The PNC Financial Services Group Q3 2024 Earnings Results & Report

The PNC Financial Services Group EPS Results

• Actual EPS: $3.49
• Consensus EPS: $3.30
• Beat/Miss: Beat by +$0.19
• One Year Ago EPS: $3.60
• EPS Beat Rate: 8 of last 8 quarters

The PNC Financial Services Group Revenue Results

• Actual Revenue: $5.43 billion
• Expected Revenue: $5.39 billion
• Beat/Miss: Beat by +$42.85 million
• YoY Revenue Growth: +3.80%

The PNC Financial Services Group (NYSE:PNC). is a diversified financial services company headquartered in Pittsburgh, Pennsylvania. Through its banking and financial services businesses, PNC serves consumers, small and mid-sized businesses, corporations, government entities and institutional clients across the United States.

PNC’s principal activities include retail banking, corporate and institutional banking, and asset management. Its products and services include deposit accounts, consumer and business lending, mortgages, credit cards, treasury management, investment banking, commercial finance, wealth management and investment advisory services. PNC also operates the nationwide online bank PNC Bank, National Association.

The company traces its history to Pittsburgh-based banking institutions established in the 19th century and adopted the PNC name following the 1983 merger of Pittsburgh National Corporation and Provident National Corporation. PNC maintains a branch and office presence in numerous U.S. markets and serves clients nationwide through digital and institutional channels. William S. Demchak serves as chairman, president and chief executive officer.

The PNC Financial Services Group Q3 2024 Earnings Call Transcript

Key Takeaways

• Strong Q3 results: generated $1.5 B net income ($3.49 EPS), achieved positive operating leverage for the 3rd consecutive quarter, with NII up 3% and fee income up 10% while controlling expenses.
• Franchise momentum: corporate loan commitments increased, retail investments in branch density drove household and checking account growth in key markets, and AMG benefited from favorable equity markets.
• Credit quality remains stable overall, but the CRE office portfolio is under pressure with expected additional charge‐offs despite 11.3% reserve coverage (16% for multi‐tenant).
• Capital strength: CET1 ratio improved to 10.3%, tangible book value per share rose 9% linked‐quarter, AOCI improved 32%, and ~$800 M was returned to shareholders.
• Q4 outlook: total revenue expected to be stable (NII +1%, fees down 5–7%), non‐interest expense up 2–3%, and net charge‐offs around $300 M, keeping full‐year positive operating leverage on track.

Presentation

[Operator]

Please note that this conference is being recorded. I will now turn the conference over to Bryan Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

[Bryan Gill, EVP and Director of Investor Relations at PNC Financial Services Group]

Good morning. Welcome to today's conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman and CEO, Bill Demchak, and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. 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 are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of October 15th, 2024, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.

[Bill Demchak, CEO at PNC Financial Services Group]

Thank you, Bryan, and good morning, everyone. As you've seen, we had a very good third quarter. We executed well and saw strong momentum across our franchise. We generated $1.5 billion in net income, or $3.49 diluted earnings per share. Rob will take you through the details shortly, but I wanted to highlight a few points. First, we generated positive operating leverage for the third consecutive quarter, and as an aside, our strong performance has positioned us to deliver positive operating leverage for the full year of 2024. Inside of the third quarter performance, NII grew 3% as we continue our growth trajectory towards expected record NII in 2025. Our fee income grew 10%, with a very strong quarter in capital markets, and we remain disciplined on the expense front.

[Bill Demchak, CEO at PNC Financial Services Group]

Second, we continue to see strong growth and activity across our franchise. C&IB continues to have great momentum as new loan production and commitments increased this quarter. While overall loan utilization has remained soft, the recent Fed actions to lower interest rates and the expectation of further cuts is likely to spur greater demand as we move ahead. Importantly, we are well positioned to serve our customers when loan growth returns. Within retail, we continue to invest heavily in our branch network to build density in our most attractive growth markets, and we are seeing success. We continue to grow customer households and checking accounts, with the highest customer growth being realized in the Southwest markets. AMG is accelerating growth in high opportunity markets and benefiting from favorable equity markets.

[Bill Demchak, CEO at PNC Financial Services Group]

Third, our overall credit quality remains relatively stable, reflecting our thoughtful approach to managing risk, customer selection, and long-term relationship development. While we expect additional charge-offs in the CRE Office segment, we're adequately reserved. Lastly, we continued to strengthen our capital levels during the quarter, and with the ongoing improvement in AOCI, our tangible book value per share increased 9%. In summary, we delivered strong results in the quarter, and we remain well positioned to continue our momentum. In fact, we're in the middle of our strategic planning process, and I can't recall a time when our organic growth opportunities have ever been more attractive. Now, before I turn it over to Rob for more detail on the financial results, and outlook, I'd like to say thank you to our employees for everything that they do for our customers and our company.

[Bill Demchak, CEO at PNC Financial Services Group]

And with that, I'll turn it over to Rob to take you through the quarter. Rob?

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average linked quarter basis. Loans of $320 billion were stable. Investment securities increased slightly by $1 billion, or 1%, and our cash balances at the Federal Reserve were $45 billion, an increase of $4 billion, or 10%. Deposit balances grew $5 billion or 1%, an average $422 billion. Borrowed funds decreased $1 billion, or 2%, primarily due to the maturity of FHLB advances, partially offset by parent company debt issuances. At quarter end, AOCI was -$5.1 billion, an improvement of $2.4 billion, or 32%, compared with June 30th.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Our tangible book value increased to approximately $97 per common share, which was a 9% increase linked quarter and a 24% increase compared to the same period a year ago. We remain well capitalized, and our estimated CET1 ratio increased to 10.3% as of September thirtieth. Regarding the Basel III Endgame, while certain aspects of the proposed rules are likely to change, we estimate our revised standardized ratio, which includes AOCI, to be 9.2% at quarter end. We continue to be well-positioned with capital flexibility, and we returned roughly $800 million of capital to shareholders during the quarter through common dividends and share repurchases. Slide five shows our loans in more detail. Average loan balances of $320 billion were flat compared to the second quarter, as well as the same period a year ago.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

The yield on total loans increased 8 basis points to 6.13% in the third quarter. Commercial loans were stable at $219 billion linked quarter, as utilization rates remained low and well below the historical average of roughly 55%. We continue to have confidence that commercial loan demand will return in the coming quarters as our loan commitments continue to increase, and we expect business investment to return to historical levels. Consumer loans averaged $101 billion and were stable with the second quarter, as growth in auto loans was mostly offset by a decline in residential real estate balances. Slide six details our investment securities and swap portfolios. Average investment securities of $142 billion increased $1 billion, or 1%.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

The securities portfolio yield increased 24 basis points to 3.08%, driven by higher rates on new purchases and the full quarter impact of the securities repositioning. As of September 30th, our securities portfolio duration was approximately 3.3 years. Our active receive-fixed-rate swaps pointed to the commercial loan book totaled $33 billion on September 30th, and the weighted average rate increased 58 basis points to 3.08%. Our forward starting swaps were $15 billion, with a weighted average received rate of 4.26%. Importantly, with our forward starting swaps, we've locked in the replacement yield on the majority of our 2025 swap maturities at levels higher than existing swaps and current market rates.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Turning to slide seven, we expect considerable runoff of lower yielding securities and swaps, which will allow us to continue to reinvest into higher yielding assets over the next couple of years. Accumulated Other Comprehensive Income improved by approximately $2.4 billion or 32%, to -$5.1 billion on September 30th, compared to -$7.4 billion on June 30th. The linked quarter improvement in AOCI was primarily due to lower rates, which benefited our swap and available for sale portfolio valuations. Going forward, AOCI, related to these securities and swaps, as well as our held to maturity portfolio, will accrete back as they mature and prepay, resulting in further growth to tangible book value. Slide eight covers our deposit balances in more detail.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Average deposits increased $5 billion or 1%, reflecting an increase in interest-bearing commercial balances as well as higher time deposits. Regarding mix, non-interest-bearing deposits were stable at $96 billion and remained at 23% of total average deposits. Our rate paid on interest-bearing deposits increased 11 basis points during the third quarter to 2.72%, reflecting growth in commercial interest-bearing deposits. We believe our total rate paid on deposits has reached its peak level, and with the 50 basis point cut in September, we've already begun to reduce deposit pricing. Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 basis points at both the November and December meetings, which will accelerate deposit repricing, particularly within our high beta commercial interest-bearing deposits. Turning to slide nine, we highlight our income statement trends.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Third quarter net income was $1.5 billion or $3.49 per share. Comparing the third quarter to the second quarter, total revenue of $5.4 billion increased $21 million. Net interest income grew by $108 million or 3%, and our net interest margin was 2.64%, an increase of 4 basis points. Fee income increased $176 million or 10%. Other non-interest income was $69 million and included negative $128 million of Visa-related activity. Non-interest expense of $3.3 billion decreased $30 million or 1%. As a result, PPNR grew 2% linked quarter, and we generated positive operating leverage for the third consecutive quarter.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Provision was $243 million, reflecting portfolio activity, and our effective tax rate was 19.2%. Turning to slide 10, we highlight our revenue trends. Third quarter revenue increased $21 million, driven by higher fee and net interest income, partially offset by lower other non-interest income. Other non-interest income included -$128 million of Visa-related activity. Net interest income of $3.4 billion increased $108 million or 3%, driven by higher yields on interest-earning assets. Fee income was $2 billion and increased $176 million or 10% linked quarter. Looking at the detail, asset management and brokerage income grew $19 million or 5%, reflecting favorable equity and fixed income market performance.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Capital markets and advisory fees increased approximately $100 million or 36%, driven by higher M&A advisory activity, as well as broad growth across most categories. Card and cash management decreased $8 million or 1%, as higher treasury management revenue was more than offset by credit card origination incentives. Lending and deposit revenue grew $16 million or 5% due to increased customer activity. Mortgage revenue was up $50 million linked quarter, driven by a $59 million increase in the valuation of net mortgage servicing rights. Other non-interest income of $69 million included Visa derivative fair value adjustments of -$128 million, primarily related to Visa's September announcement of a $1.5 billion litigation escrow funding.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Notably, we continue to see strong momentum across our lines of business and throughout our markets, and year-to-date, non-interest income of $6 billion grew approximately $400 million or 7% compared to the same period last year. Turning to slide 11, our non-interest expense of $3.3 billion declined $30 million or 1%. Excluding the second quarter, a $120 million contribution expense to the PNC Foundation, non-interest expense increased $90 million or 3% linked quarter. Personnel expense increased $87 million or 5%, reflecting higher incentive compensation related to increased business activity. Importantly, all other categories declined or remained stable. Year-to-date, non-interest expense has increased by $80 million or 1%.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Excluding the $130 million FDIC special assessment and the $120 million foundation contribution expense in 2024, non-interest expense is down 2% compared to the same period a year ago. We remain diligent in our continuous improvement efforts. We increased our CIP goal last quarter from $425 million to $450 million, and we're on track to achieve that goal in 2024. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 12. Non-performing loans increased $75 million or 3% linked quarter, primarily driven by an increase in CRE office loans. Total delinquencies of $1.3 billion were stable at June 30th. Net loan charge-offs were $286 million.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

The $24 million linked quarter increase was driven primarily by lower commercial recoveries, and our annualized net charge-offs to average loans ratio was 36 basis points. Our allowance for credit losses totaled $5.3 billion, or 1.7% of total loans on September 30th, stable at June 30th. Slide 13 provides more detail on our CRE office credit metrics. We continue to see stress in the office portfolio, given the challenges inherent in this book and the lack of demand for office properties. CRE office criticized loans were essentially stable linked quarter, but NPLs increased due to the migration of criticized loans to non-performing status. Net loan charge-offs within the CRE office portfolio were down slightly. However, going forward, we expect additional charge-offs on this book, the size of which will vary quarter-to-quarter, given the nature of the loans.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

As of September thirtieth, our reserves on the overall office portfolio were 11.3%, and inside of that, 16% on the multi-tenant portfolio, both up slightly from prior quarter. The modest increase in reserves reflects the continued valuation adjustments across the portfolio and specific reserves for certain credits. Furthermore, CRE office balances declined 4%, or approximately $270 million linked quarter as we continue to manage our exposure down. Accordingly, we believe we're adequately reserved. In summary, PNC reported a solid third quarter. Regarding our view of the overall economy, we're expecting continued economic growth in the fourth quarter, resulting in real GDP growth of approximately 2% in 2024, and unemployment to remain slightly above 4% through year-end.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

We expect the Fed to cut rates two additional times in 2024, with a 25 basis point decrease in November and another in December. Looking at the fourth quarter of 2024 compared to the third quarter of 2024, we expect average loans to be stable, net interest income to be up approximately 1%, fee income to be down 5%-7% due to the elevated third quarter capital markets and MSR levels. Other non-interest income to be in the range of $150 million-$200 million, excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be stable. We expect total non-interest expense to be up 2%-3%, and we expect fourth quarter net charge-offs to be approximately $300 million.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Importantly, considering our year-to-date results and fourth quarter expectations, we're on track to generate full-year positive operating leverage. And with that, Bill and I are ready to take your questions.

[Operator]

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Erika Najarian with UBS. Please proceed with your questions.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

Hi, good morning. Rob-

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Good morning.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

If we could just unpack a little bit of the commentary you made on the swap. So I guess first part of this question is, I noticed that the received fixed rate on your asset on your active swaps went up quite a bit quarter-to-quarter, implying that what's rolling off is well sub one. You know, you went from 2.50 to 3.08. So, I'm wondering if you could confirm that. And looking forward, I think you said something in your prepared remarks about replacing expiring 2025 swaps at a higher fixed rate, received fixed rate than you thought. So maybe just clarify that statement as well.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Sure. Good morning, Erika. So yeah, you're right. And again, all of this in terms of your question points to what is occurring, which is that our repricing of our fixed rate assets, including our securities, loans, and swaps, is occurring at higher rates. So that's all of what we've been talking about for a while. True, in terms of the swaps, new swaps are at a higher rate than the old swaps. And then, as you recall, back in the spring, we did execute some forward swaps that locked in rates for maturing assets in 2025 that contribute to our statement, which we might as well confirm upfront, our NII being at record levels in 2025, we're sticking to it.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

Got it. Okay. And just as the second part of my question, that's the mechanical side now on the strategic side. Bill, it's been such a long time since the market has seen a neutral rate of not zero. You know, everybody's talked about deposit betas, but as we think about what the natural, you know, deposit cost is for PNC, how should we think about what the spread is? Let's say we settle at 2.75%-3% in terms of Fed funds.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

... What's the spread in terms of, Fed funds versus your funding costs, naturally? And additionally, just as a quick follow-up to Rob, as we're in the liability side of the balance sheet, you know, what drove the strength in deposits? And, you know, was that mostly corporate, and is that permanent balances, or is that sort of some corporate balances just parked for now, given the uncertainty in the market?

[Bill Demchak, CEO at PNC Financial Services Group]

And I can't give a specific answer to where we might end up if rates, you know, front rates kind of hold at three and change, which I expect they will. You know, practically, you can do most of that yourself, right? So the zero cost deposits are obviously worth a lot more. If there's any steepness to the curve, you know, we get that benefit with our fixed rate assets. So maybe inside of your question is, all else equal, if we end up in an environment where front rates are three and change, and back rates are somewhat higher than that, that's the really attractive environment for banks, ourselves included.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah, and then the second part of that, Erika, was yeah, the outperformance in our deposit balances came on the commercial interest-bearing side. As commercial clients continue to build cash on their balance sheets, our expectation is that'll hold for the most part, through the end of the year.

[Erika Najarian, Managing Director and Equity Research Analyst at UBS]

Got it. Thank you.

[Operator]

Thank you. Our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.

[John Pancari, Senior Managing Director at Evercore]

Good morning.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

John.

[John Pancari, Senior Managing Director at Evercore]

On the loan side, still, you know, balances are clearly still pressured, and you flagged line utilization down a bit to 50.7 and below your historical. Can you maybe talk about the demand, the underlying demand trends that you are seeing, and what do you think is gonna be the biggest catalyst to get borrowers off the sidelines and borrowing? Is it continued rate cuts, confidence in that front? Is it the election? If you could just maybe give us some thoughts there, and what do you think a growth rate is reasonable as you enter 2025? Thanks.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Hey, John, it's Rob. So yeah, you know, all year, we've yet to deliver the loan growth that we thought was coming at some future point, and for all the obvious reasons that you've seen. Utilization is low, and there is a bit of a pause feeling, obviously, with the election coming up and the rate environment. What we point to in terms of on the constructive front is, we do continue to add customers, we do continue to add loan commitments, quarter-over-quarter. So, our commercial clients are putting those lines in place with the anticipation of borrowing. So that's a constructive sign.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

And then you've seen the low inventory levels, the low CapEx to sales levels, so it does feel as though we're at the point of the cycle to where, you know, loan growth is not too far off.

[John Pancari, Senior Managing Director at Evercore]

Okay. Got it. Thanks, Rob, for that. And then separately, capital markets clearly has been a point of strength. Can you maybe just provide us a little bit of color on the pipeline there? And do you expect a pullback in the fourth quarter off these high levels? Just how should we think about that? Thanks.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah, yeah, we do. I'll expand that a little bit in terms of our fee guidance for the fourth quarter. So, we're pointing to down 5%-7%, and all of that decline is being driven by the elevated MSR levels and the elevated capital markets levels that we achieved in the third quarter. So for the fourth quarter, you know, the MSRs is pretty straightforward. We don't expect to have those levels in the fourth quarter, and then on the capital market side, you know, the short answer is we probably pulled a little bit of the fourth quarter activity into the third quarter. A lot of that is in our Harris Williams M&A advisory businesses that had a really strong third quarter, as well as some of the other broader capital markets stories.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

So it's, it's a little bit lumpy. The pipelines, though, are strong, the momentum is strong. Capital markets year-over-year is up north of 23%. The back half of 2024, including our capital markets guidance for the fourth quarter, is up 20% over the first half. So the momentum's there. It's just not necessarily gonna fall linearly quarter-to-quarter.

[John Pancari, Senior Managing Director at Evercore]

Got it. All right, thanks, Rob.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Sure.

[Operator]

Thank you. Our next questions come from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.

[Scott Siefers, Managing Director at Piper Sandler]

Morning, everyone. Thanks for taking the question. Guess I wanted to follow up just a little bit on sort of the lending and deposit discussion. I guess first, just kind of qualitatively, do you have a sense for what a lending recovery might look like when it does come back? And I guess the context in that is I recall a time when bank loans used to grow at some multiple of GDP, but it's been, you know, quite a while since we've seen that. So, you know, maybe just some top-level thoughts there. And then on the other side of the balance sheet, just maybe your sense for how deposit costs behave if lending does come back better.

[Scott Siefers, Managing Director at Piper Sandler]

You know, you all, and I think a lot in the industry are great from a liquidity perspective, so curious how much competition factors into your thinking as well.

[Bill Demchak, CEO at PNC Financial Services Group]

You know, we can come up with 10 different theories on why loan growth hasn't been there and why it might come back, but all of them are me making up theories. It's been below trend on utilization. You know, there's a bunch of uncertainty, not the least of which is the election and rates and all the other things that may impact it. But it's, you know, it's one of the reasons why we kind of said, "Look, we'll, you know, produce growth for our shareholders without having to rely on some made-up story as to why there might be loan growth. If there is, it's terrific, and at some point it'll come back, but I've given up trying to forecast it personally. On the funding side, we are very liquid. So we have an opportunity, should it arise.

[Bill Demchak, CEO at PNC Financial Services Group]

We have a lot of capital and cash, and that would be a great thing for us. What was the balance at the Fed this quarter?

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Thirty-five spot, 45. Yeah, average.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

A lot.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah, so I don't know that it would impact our funding costs whatsoever.

[Scott Siefers, Managing Director at Piper Sandler]

Perfect. Okay, good. All right. Thank you very much.

[Bill Demchak, CEO at PNC Financial Services Group]

Sure.

[Operator]

Thank you. Our next questions come from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.

[Matt O'Connor, Managing Director at Deutsche Bank]

Good morning. Any updated thoughts on where you think your net interest margin normalizes? I think at one point a couple months ago, you said it could approach 3%. I think it was by the end of next year. But updated thoughts on that, given the forward curve and your outlook for the mix of the balance sheet. Thanks.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah. Hey, Matt, it's Rob. I do recall you asking the question before, and the answer is going to be the same, which is, you know, our NIM is increasing. We don't manage the NIM, it's an outcome. We've operated close to three. My expectation is that we'll approach those levels. I don't remember saying by the end of 2025, but maybe that's something that you added in. But, you know, we're on our way up, and, you know, three is reasonable through time.

[Matt O'Connor, Managing Director at Deutsche Bank]

Okay. And actually, maybe it was by the end of 2026. I had my notes wrong to read. And then just separately, you know, you've always been very strong in commercial lending and some of the fee businesses that come from that. You know, the consumer side has always been a little bit less of a focus, but I think you've been leaning into areas like credit card around the edges. And just any updated thoughts in terms of what could be growth drivers as we think about consumer lending, consumer fees the next couple of years? Thanks.

[Bill Demchak, CEO at PNC Financial Services Group]

Look, we've, you know, historically, we have underinvested in it, and we are under-penetrated with our existing clients.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

On consumer.

[Bill Demchak, CEO at PNC Financial Services Group]

On consumer, yeah. And that's our opportunity set. I don't know that we need to be heroic and be, you know, go beyond that, but we ought to have the same penetration rate that our peers do with respect to our consumer lending. And there's, you know, fairly material upside, should, you know, if we can pull that off, and we're investing to be able to do so.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

And we've introduced a new credit card and plans to continue to do that along those lines.

[Matt O'Connor, Managing Director at Deutsche Bank]

Okay. And when do you think you'll start—we'll start seeing some of those efforts kick in? I mean, we are seeing pretty good credit card volume growth in the industry and at most peers, and obviously there's a little bit of a lag, but when do you think some of those efforts will be a little bit more evident?

[Bill Demchak, CEO at PNC Financial Services Group]

I don't know that I have a timeline on it. I would tell you that we're investing in people, we're investing in our credit management capabilities and our marketing and our product delivery, you know, all of the above that will, you know, hopefully, through time, allow us to get the penetration we should have. I don't know what the timeline is on that, but I know it's a journey, and I know we need to start it.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

And we're at.

[Matt O'Connor, Managing Director at Deutsche Bank]

Got it.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

We're beginning now.

[Matt O'Connor, Managing Director at Deutsche Bank]

Thank you.

[Operator]

Thank you. Our next questions come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Thanks. Good morning, Bill and Rob. Following up on your loan growth commentary, you've had a lot of success over the years in taking share within C&I. If we do get a reacceleration in loan growth over, say, the next year or so, how does that influence your ability to continue to take share and perhaps outpace industry growth, you know, recognizing your competitors are obviously not willingly ceding share?

[Bill Demchak, CEO at PNC Financial Services Group]

I think that will show up. We are growing DHE and winning new clients, you know, at a record pace, I think.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

You know, when utilization comes back, we ought to, as we have in the past, my best guess is we would outperform.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah. Well, the is our loan commitments.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

They're unfunded at the moment, but they've been put in place. And I think, the most of the momentum that we see is in our Southwest markets, where we are achieving record levels and would expect to be above average if it all plays out as we expect.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Thanks. That's helpful. And then separately, on non-interest bearing deposits, you expect rates on your interest-bearing deposits to decline starting next quarter, but how long before you'd expect to see the effect of lower rates relating to compensating balances?

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah, I don't know. That's a tough one to answer. I mean, what we're encouraged about is that we've clearly stabilized now for a couple of quarters at the levels that we are, following several quarters of, you know, pretty substantial decline. So we've stabilized. There's a lot of theories in terms of what sort of the magic short-term rate is that kicks that up, but no one has a definitive answer.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Right. But is the credit that you give customers on compensating balances a sort of lever that you'd expect to use or be willing to use as you look to grow non-interest-bearing deposits? Just trying to think through whether that's a potential you know something that could spur growth.

[Bill Demchak, CEO at PNC Financial Services Group]

You should assume that crediting rate is, you know, below market versus open deposit rate. And so it's not gonna have a moving beta for some period of time relative to rates coming down.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

It's relatively constant, and we're fine with that.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Okay, great. And if I could squeeze in one last one. If the NII trajectory that you laid out for 2025 plays out as anticipated, is there any reason why, you know, the positive operating leverage commentary that you laid out is very helpful, but any reason why the efficiency ratio wouldn't get down into sort of that high 50% range? Seems like the math would suggest that that could get there, but would appreciate your thoughts.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

We'll have to see, Bill. We're in the process of doing our budgeting for next year right now, so we'll have more for you on that, in our January call.

[Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research]

Okay. Thanks for taking my questions.

[Operator]

Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Hi. Hey, Bill, your prior comment that you expect record NII in 2025, do you feel more, less, or just as confident as before? And what sort of loan growth do you kind of assume for next year?

[Bill Demchak, CEO at PNC Financial Services Group]

We wouldn't have said it if we didn't feel confident to begin with, so I don't know levels of confidence, but we feel pretty good about it.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

We're just as confident. That's for sure. Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

And we don't have any loan growth in there whatsoever to get to that number.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

So no loan growth for next year?

[Bill Demchak, CEO at PNC Financial Services Group]

We have something, but it's-

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

We will have something, but the record NII level is not reliant on-

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah, it's not dependent on loan growth.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Okay. And then I think last quarter you used the word befuddled as to why loan growth wasn't coming back. I guess number one, could be the election. Number two, could be private credit. Number three, could be disintermediation in capital markets. Number four, companies could just be managed differently today. Or number five, you could have a weaker economy, or it could be all of the above. Just give us your best stab at why loan growth remains just so weak in an economy that's still growing.

[Bill Demchak, CEO at PNC Financial Services Group]

I think all of your reasons, other than three and four. I don't think private is causing utilization rate on middle market companies to remain low, you know, and for the businesses we play in. I'm not sure. I mean, at the margin, public markets being wide open has caused some of our larger clients to pay down outstanding balances and hit the capital markets. So that's probably true at the margin. But this basic notion of, you know, people just aren't using working capital the way they used to, and maybe that's the way they run the company post-COVID. Maybe that's the uncertainty. It's gonna play out over time, and we can all guess about it. I just don't know the answer, so I'm still befuddled.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Okay. And then lastly, your reserves on office CRE were taken even higher, especially multi-tenant. Last quarter, you said the industry is in the first inning. I think a lot of people disagree with that. I'm not saying... Yeah, I'm not sure. We're two years into this, at least, and it's still a big question mark, I think, in a lot of people's minds. So when you said the industry is in the first inning, and clearly your reserves are higher than others, why, why do you say it's only the first inning? What's your reasoning?

[Bill Demchak, CEO at PNC Financial Services Group]

I think, you know, we're just now starting to clear buildings in sales, right? We've had some extensions. We've had, you know, maturities hitting. We have a whole slew of term loans in the CMBS market and with small banks that will be out there three, four, five, six years. So I just think this plays out through, you know, over a long period of time. You know, office vacancies, pick your market, are quite high, and we're just now realizing the mark-to-market value of that as we resolve properties. You know, that's why we're reserved where we are, and that's why, you know, I'm not worried about it, per se, from PNC's standpoint, but no, this is gonna be noisy for a while.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

I might refine that a little.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Go ahead.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Early innings.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

I think early innings, yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

But we're not-

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Okay.

[Bill Demchak, CEO at PNC Financial Services Group]

I mean, importantly, we're not in early innings with respect to how we're reserved. Yeah. I mean, you know, I love our haste, but you know, to the best of our ability, we've taken all that up front.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

And then sneaking one more last one. As far as acquisitions, I know you'd like to buy them on the cheap. I mean, National City, you know, you go down the list. It's getting tougher for you to buy things on the cheap. Maybe if you... A, a bank does have a office or CRE problem, you swoop in there, but am I right in thinking it's a lot less likely you'd do an acquisition now that some of these stocks have come back? Or what's your thinking?

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah, no, you're right. We don't see value in an acquisition at the moment.

[Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo]

Okay. Thank you.

[Operator]

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question has come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Good morning. I guess maybe just one, Rob, for you as a follow-up on deposit pricing. I think fair amount of uncertainty around how much banks will be able to flex deposit costs lower. We got the September cut. And remind us, one, around your beta expectations and any early proof points on how customers, and especially commercial customers, have received the lower rates over the last few weeks?

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Sure. So, you know, we're early on, just a couple of weeks out from the rate cut, but now we're in a down beta cycle. You know, we've said that we think that our terminal beta will be approximately 50%, and we will reduce rates paid through the balance of this year, and maybe we get a little bit less than half of the way there by the end of 2024. But that's gonna play out. It's early, but that's sort of our thinking. So, you know, rate paid will be coming down, particularly in the higher interest-bearing commercial deposits, some wealth deposits, and that's underway, and we'd expect that to continue.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Got it. And on commercial clients, so heard you around loan growth and all the reasons why loan growth may or may not pick up. If you don't mind just speaking to the health of the commercial customer base, and whether, like some of the macro data around jobs could be a bit misleading. Like, when you talk to your C&I customers, are they... Like, are the balance sheets healthy? Like, do they—if the Fed were to pause rate cuts after a cut or two, does that increase the risk for these customers, and how they might approach investing, hiring, et cetera? Would love any color you can share.

[Bill Demchak, CEO at PNC Financial Services Group]

I guess maybe a simple notion is companies at the margin are losing margin, right? They can't pass on prices the way they once could. They're not making it up in volume. So the discussion of, you know, how do I cut costs, has at least entered the dialogue. But we haven't seen that show up in layoffs, right? The data remains strong, and as long as the data's strong, consumers are spending, and the economy is strong. So everybody's staring and watching and looking, and there's margin pressure on corporates. But you know, there's no... we don't see in conversations, you know, some pending big, you know, layoff spike hitting the U.S. economy.

[Bill Demchak, CEO at PNC Financial Services Group]

You know, there's specific industries that are in slumps, whether it's transportation, you know, healthcare, struggling consumer space. They're, you know, at the margin, but that's, you know, it's just at the margin.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Nothing new.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

Got it. Got it. And if one last one, just following up on Mike's question on M&A. Bank transactions usually stock for stock. Now, what? I mean, your stock has done well. Why would a deal, given your history and track record on deal integration, like is it just completely ruled out at this point? If there's a willing seller acquiring a good franchise, does it no longer make sense, just because of pricing?

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah, it's. I mean, the fact that we have a multiple advantage, you know, our stock is worth the money it trades at. I'm not sure other stocks are. So, you know, straight up financial math saying it works doesn't mean it's a good deal. And, you know, when we look at potential targets, it would be interesting, you know, from certain geographies and so forth, they just don't pencil out when you look at their balance sheet, and the amount of investment we'd have to put in the franchise and just the time sink it takes to do it. So, you know. And by the way, we look at everything. I just don't think the market's anywhere close where we'd find something attractive.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Or pay a premium on top of what you think is already a premium price again.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America]

That's fair. Thank you.

[Operator]

Thank you. Our next question has come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

[Betsy Graseck, Analyst at Morgan Stanley]

Oh, hi. Thanks so much. Okay, great. Just to follow up on the last question. So, right, doesn't make sense, M&A right now in this environment, given, well, whatever. I won't go there. But just the underlying question is organic growth. How do you see your organic growth progressing over the medium term? Are there legs to acceleration or is what we're seeing today a good run rate?

[Bill Demchak, CEO at PNC Financial Services Group]

No, there's legs on acceleration, certainly in C&I, as we continue to build out these new markets. What you're gonna see us do is more aggressively invest into our retail distribution franchise, you know, very targeted and high volume branch builds in particular markets. You know, at the moment, go back to somebody's question of: Hey, what if rates are three and a quarter at the front end, and what do you earn on deposits? The break even on a branch has become a lot easier to achieve, and you know, my historical comments on the need for scale are still true. It just looks like the way we're going to have to get there, at least in the near term, is through you know, investment and organic growth, and we're good at it.

[Bill Demchak, CEO at PNC Financial Services Group]

We've been executing on it, and we'll just continue on.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Particularly in the Southwest markets, where-

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

... the momentum's very strong across all our businesses, C&IB, retail, and the private bank.

[Betsy Graseck, Analyst at Morgan Stanley]

... Okay, great. Thanks so much. Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

Same then.

[Operator]

Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Hi, Rob. Hi, Bill.

[Bill Demchak, CEO at PNC Financial Services Group]

Hey, Gerard.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

You guys have done a very good job in managing credit over the years, and it shows up again this quarter. Can we take a look at, in the C&I portfolio, what are the trends that you guys might be seeing in your the SNC portfolio or the asset-backed portfolio or the leverage portfolio? Are the trends pretty benign, or what are you guys seeing there?

[Bill Demchak, CEO at PNC Financial Services Group]

Not much. You know, at the margin, we still have more downgrades than upgrades, you know, very simple ratio across that whole book. Much of that is driven by margin compression, as opposed to anything fundamental with the underlying company. But no, the economy is healthy, and company, you know, and our portfolio's healthy. You know, we'll have lumpy one-offs. There's always some story that happens, and we had one of those this quarter, actually.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Yeah. Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

But overall, the portfolio feels pretty strong.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

And just to clarify with those-

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Go ahead, Rob, sorry.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Yeah, they're still very acceptable, bookable credits. They're just not as strong as the ultra strong they were, yeah, the last time we raised them.

[Bill Demchak, CEO at PNC Financial Services Group]

Yeah.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Got it, and I know you touched on this on commercial loan growth about, you know, companies might be stronger. Have you seen any evidence that, you know, because of the pandemic, because of what companies went through, you know, your longtime customers that you've talked to for years, do you actually see them, better managed or stronger because of what happened during the pandemic?

[Bill Demchak, CEO at PNC Financial Services Group]

I think that almost has to be true. It certainly... You know, part of the answer to the utilization question, by the way, has to be the notion that you know, basically, working capital was free for a bunch of years.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

And all of a sudden, it got expensive, so you're looking at places where you can improve margin, and you're trying to cut your borrowings and be more efficient at what you're running in inventory and investments. So, you know, companies did without a lot of stuff during the pandemic, and you learn from that, and you try to keep to it. So, yeah, we'll see.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Yeah. Yeah.

[Bill Demchak, CEO at PNC Financial Services Group]

But, other broader message is the economy's fine, companies are fine. Labor still feels strong. You know, a lot of things in the geopolitical horizons that could disrupt that, but those are exogenous variables to the basic economy we operate in.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Great. And then just a final follow-up. You gave us some good data, of course, on the commercial real estate office portfolio. What kind of impact, or I guess if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help you, help the values of those properties. I know each property is different, vacancy rates are critical, but is there any kind of point that you guys look at, if the cap rates fell 100 basis points or a hundred and fifty, that would help the valuation process?

[Bill Demchak, CEO at PNC Financial Services Group]

Look, lower cap rate at the margin starts to help. I think what you're running into, though, is you'll have office buildings that you know, if they're 50% vacant, they'll hit the market, and the question will be: Can they ever get to normal occupancy through historical absorption rates? And if the answer to that is no, then the value of that building, we just saw one in New York, is next to zero. If there's a tail on absorption, where, yes, I think I can rehab it, and I get this thing back to my normal, you know, 90%-95%, then it has value as a going concern, and it's worth something. The cap rate almost is irrelevant in those two scenarios. If the thing is never gonna be occupied, it doesn't matter what the cap rate's worth. It's worth land.

[Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets]

Very good. Good insights. Thank you.

[Operator]

Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Bryan Gill for any closing comments.

[Bryan Gill, EVP and Director of Investor Relations at PNC Financial Services Group]

Okay, well, thank you all for participating on the call this quarter, and feel free to reach out to the IR team if you have any follow-up questions.

[Bill Demchak, CEO at PNC Financial Services Group]

Thanks a lot, everybody.

[Rob Reilly, EVP and CFO at PNC Financial Services Group]

Thank you.

[Operator]

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

Participants

Analysts

• Ebrahim Poonawala, Managing Director and Head of North American Banks Research at Bank of America
• Bill Demchak, CEO at PNC Financial Services Group
• Scott Siefers, Managing Director at Piper Sandler
• Bill Carcache, Senior Equity Research Analyst of Financials at Wolfe Research
• Matt O'Connor, Managing Director at Deutsche Bank
• Betsy Graseck, Analyst at Morgan Stanley
• Mike Mayo, Managing Director and Head of U.S. Large-Cap Bank Research at Wells Fargo
• Rob Reilly, EVP and CFO at PNC Financial Services Group
• John Pancari, Senior Managing Director at Evercore
• Erika Najarian, Managing Director and Equity Research Analyst at UBS
• Gerard Cassidy, Managing Director, Head of U.S. Bank Equity Strategy, and Large Cap Bank Analyst at RBC Capital Markets
• Bryan Gill, EVP and Director of Investor Relations at PNC Financial Services Group