to amortize at least 50% over three years. So I have a riskless 10% piece that's paying me 3% and SOFR + 5 that I can't do because it's a criticized loan under the old guidance. Right? I don't really care whether that thing can amortize or not, and I'm perfectly happy to liquidate the company because I'm going to get my money back. That's the best example.
I mean, it's just it drives dumb outcomes and causes banks to do riskier things that fit within some silly definition that somebody made up.
Okay. And then, on the other side of the balance sheet, deposit growth. Again, I think you sort of step up in commercial deposit growth in Q3. What have you seen so far this quarter? How is a deposit beta tracking post the more recent rate cut? And then, just more broadly, are you seeing any change in the competitive environment for deposits?
So remember in the third quarter, we had a jump in commercial deposits. The bulk of that was our clients figuring out that our on-balance sheet rate was better than our sweep rate. We didn't change it. It's just that money market rates became less competitive against what we could pay. So we had balance growth, which caused the hiccup in the NIM growth. We try to make money. We don't necessarily focus on NIM. And so we took a lot of deposits that dropped our NIM a basis point but made us a lot of money. This quarter, corporate deposits are up again, but not at the same pace. Retail deposits are doing great. We actually don't see the pressure that everybody's talking about on deposits. If anything, we've tried to shy away from corporate deposits this quarter just because we got grief last quarter.
And on the consumer side, we're not pushing anything. We have a little. Our beta's tracking to our. I think we said we get to 41 or something over there, Rob. So people talk about it. I don't know that we see it.
Okay. So let's take these pieces and talk about the net interest income outlook for next year. And I think you previously talked about $1 billion of growth in NII. You talked about hitting the 3% net interest margin at some point in 2026. Does that still hold? And then I guess if we do see better loan growth next year, is there an upside case to the $1 billion number that you've been talking about?
Yeah, a couple of things. First of all, yes, it holds. I think Rob said $1 billion. I think I said comfortably over $1 billion. That does not include First Bank, which I'll want to talk about at some point. Yeah. Loan growth beyond the 1% or 2% we otherwise would assume would help.
So maybe it's a good point to talk about First Bank in terms of how we should think about that.
Yeah. So we will obviously give combined guidance with fourth quarter earnings, assuming which should happen First Bank close before we do first quarter earnings. First Bank itself will be EPS neutral to a couple pennies, including the charge next year. So everything we're talking about is just PNC sitting there, standing there, doing its own business, right? We ought to grow NII north of $1 billion. We're going to grow fees. We're going to grow expenses, credits in good shape. You're going to start doing some math. Now, First Bank shows up in the picture. We'll take the integration costs early part of the year. And then our exit run rate is a full $1 better, right? We said we make $1 more from this thing post the first charge. So it doesn't cost anything the first year. And then we're at a $1 better run rate.
On top of a guide I just gave you that's showing NII going up $1 billion, expenses under control and fees growing. Also, by the way, capital probably going down through more aggressive repurchases.
Okay. That's a pretty good picture. So maybe we can talk about efficiency improvements as part of that outlook. You've done a very, very good job, I think, in terms of the continuous improvement program and reduction in operational roles over the last few years. Can you talk a little bit about where we've got to in terms of process optimization for the firm, where you see the greatest opportunities? And then, look, the other thing I'm very interested in hearing about is that there has obviously been a change in both the regulatory and the supervisory environment to a degree. Is that a tailwind in any way as you think about the ability to drive efficiency improvements from here?
Yeah. So just rewind for a bit. I think we probably have 2,000± fewer operational people inside of our mid-back office in the retail bank over the last handful of years. Simple soundbite. Our headcount's the same as it was 10 years ago when we were a third the size, all through the process of automation, branch optimization, so on and so forth. That should continue. The big buzz right now is it's going to continue because AI is going to drive it. But we've been on a journey of automation for years, and AI may well be an accelerant. It will most definitely be an accelerant in our tech headcount as we are already using agents against the programmer role. When we run our plan every year, we're running a five-year strategic plan. We're running below 60% today. That improves in a plan materially over time.
What I would tell you is I don't know that you can run a bank that is investing in its future much below the mid-50s. Math on our plan might show it's getting better than that, but practically, we'll be investing in growth when that happens.
I mean, so a couple of things. I mean, first, can you just touch on some of the bigger use cases for AI?
For AI, yeah.
And maybe how have those changed? And then, look, secondly, how should we think about these efficiency improvements? Because if you kind of go back and look at the banking industry over a long period of time, a lot of these efficiency improvements get passed on to the customer in terms of just better pricing. Do you think that's going to be different going forward as we think about how it changes the return profile of the industry from here?
So, we are in. No bank ever wants to say this, but in the retail space, we are in a commodity business in a consolidating industry. Who wins in that space? You have to be the low-cost provider with a very good product, with ubiquitous presence. To be a low-cost provider, you need to be leading edge in technology and automation and pull manual labor sources out of that. If you go back through time and look at our expense base shifting from technology or, sorry, to technology from physical plant and people, right, that will continue, and I think it's a necessary ingredient ultimately to succeed in what is a consolidating retail environment for a largely commodity-based. People are better at it, but I offer a checking account. You offer a checking account. Some people can grow faster than others, so it has a large impact.
I think in the end, it does not improve margins long term. We haven't seen it do so. So go back to we use our mortgage operations, for example. We've taken 27% in the last couple of years of the cost out of servicing a single loan, and we've done that. Think about, look at our retail operations. I just think that then comes with the next new investment to continue to grow the franchise. Maybe I'm wrong, but I think the day you sit back and try to harvest, you lose. All the way back to when we did National City, we've been massively investing every year in future growth of the company, whether technology, putting people into new markets as we open markets, building new branches, investing in people. By the way, for 10 years, we've had positive operating leverage.
Every single year, if you back out individual acquisitions, we're going to run this year north of four, and we're going to run next year higher than that, still investing a lot of money. But I think if you want to win in this consolidating space, you're going to invest a lot of money through time, and the good thing with us is we don't have any jump that we have to do. We've just been doing it consistently.
Yeah. So let's talk about some of the growth initiatives. You obviously talked about the 300 branches. Few questions. First, why 300? Why is that the right number? How did you kind of come up with that? Second, you're both building branches, but you're also buying branches. You're buying banks, effectively. You bought a bank. Talk about the economics of new branches versus building branches. And then, look, if we put this all together, you've talked about the 7% market share that represents critical mass. Is that still the right number? And look, how are you tracking towards that in some of these markets where you've obviously got?
So the 7%, some people use 8%, but I think the science is pretty well developed that once you get 7% or 8% branch share in a market, you have disproportionate deposits per branch share. So if I have 7% branch share, I get 8% deposits or something in a mature market. Our digital accounts, which we open I actually don't know our percentage of openings, but it's quite high these days. Some high 90s+ percent of our digital accounts are open within a couple miles of where we have a branch. So some assumption that you can live on digital without branches, we've kind of disproven. By the way, we tried that in a couple of markets when we were just doing a few de novo branches. Why do we build versus buy? 10 years from now, go back to this investment point.
There's going to be no one who is mad at us for building 300 branches. I'm only building 300 because we've never tried to build that many, and our real estate group is losing their minds. The return's pretty good. Ultimately, you put them in the right place. It's better oftentimes, not always, but oftentimes than actually buying presence in the market because many of the things for sale in a particular market are old FDIC failed, underinvested branches on the wrong corners, and I need to build branches anyway. So we're going at this as hard as we can. It leads to the same outcome we've been talking about for 10 years, which is ultimately getting density in the top 30 MSAs that we want to operate in. And we'll continue to do that.
Okay. So we're going to talk about capital in a minute, but before we do that, maybe we can talk a little bit about the outlook for some of the fee lines. You talked about the fourth quarter coming in better on capital markets. There seems to be tremendous optimism around the outlook for capital markets.
Next year.
Next year. Obviously, your franchise is slightly different, so maybe you can just talk a little bit about your expectations and how they changed since you last spoke in terms of the opportunity set in capital markets.
Not changing our targets, but we have, as we said, the back end of this year picked up, and it's likely to continue into next year. The businesses that we're in, just as an aside, largely middle markets, smaller, large corporate, leader in loan syndications, both investment grade, high-yield asset-based, big player in real estate, derivatives, foreign exchange, investment grade bonds, high-yield bonds. We own Solebury, which is involved in most of the IPO business. It's probably got 50% market share in IPO advisory. So we're in all of the spaces. We're just not in the business of committing large amounts of capital bridge financing to then be taken out by equity. And so we like where we are. We think it's going to continue to grow. We think we have a very strong franchise. That collective franchise, by the way, is well over $1 billion in revenue.
Okay, so let's talk about capital, and I know there's a lot of different moving pieces around what's going to happen to regulatory capital reform, but how has your thinking about steady-state capital requirements changed, and maybe you can just help us think through if regulatory capital is no longer the backdrop and it becomes either internal stress testing or rating agencies. What do you think is the right level of capital to run PNC at if the decision is up to you versus some regulatory authority?
So our current binding constraint is basically Moody's. We were affirmed at our current rating and with a 10% target, which is where we'll run. That's well in excess of what we need from a regulatory standpoint. One thing that'll help us, I believe, as they go through Basel III Endgame is they'll probably get risk rating. We will probably get risk rating relief for our corporate credit book, which will lower risk-weighted assets, which would change that number both for Moody's and for regulatory. Either way, we're running at 10.7 today, and we generate a lot of capital. So we're sitting on a capital capacity as we go into next year well north of $5 billion in today's world to get to the short answer to your question. Against where our share prices and opportunities, you're going to see it be pretty aggressive share repurchases.
Just on that, Moody's is going to give you credit for the capital relief you get from Basel III Endgame?
They do. Their ratings based on their capital ratio is also based on risk-weighted assets, so I assume so.
Okay.
I didn't say the world's rational.
Okay. So before we talk about basis.
By the way, when we run stress tests, just to get to there, if you throw out all the third-party rules, so you run a stress test, even our real severe stress test. Even last year, we stressed down to 9.7 or something. This year's stress tests will be a lot lighter. We run literally dozens of them, and we could run lower than where we are. I don't see a need to. It doesn't hurt you to carry excess capital as long as you're not doing something stupid with it.
So, maybe we can, before we talk about credit, let's talk about uses of the excess capital. I guess there's a couple of questions. I mean, it does sound like you are thinking about increasing the cadence of the buyback. Is that for this quarter? Is that for next year? But it would also be just helpful to get an update in terms of how you're thinking about deployment of excess in terms of both growth in the business, capital returns, but also just in organic.
So we'll always deploy first to grow the business. We have a fantastic organic opportunity. We're not going to shortcut that through some shortage of capital. At the moment actually, I'll step back. Fourth quarter, we said we would do 300 to 400. We've done 300 to 400. As we go into next year, you should assume that's a higher number as we work our way down to a 10% target from 10.7% while we're making I don't know what the number is, $7 billion+ a year. So buyback will be larger. The question you really want to ask is whether we'll spend that capital on M&A. And I can't tell you how frustrated I am by this year's performance and kind of the misunderstanding of what we may or may not do vis-à-vis long-term plan.
First point, I was very public in advocating that banks need the ability to compete, and banks should be allowed to merge. Otherwise, we're going to see consolidation at the very top without any challenges. Second point, we're 165 years old, and that doesn't mean I have to change that overnight. I just want the ability to. Third point, I don't think this current regulatory environment that there's any window whatsoever related to the political environment. I think that may be true for G-SIBs who are contemplating large deals, but I think it is well accepted at this point that on both sides of the aisle, it is important to create challenger banks to the G-SIBs. So I don't think we're under any window pressure that you have to get some deal done anytime in the near future. Next point is there's no large banks for sale.
Independent of we wanted to even do anything, have you heard anybody come up here and say, "I'm interested in selling"? No, they all want to buy, and at the worst, they'll say, "I won't buy anybody else, so I'm going to buy back my shares, but I sure as hell don't want to sell," and then you have a whole group of small banks who all want to sell who had their share price run up at multiples higher than our multiple, given our growth trajectory that I just told you about. Why the hell would we buy them? We look at First Bank, and people say, "Oh, you pay 2.4x book. Oh my God, heart attack on First Bank." First Bank was, on every deal we've done since I've been sitting in the seat, the highest cash-on-cash return deal we've ever done.
To the amount of money we invest $4 billion and we get back this in our earnings, we already told you it's north of a buck a share. It says north of $400 million. It's actually appreciably north of that. Say 400 without the accretion accounting. Just cash-on-cash yield. We've never gotten that in any other deal we've done. So looking at tangible book value and earnback when you are not looking at the opportunity to take cash costs out and the degree of certainty of the money you can earn is the wrong metric to look at.
The bank deal is getting done saying, "Hey, I have no tangible book value dilution, but oh, I'm stopping share repurchases for the next 20 years, and I just bought this crappy-ass franchise that isn't going to make me any money." You want to buy a good franchise where you get good return on what you bought. And I would just tell you First Bank was actually the best one we ever did. We bought RBC at one times a buck. They didn't make nearly the return, not even half the return we get out of First Bank. Now, having said all that, that thing, First Bank is the most unique bank I've ever seen. I've had all these small banks come and talk to me. Everybody wants to be sold at 2.5x book. They're all business banks. They're not retail banks.
First Bank is first and foremost a retail bank that deals with retail deposits and has a retail customer share, and go back to all our strategic priorities going back 10 years. What is it I want to do? I want to grow retail share, and that franchise did it, but some assumption that we ought to trade two points off a multiple that would be worthy of our growth rate because we're going to do something dumb and overpay for somebody who's either not for sale or masquerading as a retail bank is a really bad assumption.
Let me ask you a couple of questions. I mean, the first is, can you just remind us of the financial hurdles any acquisition needs to meet for you to consider? And then, look, secondly, I do think there is this view that's been emerging over the course of this year that we are going to see this acceleration in regional bank consolidation next year. I mean, do you buy into that? And then the third thing is, look, is there a combination out there that would concern you from a competitive standpoint?
So what are financial metrics we look at? I mean, everything you would think put together, but ultimately, we're saying how much money, whether cash or stock, because they're kind of fungible. I could issue stock. I could issue cash. Just how much proceeds am I giving to something? What am I getting back both in near-term earnings and franchise value, and what is the degree of difficulty in doing it? Including credit risk, including cost takeout, including do I have to rebuild all the branches. So as logical as you think we would be when you put, "I'm putting this much cash up, and I'm going to get this back, and here's my net present value." That's what we look at.
This metric of when's your tangible earnback, what's your dilution, what's your, you can't look at that in isolation because it's not giving you the picture of whether it's a good return or not. Is there going to be a lot of activity in the next couple of years? I think at this point, like every small bank’s for sale. They’ve driven a price up where most people who would be acquirers, even though they really want to acquire, struggle with any of the metrics associated with it. I don't think there's large bank deal that gets done in any way, shape, or form, and I don't particularly get worried. I mean, you do any combination you want.
I think that any really big combination who would clog up a map for us in some way, shape, or form probably comes with so much execution risk that I would just double down on our investment in organic growth.
Okay.
I mean, these deals, by the way. Some notion it's truly fraught. Some notion that I can do banker math and put two things together and wave a magic wand and actually execute and cause that outcome is a super dangerous notion. A deal that was the same size as us or even half the size of us comes with material execution risk, compliance risk, systems risk, degrees of complexity in doing operational conversion, personality conflict, dual heads of everything. We don't need that. We're growing like a weed, just doing what we're doing.
Okay. So we've got a minute left. And you did touch on this, but I do want to ask this specifically, which is, look, as you talked about, your operational trends this year have actually been very good on our numbers. I think we have you growing PP&R, kind of low double digit, maybe even higher over the course of this year. Other than the M&A piece, what do you think people are missing when it comes to the investment case for PNC over the next couple of years?
I think the market is way too focused on who's going to buy whom as opposed to what is a good franchise. I think there's absolutely no differentiation on a bank that is actually able to grow because it's growing clients and business versus one who is mortgaging their future or just recovering from a disaster. I think there's way too much focus on, "Let's guess who the next person to be sold is," and, "Let's guess on the next person who's going to buy," and look, every single financial metric we look at, we're basically at the top of our peer group this year, and by the way, we were last year too, and by the way, we probably will be next year, and we actually sit at the bottom of our peer group in total shareholder return this year, all because people think I will do something stupid.
So it's really frustrating. I mean, literally, it's like the whole world is betting that I'm going to do something stupid that's caused the stock to go down. And I won't.
I think that's a great note to end it on. But still, thank you very, very much for joining us. We'd love to have you back next year.
Thank you.