Good morning. My name is Frank, and I will be your conference operator today.
Will be a
question and answer session. There will be a question and answer session. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Brian Gill.
Please go ahead, sir.
Well, thank you, and good morning, everybody. Welcome to today's conference call for the P&C Financial Services Group. Participating on this call are P&C's Chairman, President and CEO, Bill Demchak and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward looking information. Financial.
Cautionary statements about this information as well as reconciliations of non GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials. These materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 16, 2021, and P and C undertakes no obligation to update them. Now I'd like to turn the call over to
Thanks, Brian. Good morning, everybody. As you saw, we had a solid start to the year as we grew revenue and controlled our expenses to generate positive operating leverage in the linked quarter comparison. Our first quarter results also benefited from our provision recapture driven largely by an improving economic outlook. Financial.
Despite this recapture, our reserves remain at over 2% of loans as we continue to work through the COVID fallout and work to understand potential secular changes financial classes. Our capital and liquidity levels also remain at record highs. With the rise in term yields, We've been deploying some of this excess liquidity and increased our investment securities by $9,000,000,000 at period end. You'll notice they didn't change much on an average basis as we bought later in the quarter. We also actually added another $9,000,000,000 in TBAs that are going to settle early in the second quarter And finally, we've continued our purchase activity into the Q2 and we continue to operate and C Financial.
We are also expanding this at very high levels of cash at the Fed that can be deployed over time in loans or securities based on market opportunities. While not a surprise, The quarter was impacted by continued weak loan demand in the face of strong bond market issuance levels, pay downs and competition resulting in and C Financial. Based on the strength of the U. S. Economy, we would expect to see loan demand improve and ultimately drive utilization rates Higher over time.
We continue to execute well against our strategic priorities, including our national expansion, which will significantly accelerate through our pending acquisition of BBVA USA. We're making good progress on BBVA integration planning and are on track for a mid year close pending regulatory approval. We haven't found any significant surprises regarding the quality and our employees are working effectively with their BBVA counterparts and everything including Financial. With the quality of BBVA markets, especially in their largest markets, especially in Texas and is proving to be everything we hoped it would be. As we plan for the integration of BBVA USA, we continue to invest in and leverage our own technology so that we can better serve our customers.
Earlier this week, P and C launched low cash mode, which fundamentally changes Banking experience for our virtual wallet customers by allowing them to avoid overdraft fees through unprecedented Account Transparency and Control. Low Cash Mode represents a shift away from the industry's widely used overdraft approach, which drives customer dissatisfaction which we believe is unsustainable. We firmly believe this differentiated approach will drive significant growth in new and existing relationships over time as we execute our national expansion strategy. Low cash mode allows our virtual wallet customers to see and control Financial. What's happening in their checking accounts in real time.
If a customer's balance is negative or about to go negative, they have at least 24 hours to cure their negative balance by determining whether certain payments are processed that otherwise might result in overdrafts. This payment control is a significant differentiator that we believe will customers avoid overdraft fees of approximately $125,000,000 to $150,000,000 annually. P and C's full 'twenty one Full year 2021 revenue outlook anticipated this fee reduction as did our estimate of BBVA's PPNR contribution to P Financial and as a result is not impacted by this change. I'd like to close by thanking our employees who continue to support our clients and Communities through the various COVID challenges by executing on our value added relationship based model. And with that, I'll turn it over to Rob for a closer look at results and then we'll take your
Thanks, Bill, and good morning, everyone. As you've seen, we reported 1st quarter net income of $1,800,000,000 or $4.10 per diluted common share. Our balance sheet is on Slide 3 and is presented on an average basis. During the quarter, loans declined by $8,000,000,000 or 3% due to lower utilization and continued soft loan demand. Financial.
Investment securities grew approximately $700,000,000 or 1% linked quarter. However, on a spot basis balances increased $9,000,000,000 or 11%, as we accelerated our purchase activity near the end of the quarter due to the steepening yield curve. Our average cash balances at the Federal Reserve grew to $85,000,000,000 in the Q1, driven by continued deposit growth and lower loan balances. On the liability side, deposit balances averaged $365,000,000,000 and were up $6,000,000,000 or 2% linked quarter. Borrowed funds decreased $3,000,000,000 compared to the 4th quarter due to the runoff and redemption of debt obligations.
Our tangible book value was $96.57 per common share as of March 31, a decrease on a linked quarter basis, segment, primarily due to a decline in AOCI. Year over year, tangible book value increased 14%. And as of March 31, 20 21, our CET1 ratio was estimated to be 12.6%. Regarding capital return, Our Board recently approved a quarterly cash dividend on common stock of $1.15 per share or approximately $500,000,000 Assuming a midyear close, we expect to resume share repurchases in the second half of the year. Slide 4 shows our average loans and and financial results in more detail.
Average loan balances of $238,000,000,000 in the first quarter were down $8,000,000,000 or 3% compared to the 4th quarter. Financial loan balances declined $5,400,000,000 or 3% as overall utilization rates declined to historically low levels. Beyond that, Paycheck Protection Program balances remained flat as originations were offset by loans forgiven. And within our commercial real estate business, Financial. Multifamily warehouse lending declined seasonally by $2,000,000,000 Consumer loans were down $2,300,000,000 with lower balances across all consumer categories as loan demand continued to soften due to higher consumer cash levels.
The yield on loan balances was 3.38%, a 3 basis point increase compared to the 4th quarter. However, the increase selected elevated commercial real estate prepayment fees and higher PPP loan forgiveness during the quarter. The rate paid on our interest bearing deposits is now 6 Financials, a 2 basis point decline linked quarter. Average deposits increased $6,000,000,000 or 2%, driven by enhanced consumer liquidity, primarily related to government stimulus payments. In the year over year comparison, Financial.
Total average loans decreased 2% or $5,000,000,000 primarily due to the elevated drawdowns that occurred during the Q1 of 2020. Deposits increased $76,000,000,000 or 26% and again were driven by the high cash balances of our As a point of context, consumer checking account balances are on average roughly 40% higher than this time a year ago. As a result, our period end loan to deposit ratio has declined to a historic low of 63% at the end of the first quarter, compared to 87% in the same period in 2020. Slide 5 details the change in our average securities and Federal Reserve balances over and Exchange Commission last year. Security balances of $86,000,000,000 in the Q1 increased $2,000,000,000 or 2% compared to the same period a year ago.
Financial. Over the same time, our Fed balances have increased nearly fivefold, driven by significant government stimulus as well as the proceeds from the sale of our Equity Investment in BlackRock. As most of you know, during 2020, we were patient in deploying this excess liquidity, interest rates remained at historically low levels. However, with the recent yields curve steepening, we accelerated our rate of purchasing, Banking, increasing our spot balances by $9,000,000,000 with another $9,000,000,000 of forward settling securities as of March 31. Average security balances now represent approximately 20% of interest earning assets and our expectation is to build these balances to approximately 25% to 30% by year end.
As you can see on Slide 6, net income of $1,800,000,000 grew 25% compared to the 4th quarter, reflecting strong pre tax pre provision earnings and a substantial provision recapture. 1st quarter revenue was $4,200,000,000 up slightly compared with the 4th quarter, driven by higher non interest income, which was 44% of total revenue in the Q1. Expenses declined $134,000,000 or 5% and remain well controlled. The provision recapture of $551,000,000 reflected improved forecasted economic conditions and lower loan balances. Now let's discuss the key drivers of this performance in more detail.
Turning to Slide 7, this chart illustrates our diversified business mix. Financial. Total revenue increased $12,000,000 compared to the Q4 of 2020. Net interest income of $2,300,000,000 was down $76,000,000 or 3%, primarily due to lower loan balances and 2 fewer days. Net interest margin of and expected to slowly rise throughout 2021.
Non interest income grew $88,000,000 compared Financials and Exchange Commission. Fee income of $1,400,000,000 decreased $102,000,000 or 7%. Most of the decline was driven by lower corporate service fees related to elevated 4th quarter merger and acquisition advisory activity. Additionally, consumer services and service charges on deposits were down slightly, Financial segment, reflecting seasonally lower activity and higher consumer cash balances and growth in both asset management fees and residential mortgage revenue partially offset some of the decline. Other non interest income of $483,000,000 grew $190,000,000 and included higher revenue from both Private Equity and Underwriting.
Linked quarter growth also reflected the impact of the $173,000,000 negative Visa derivative adjustment in the 4th quarter. Compared to the same period a year ago, total revenue declined $116,000,000 as a decrease in net interest income from lower interest rates and volumes segment with partially offset by growth in our broad based fee businesses. Turning to Slide 8. Expenses were down by 1 $134,000,000 or 5% linked quarter across all categories, primarily due to disciplined expense management and seasonality. Financial.
Year over year expenses increased $31,000,000 or 1% and remain well controlled. During the Q1, we generated 5 and linked quarter positive operating leverage. And as a result, our efficiency ratio for the Q1 was 61%. We remain deliberate around our expense management. And as we've previously stated, we have a goal to reduce costs by $300,000,000 in 2021 through our continuous improvement program and we're confident we'll achieve our full year target.
As you know, this program funds a significant portion of our ongoing business and technology Investments. Our credit metrics are presented on Slide 9 and reflect improvement in all these 3 major categories. Non performing loans decreased $148,000,000 or 6% compared to December 31. Commercial non performing loans declined Consumer non performing loans increased $26,000,000 related to residential real estate and home equity loans as a result of borrowers exiting forbearance. Total delinquencies of $1,100,000,000 at March 31 decreased $217,000,000 or 16%.
Financial. Consumer loan delinquencies declined $203,000,000 primarily due to lower auto and residential real estate Financial loan delinquencies decreased by $14,000,000 Net charge offs for loans and leases were $146,000,000 and Exchange Commission. A decline of $83,000,000 linked quarter. Commercial net charge offs of $51,000,000 decreased by $58,000,000 segment, driven by lower gross charge offs. And consumer net charge offs of $95,000,000 declined by $25,000,000 segment, primarily in our auto and credit card portfolios.
Annualized net charge offs to total loans in the Q1 was 25 basis points, a decrease of 10 basis points compared to the same period last year. Slide 10 shows $724,000,000 reduction in our allowance for credit losses during the Q1. Portfolio changes represented $251,000,000 of the segment, primarily driven by lower loan balances. $473,000,000 of the release in reserves was related to economic and qualitative factors. Turning to Slide 11, I want to highlight the progress we've made toward completing the acquisition of BBVA USA.
And Company. Notably, we filed all major regulatory applications and have completed a number of our key pre close objectives. We're on track to close the acquisition mid year and remain confident in our ability to achieve the financial objectives we laid out at the time that we announced the deal. In summary, P and C reported a strong Q1. In regard to our view of the overall economy, our current expectations are for GDP to and the P and C Financials.
We will now be conducting a Looking at the Q2 of 2021, compared to the Q1 of 2021, we expect total average loan balances to be stable. We expect NII to be up approximately 2%. We expect fee income to be up approximately 3% to 5%. We expect other non interest income to be between $300,000,000 $350,000,000 excluding net securities and Visa activity. We expect total non interest expense to be stable and we expect 2nd quarter net charge offs to be between $150,000,000 $200,000,000 Looking at the full year 20 21 guidance.
We expect P and C standalone to remain stable year over year in regard to both revenue and expenses. We do expect revenue benefits from the higher rate environment increased securities balances. However, average loans will continue to be a drag through at least the first half of twenty twenty one. We acknowledge some upside exists in spot loan growth during the second half of the year, but that remains to be seen and as a result is not included in our guidance. Regarding the pending acquisition of BBVA USA, Day.
We're increasing our expectations for the full year benefit to P and C's 2021 pre provision net revenue from $600,000,000 to $700,000,000 primarily driven by refinements to interest rate assumptions. Consistent with last quarter, this expectation excludes integration costs and assumes a mid year close. And with that, Bill and I are ready to take your questions.
Thank Our first question comes from Betsy Graseck with Morgan Stanley. Please proceed.
Hi, good morning.
Hi, good morning.
Hi, good morning. Good morning, Betsy.
Okay. So two questions. One on your NII guide, Up approximately 2%, that's for the Q1. But then in the commentary around second quarter, sorry. Right.
And then in the commentary around your securities book, you were highlighting that you're planning raise securities book to what 20% to 25% to 30% by year end. So I just wanted to kind of get your sense As you're building towards your goal by year end, should we be anticipating that this rate of change of improvement in 2nd quarter NII is Something that we should be expecting could persist if the forward curve sticks around where it is in 3Q and 4Q as well?
Sure. So, yes, again, that was for the Q2 on the NII guide. When we take a look at the full year and this is part of our guidance in terms of revenue being stable for the full year, we do expect some more NII Meeting at the beginning of the year. So that's where we come out in terms of stable. In regard to the building up of the securities book, I mean, it's 3 things really.
1, we have put more money to work Because the curve has deepened. 2nd, we're going to continue to do that in a measured way. And then 3rd, for the foreseeable future, we'll be running as a percentage of our interest Asset Securities balances at a higher level. So historically, we've been approximately in the 20% range where we're guiding toward more of the 25% to 30% range.
And Betsy, the only thing I would add is, you said it's kind of a goal. It's not really a goal. It's Given the carry right now and how much cash we're sitting on that the reason we put that in there is that our Security balances and frankly for the whole industry are likely to run higher as a percentage of our total assets they have historically, and we'll keep adding to them throughout the year opportunistically as we've done. But You see that in the actions we took late in Q4 sorry, late in Q1. If we were simply trying to drive NII, we could have front loaded those purchases at lower yields and had NII flat.
We didn't do that. We waited. Waiting turns out to have been the right thing. And you'll You've seen us do that, but you'll see us continue to do that through the course of the year.
I totally get it. It's such an unusual environment here with the loan to deposit And what's going on with the liquidity in your book. So that makes a lot of sense. And the revenue being stable for the full year with the loan commentary you just I mean, part of that is a function of the PPP roll off that's expected. Is that fair?
Yes, in part. Yes, that's all part. That's all built
And then on your yes, go ahead.
I was just going to say, look, the biggest unknown Loan growth specifically is when the inventory start the inventory build starts for our Financial. The corporate customers utilization is running as much as 11 points below the peak, maybe 5 points below sort of historic averages. And even though the economy is really kind of taken off here for whatever reason, we haven't seen the typical inventory build and CapEx that you would see in this economy. Pandemic. But when that happens and it will happen, it almost mechanically has to happen, you're going to see pretty appreciable loan growth.
We just don't know when that's Particularly as it relates to 2021. Yes.
Got it. All right. And then just separately on the P and C. P and R that $700,000,000 up $100,000,000 from your prior guide. What's driving that delta?
Yes. As I said in my comments, Betsy, this is Rob. It's largely refinements in our assumptions around interest rates and some general true ups Financials relative to the assumptions that we had at the time that we announced the deal.
But just based on our prior conversation, is it more that you're Expecting they have more asset sensitivity in their book than
you saw before? No,
not necessarily,
no. No. We had there's so many little things. Rates moved in our favor. We're doing really well on expense opportunities, a whole variety of things and they ended up
Yes, that's right. True ups from assumptions that we made last November and the environment has changed a lot. In our knowledge. In our knowledge. That's right.
Our next question comes from John McDonald with Autonomous Research. Please proceed.
Hey, Bill, I wanted to follow-up on the loan growth thoughts and we're all just kind of thinking out loud here. But could we see the inventory Financial and the CapEx pickup, but still not kind of see loan demand because corporates have a lot of cash and other alternatives and Supply. How much is that a factor too do you think going on right now?
That will obviously impact our large Corporate book, which I think at the moment has its lowest utilization rate ever. But the bulk of our book, Remember, some 90 plus percent of our clients are private companies. And so our middle market and commercial book really doesn't have to the public markets and that cash build that you're seeing in large corporate. So I do think you'll see utilization there increase. By the way, we've We've seen utilization increases in our asset based lending book.
Small. They're small.
That's kind of the first place you would expect to see it. So that's encouraging.
Got it. And Rob, did you say that you're not building in a second half pickup too much into your expectations?
Yes. Okay.
That is what I said, Because at this point, it's conjecture.
Yes. And Rob, a follow-up for you. Obviously, your capital ratios have gone quite high. Is it fair and I know you don't want to get into deal assumptions and all that, but is it fair to us for us to think that you'll end I'll close the deal with higher capital than the 9.3% pro form a just given where you're starting from now. And could you remind us too just what CET1 ratio feels appropriate as a target for you guys longer term?
Yes, sure. Sure. On the BBVA, I would say on everything, we'll have a whole bunch of numbers for you once we close the deal. But for today's purposes, we're tracking at above all of our assumptions, including the CET1 ratio. So yes, my estimations are that it will be higher than that 9.3%, but we'll get into that detail Once we own the bank.
In regard to our targets, we've always said around 8.5%. That's been sort of The level that we felt comfortable with, obviously, we've been a lot higher than that. So the relevance of that number isn't as strong
John, you're asking a question, are we going to have excess capital that could be deployed in share buybacks and other Thanks. And the answer is yes.
Yes, that's right.
Yes. And the deal doesn't change or how you think about the right capital level for the company?
No,
Our next question comes from Scott Siefers with Piper Sandler. Please proceed.
Good morning, guys. Hey, thank you for
taking
my questions.
And maybe to revisit the loan growth thing. So I mean, you guys are seeing same trends as everybody else, but you You guys are a bit unique in terms of how much of the country you see. Are there any geographic differences on utilization or sort of Equity, etcetera. I guess I'm just curious if there's any differences either geographically or anywhere?
Not particularly. No, we haven't seen geographic differences, utilization as well across the board.
I think one of the issues is supply chains have been so disrupted that people actually can't build inventory. And we're strangely being held back by demand and production capacity.
Yes. Yes, that definitely makes sense. It's just such an unusual phenomenon. But I appreciate the thoughts there. And then maybe Just more of a TIGITAC one.
The other fee expectation, so it was a very, very strong quarter this quarter. I think the guide is a
Yes, that's we get some volatility on that quarter to quarter because there's a lot of elements there. But the guide is a $300,000,000 to $350,000,000 is what we expect to occur in the
Our next question comes from Erika Najarian with Bank of America. Please proceed.
Hi, good morning. During this earnings season, we've asked a lot of questions as analysts of when loan growth is going from a cyclical standpoint. But I'm wondering given the deal expected to close in mid year and as we think about how this could potentially help. Maybe they'll talk through how these newer markets could potentially Give you an even better opportunity to capture loan growth recovery once that comes.
I think that's going to be the case. But I think, one of the things we've We've been careful to do and sort of framing our expectations for you guys around BBVA was, we recognize that there are about our growth potential. But for the 1st year or so, we're going to and this is all in sort of the numbers we gave you. There's going to be a little trade off of we'll be growing the business we want as we shrink some of the business we want. So the real acceleration is probably a couple of years down the
Got it. And as you have made more progress on towards closing the deal, Financial. Can you give us a sense of you still feel like there's not going to be a significant amount of investment That you have to put into the combined franchise in terms of technology Thinking about another deal that had closed, prior, where there was a lot of investment spend that was A little bit of a surprise. What's the question?
I won't talk about what other people are doing, but we Pretty much have this nailed down. We know and it's all in the numbers we've given you. We are going to invest Certain capacity for their branches, for example, connectivity, faster routers. We're going to expand some of the compute capacity we have in our cloud. But all of that we've given you And it's not a big deal.
It was all on the deal assumptions and all those things are proving to be
Our next question comes from Ken Usdin with Jefferies. Please proceed.
Financial. Hey, good morning, guys. Just wanted to follow-up on the fee side, 3% to 5% growth in the second half of what was pretty good numbers to begin in the first. Just Wondering if you could help us understand just where your expected growth is coming from and what do you think is going to lead that forward? Thanks.
Sure, Ken. Yes, I would say on the fees, as we look forward to the Q2 relative to the guide, Corporate Services and Consumer Services will be up, we'd expect in sort of that mid single digit range. And then the other fee categories, asset management, mortgage and service charges on deposits, probably low single digits. So that's sort of how we financials.
Okay, great. And then just as a follow-up on mortgage, obviously not a bigger line for you guys, but just given Some changes in the business you guys have been making and the relatively new platform. Just do you see share gain opportunities? And is the Just against gain on sale margins in terms of just how resi can continue to build over time?
Yes. I mean, hey, we are mortgage isn't as Big of a percentage of our businesses as others, but we're very excited about what we've built and the opportunities that we have. Particularly, the market will do what the market will do, but particularly
Okay. Last little follow-up, just Rob, I know you guys don't really give us a number on just premium M inside the bond book, but can you Help us understand, has it been a drag? Is it you're buying a lot of bonds? You're probably still buying some premium bonds too. Just how should we just think about that big picture?
Yes. It's come down a little bit and we'd expect it to continue to come down a bit.
Even with purchases.
And it is in the numbers, yes, even with the purchases. Okay,
Got it. All right. Thank you.
Sure.
Our next question comes from Mayo with Wells Fargo Securities. Please proceed.
Hi. In terms of the guidance For the acquisition, so from $600,000,000 to $700,000,000 Look, the bank index is up 40 since November 15 when you announced the deal. So I guess it seems logical that your benefits are going to be greater, especially with Fixed price. So what does that mean for 2022 and the ultimate savings. I mean mathematically, if you look at the industry and you look at BBVA, of course, it
I'm trying to figure out where you're going with that, Mike. I mean, we're going to once we Close the deal, we'll give you some updates on numbers and so forth. I guess what I would say to you Financial. We remain, I remain, now so even To a greater extent, really excited by the out year growth potential of this deal. We tend when you do a deal, you give kind of 1.5 years worth of guidance when all the marbles are thrown up in the air and you're working on cost saves and integration.
The potential of the franchise In these markets is phenomenal. The potential for cross sell and for growth of new clients is phenomenal. And we're really excited by
I guess I'll just wait until you close it and get more information for 2022 guidance.
And we'll have it.
Okay. Well, let me just let me get some concrete numbers from you. I love What you're saying about the loan data, I just I love data. So when you say you're 11 points below peak utilization and five
The only one I can think of right off the top of my head is our corporate finance utilization is 57% of the peak number. And I think I saw some strange tailwinds. Yes, that was a little bit lower there. And that's a function of all the corporate cash. The 11 point drop was off of the high utilization we saw, Mike, with all the draws during the Q1 of last year, which is why the average is maybe 5%.
And It's hit. Certain areas have been impacted more than others. Municipal utilization is way, way down. As I said, Corporate Finance is way, way down. Even our asset based business, which typically runs fairly high utilization has really struggled, just given Lack of ability to build inventory.
So I don't know if you remember the number, Rob, but we've messed around with If you kind of regress economic growth, retail sales, a whole bunch of other different things Against and inventory levels against loan utilization, it's an R squared up over 80.
That's right.
And it should be growing Today, we just haven't seen it. I can't give an answer as to why.
And then last one, you said private
That's my number. So by loan balances, I'm going to say it's half.
Yes, that's right. That's a better number. And that's obviously on Institutional Corporate side.
Yes. Yes.
And just I mean, I guess you're just being conservative or what? Because you're saying it has to Mechanically has to happen. It's in the process. You're starting to see an asset based lending, but you're not building it in your expectations even for the Q4 of this year. So is that just you being conservative or
Yes. No, it's us saying, look, Mike, we could sit here and tell you, and I've watched some of these So the back half
of the year is going
to be great. Everything will be wonderful. I hope they're right. And if they're right, we'll do really well. But I can't promise you that.
Or
it's the big timing.
Yes. What we show you is the stuff we know. I know that mechanically our loan balances are going to grow as the economy improves and they build inventories. I can't tell you the timing of that. By the way, nobody else
Our next question comes from Gerard Cassidy with RBC. Please proceed.
Good morning, Bill. Good morning, Rob. Financial.
Hey, Gerard.
Can you guys talk about your deposit balances, of course, are up dramatically. You've given that to us. And Bill, you've talked about the utilization of your customers with the liquidity. Is that the number one driver of Possibly taken deposits down or some of your custody bank is not necessarily your peer, but the custody banks are hoping for higher rates to bring their balances down. How much would rising short term interest rates help you guys bring down your deposit balances to get the loan to deposit ratio in more of a historical relationship without having the loans having to grow dramatically.
I don't think rising short term rates has any impact at all. I think as a practical matter, deposit balances in the industry are Once we see a pickup in that and I think excess liquidity in the system is here to stay for a long period of time Because I don't think the Fed is going to shrink their balance sheet anytime soon. So I think we're going to be in There's a structural change in banking, which is going to have more liquidity, higher security balances For an extended period of time.
Very good, which Obviously, I agree with you guys on that as well. Shifting over to the allowance for credit losses In your slide, I think it was slide 10, you give us good color on the levels and what drives those with the portfolio changes and the economic Qualitative Factors recognizing BBVA is going to influence this number by the on the out years. But when you look at the reserves and you compare them to the day one reserves back in January 1, 2020, which you guys show here, you're still well above them. And if the economy over the next 12 to 18 months is even going to be better than what we all thought on January 1, 2020 pre pandemic. That would suggest reserves should come down.
Do you think you'd get close to then day 1 level or is that just too low?
No, I think you can get there That level, it's just a question, like you pointed out in terms of timing. So our reserves right now reflect our current forecast. If subsequent forecasts are more bullish We're more optimistic, we'll continue on that trend. But the timing of how fast we would get there, Gerard, is per our earlier comments,
Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed.
Good morning. Call. Matt, can you talk about your interest rate positioning post the actions you plan to take in the securities portfolio? And then also after you fold in BBVA USA, I realize there are some moving pieces, but what would your expectations be in terms of how asset sensitive you are factoring those two things in?
We're going to still end up being asset sensitive. I mean, largely because even with our suggested build, The deposits we're going to have with the Fed are going to be quite large. I would tell you that our duration of equity And measured asset sensitivity has decreased as a function of the rise in rates, But that's less about what we're doing and more about the negative convexity in the bank's balance sheet.
Okay. Any way to kind of just frame how meaningfully levered you will be to rates, I guess put it another way, like you have a lot of leverage to rising rates now, but as you grow the securities book, we're
hardly going to dent it. I mean the chart you see the chart we have in there where you see our cash balances versus security balances. Put any loan growth you want in there. We're buying We're not buying the long end of the curve. We have a massive opportunity to deploy that.
But as we always do, we're We're going to increment our way in. By the way, incrementing our way in is what gets us to that 25%. Right.
Yes. Okay. And then separately, I'm probably getting a little ahead of myself here. Does we think after the BBVA You've clearly shifted your view to wanting branches nationally. And would the thought be to lead with organic growth or because you're basically folding them into your platform, would you be ready to do another deal maybe quicker than normally?
We certainly mechanically would We're ready to do another deal. I think like all things, it's a function of where you create value. If it's cheaper to go organically, which it was to continue to create scale.
And we'll have those capabilities. Yes.
Okay. That's helpful. Thank you.
Our next question comes from Bill Carcache with Wolfe Research. Please proceed.
Thank you. Good morning.
Financial. Good morning.
So, Bill and Rob, can you discuss how you guys are thinking about pent up demand dynamics for your consumer versus commercial customers? Where is there greater gearing to the reopening and how do excess savings and excess liquidity on both sides shape your view?
Well, sort of our outlook for consumer lending. Is that sort of what you're getting?
I'm trying to find your
Yes. I guess just thinking about as we look to like sort of these pent up demand dynamics Sort of like the reopening and like kind of animal spirits being unleashed as you look to the second half of the year and all that being a positive Financial. For loan growth, like how does that differ between the consumer and the commercial side? Like there's a lot of liquidity sitting around on commercial balance sheets. There's consumer has a lot of savings.
Does that sort of delay like the has a lot of savings. Does that sort of delay like the rebound in balance growth on each side? Or are both sides going to be affected
I see where you're going. I think consumer lending is going to drag C and I increase. I think consumers are really flushed with cash. You've seen retail sales. I think they continue to accelerate by the way.
But what's happening is the people who don't borrow are buying and that people who would normally borrow are sitting on fiscal payments That they're going to have to burn through over time before you see balance growth. We're seeing massive transaction volumes. So we see it in swipe fees in effect.
But I
don't know that you're going to see balanced growth. I think consumer will lag commercial and I get back to public companies and even some of the smaller public companies, will continue to rely on bank balance sheets to fuel their growth.
Got it. That's very helpful. And Bill, maybe I can circle back on a question that I'd asked you a while ago about sort of the Financial Technology Players like The Times of the World. And maybe just specifically on any color that you can give on perhaps how Active you are in discussions with regulators regarding sort of the uneven playing field with many of these players, particularly some of these Some of these players are benefiting from things like unregulated debit interchange, which was never intended for them. It was more for like the smaller bank exemption that was intended for post Durbin.
And so I guess is there any expectation of a leveling of the Do you see in the future or is this sort of the competitive landscape that is sort of the new reality?
So it is a topic Financial. Of interest, both on the political and regulatory side, less about competition and more about safety and But rather new entrants into the payment space, the exponential increase in fraud we've seen because Pete, I'm somewhat shocked actually nobody has asked me a question about low cash flow that we rolled out this That product is a result of years Technology Investment that allows us, I think is the only institution in the world to have effectively real capability of what's going on in our customers' accounts and therefore showing them what's going on in their accounts and therefore empowering them Choose what's going on in their accounts. No fintech has that. Go back to because they rely on these small banks as their back office, which Bring on the competition. At some point, they need to make money and To justify their existence, our challenge is presenting and we think we do this, a great proposition to our customers with ease of use and the very best products.
And I think we have the technology backbone to do that. So I'm less worried about Competing with somebody, I'm more worried about safety and soundness to the system and data and disruption to our customers who don't understand where data is being shared Financial.
That's very helpful. I was going to ask about the new service, but I saw you Talked about it on CNBC, so
I figured
I'd save my question. If I could squeeze in maybe one last one. Treasury departments of any of your clients even remotely considering the idea of having some allocation to Bitcoin. We've seen Some businesses move in that direction. And with the Coinbase IPO, I guess it sort of seems like it's a bit out of but perhaps you could argue it's becoming more mainstream.
And so just wondering is that something that your treasury function is preparing for? And then And maybe on the wealth side, are any wealth clients expressing interest in gaining exposure to crypto assets? Any thoughts on how you guys are Financial sort of position for any potential emergence of crypto as a potential asset class, especially
in
the aftermath of that.
We've been working on this long before Coinbase went public. In fact, we've talked to Coinbase about partnership and custody for our wealth clients. Practically, we've had a work stream around this, both for our corporate clients and treasury, but also for our wealth clients. The technology stretch isn't a big deal for us. It's more of the compliance based issues that you would expect.
And then importantly, choosing the right partners
Care. And suitability and fiduciary accounts.
Yes. You can imagine that for wealth clients, there'd be a lot of disclosure around
A follow-up from Mike Mayo with Wells Fargo Securities. Please proceed.
Hi. The FinTech comment got me to ask another question. If you think about Some of the players, the bankers in the industry, they're starting to set up bilateral relationships, even multilateral relationships with some big tech. And that's an option versus going directly for the consumer, especially with you going national now. Are you looking to continue permanently with getting customers directly?
Or are you looking to partner more To lower your customer acquisition costs and go more broadly, kind of like banking as a service, as a plan B.
We're going to get them directly. Look, Mike, I think when you effectively offer your products As the low cost provider to somebody else who owns the relationship, you've just sold your soul to the devil. It's the beginning of the end of your franchise in whatever space you're playing. We need to own the customer relationship and we need to deserve to own the customer relationship through an offering that doesn't need that FinTech platform on the front end. It's the alternative to that, right?
And this is you've heard Jamie talk about this as well. If tech gets into the space owns client relationships, then we become a commodity provider industry with 5,000 participants. It's It's a disaster. You can't default to that endgame. You have to own the customer.
And when you think about the risk With data, to the extent customers open banking and if customers opt in to share their data with other providers, Does that force your hand more or how do you defend against that?
I think there's a lot of
We
need safety and soundness around data. That is the biggest systemic risk at the moment in my view. People talk about cyber, but what they're really talking about is data and disruption of account flows, payment flows because data is The consumer that by the way is solved ultimately Through tokenized API based authorization at the bank for what the consumer wants to share, not through screen scraping. And we're working our way towards that. I think that's the ultimate endgame.
But the consumer has to be empowered And not to places that are otherwise in my view of not regulated in terms
Their controls around data and looking to monetize that data in some way.
Got it. Thank you.
There are no further questions at this time.
Okay. Well, thanks, Frank. Bill, would you like
to make any closing comments? Thank you, everybody. Look forward to talking to you at the end of the second quarter. Stay
This concludes today's conference call. You may now all disconnect. Have a great day, everyone.