The PNC Financial Services Group Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 16, 2025

Key Takeaways

  • Record 2024 results: PNC earned $6.0 B ($13.74 per share), achieved record revenue, grew fee income by 6%, and generated positive operating leverage while returning $3.0 B to shareholders.
  • 2025 outlook: PNC expects total revenue up ~6%, net interest income up 6–7%, fee income up ~5%, non-interest expense up ~1%, and stable loan growth, driving meaningful positive operating leverage.
  • Strong capital and liquidity: CET1 ratio of 10.5%, tangible book value per share up 12% to $95.33, high deposit growth and a 20% floating-rate securities portfolio position PNC well for evolving rate environments.
  • CRE office portfolio stress persists as balances declined 7% and reserves increased to 13%, with management expecting additional charge-offs despite adequate overall reserving.
  • PNC is investing in growth with a new online banking platform, doubling new branch builds in expansion markets, and entry into Salt Lake City to enhance its franchise footprint.
AI Generated. May Contain Errors.
Earnings Conference Call
The PNC Financial Services Group Q4 2024
00:00 / 00:00

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Operator

Greetings and welcome to the P&C Financial Services Group 4th Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Gill, Executive Vice President and Director, Investor Relations. Thank you. You may begin.

Bryan Gill
Bryan Gill
EVP, Director of Investor Relations at The PNC Financial Services Group

Hello, good morning and welcome to today's conference call for the P&C Financial Services Group. I'm Brian Gill, the Director of Investor Relations for P&C and participating on this call are P&C'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.

Bryan Gill
Bryan Gill
EVP, Director of Investor Relations at The PNC Financial Services Group

These statements speak only as of January 16, 2025, and P and C undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Thank you, Brian, and good morning, everyone. As you've seen, we had a solid Q4 and a very strong year. For the full year 2024, we earned $6,000,000,000 or $13.74 per share. We executed well against our priorities and continue to gain momentum across our franchise. While loan demand remained soft throughout the year, our net interest income benefited meaningfully from fixed asset repricing and we expect to see further tailwinds from repricing over the next couple of years.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We grew fee income by 6% and we achieved record revenue. At the same time, we maintained our expense discipline allowing us to deliver positive operating leverage, which is an aside and you will recall that looked pretty much out of reach at the start of 2024. Finally, we grew capital and increased our tangible book value per share by 12% compared to last year, while returning $3,000,000,000 of capital to shareholders through dividends and share buybacks. And Rob is going to walk through the financial results in more detail, but I wanted to take just a moment to reflect on the strength of PNC's positioning as we head into 2025. Our businesses are performing exceptionally well and we continue to see positive momentum, particularly in our expansion markets.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

CNIB had record revenue and non interest income in 2024 as new client growth continued at an accelerated rate. Our sales in our expansion markets grew 26% with over 60% of those sales being non credit. In retail banking, consumer DDA growth in 2024 was the highest it's been in 8 years and we produced record brokerage revenue at P&C Investments and the asset management group delivered its strongest level of positive net flows in years. Going forward, we're investing in new products and an expanded footprint to further accelerate our momentum. We will soon be rolling out our new online banking platform.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We are doubling our new branch builds to gain scale on some of the fastest growing regions in the country. And on the corporate side, we recently announced our entry into the Salt Lake City market. As Rob will highlight, our forward guidance solidly points to record NII in 2025 as well as strong fee income growth across our franchise. This combined with our ongoing expense discipline positions us to deliver meaningful positive operating leverage this year. While there are a lot of uncertainties regarding the outlook for the economy, interest rates, the regulatory environment, we believe that PNC's balance sheet is well positioned.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We are adequately reserved for our credit risk and our strong capital levels provide substantial flexibility as we enter 2025. Before wrapping up, I'd like to spend just a moment to express our sympathies to those who have been impacted by the wildfires. PNC is, of course, committed to supporting our customers, our communities, and importantly, the more than 200 employees we have in the affected areas. I also want to thank our employees for everything they do for our company and our customers. We accomplished a significant amount in 2024 and we're entering 2025 with a lot of momentum.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I've never been more excited about the opportunities in front of us to continue to grow our franchise and to deliver for our stakeholders. And with that, I'll turn it over to Rob to take you through the numbers. Rob?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average basis. For the length quarter, loans of $319,000,000,000 were stable, investment securities increased by $2,000,000,000 and our cash balances at the Federal Reserve were $38,000,000,000 a decrease of $7,000,000,000 or 16%. Deposit balances grew $3,000,000,000 and averaged $425,000,000,000 Forward funds decreased $9,000,000,000 or 12 percent primarily due to the maturity of FHLB advances. At quarter end, AOCI was negative $6,600,000,000 compared to negative $5,100,000,000 as of September 30, reflecting the impact of higher rates.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Our tangible book value was $95.33 per common share, which was a slight decline linked quarter due to the decrease in AOCI, but a 12% increase compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 10.5% as of December 31 and 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. We returned approximately $900,000,000 of capital to shareholders during the quarter through both common dividends and share repurchases. Slide 5 shows our loans in more detail.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Average loan balances of $319,000,000,000 were stable compared to the 3rd quarter and the yield on total loans decreased 26 basis points to 5.87% in the 4th quarter, primarily driven by lower short term rates. Consumer loans averaged $100,000,000,000 and were essentially flat linked quarter as growth in auto was offset by a decline in residential real estate. Commercial loans of $219,000,000,000 were stable as growth in C and IB and leasing balances was offset by a $1,000,000,000 decline in commercial real estate loans. On a period end basis, commercial loans declined roughly $5,000,000,000 reflecting both lower CRE balances and utilization rates. Slide 6 details our investment security and swap portfolios.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Overall, we continue to be relatively neutral to changes in interest rates in 2025 and we continue to manage our fixed and floating rate assets to reduce interest rate sensitivity in future years. Average investment securities of $144,000,000,000 increased $2,000,000,000 as purchases more than offset runoff and maturities. During the quarter, we continue to add floating rate securities and our total portfolio is now 20% floating compared to 6% a year ago. The majority of our floating rate securities are designated as available for sale and as a result comprise approximately 40% of our AFS portfolio. Also floating rate securities are a higher yielding alternative to excess cash at the Federal Reserve.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

The yield on our securities portfolio increased 9 basis points to 3.1 7% driven by higher rates on new purchases and the runoff of lower yielding securities. And as of December 31, the duration of our securities portfolio was approximately 3.4 years. Our received fixed rate swaps pointed to the commercial loan book totaled $50,000,000,000 on December 31, comprised of $37,000,000,000 of active swaps and $13,000,000,000 of forward starting swaps. The weighted average received rate on the active swaps increased 14 basis points linked quarter to 3.22%. Looking forward, we expect considerable runoff in our short term duration securities and swap portfolios, which will allow us to continue to reinvest into higher yielding assets.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Accordingly, AOCI will accrete back with maturity, resulting in continued growth to tangible book value. A full update on the expected maturities and AOCI burn down is provided in the appendix. Slide 7 covers our deposit balances in more detail. Average deposits increased $3,000,000,000 or 1%, reflecting continued growth in interest bearing commercial balances, partially offset by lower consumer brokered CD balances. Regarding mix, non interest bearing deposits were stable at $96,000,000,000 and remained at 23% of total average deposits.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Our rate paid on interest bearing deposits declined 29 basis points during the 4th quarter to 2.43%, reflecting pricing actions commensurate with the Fed rate cuts. Our cumulative deposit beta through December was 47% and going forward, we expect our beta to be in the high 40% range during the anticipated rate cutting cycle. Turning to Slide 8, we highlight our income statement trends and a few notable items this quarter. 4th quarter net income was $1,600,000,000 or $3.77 per share. Comparing the Q4 to the Q3, total revenue of $5,600,000,000 increased $135,000,000 or 2%.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Net interest income grew by $113,000,000 or 3%. And our net interest margin was 2.75 percent, an increase of 11 basis points. Non interest income of $2,000,000,000 increased 1%. Non interest expense of $3,500,000,000 increased $179,000,000 or 5%. The increase included non core items netting to $79,000,000 pre tax or $62,000,000 after tax, which I'll provide more detail on in a few moments.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Provision was $156,000,000 reflecting improved macroeconomic factors and portfolio activity. And our effective tax rate was 14.6%, which included $60,000,000 of income tax benefits related to the resolution of certain tax matters. Turning to Slide 9, we highlight our revenue trends. On a full year basis, we generated record revenue of $21,600,000,000 as lower net interest income was more than offset by 6% growth in non interest income. Looking at the linked quarter comparison, revenue increased $135,000,000 driven by higher net interest income.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Net interest income of $3,500,000,000 increased $113,000,000 or 3%, driven by lower funding costs and the continued benefit of fixed rate asset repricing. Fee income was $1,900,000,000 and decreased $84,000,000 or 4% linked quarter. Looking at the detail, asset management and brokerage income declined $9,000,000 or 2%, reflecting lower annuity sales, partially offset by the benefit of higher average equity markets. Capital markets and advisory fees decreased $23,000,000 or 6%, reflecting elevated 3rd quarter activity. Card and cash management fees were stable as higher treasury management revenue was offset by credit card origination incentives.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Lending and deposit services revenue grew $10,000,000 or 3 percent due to increased customer activity. Mortgage revenue declined $59,000,000 linked quarter primarily due to elevated RMSR hedge gains in the 3rd quarter. And our other non interest income increased $106,000,000 reflecting a less negative impact from Visa derivative activity. Turning to Slide 10, full year non interest expense decreased by $488,000,000 or 3%. Core non interest expense was down $152,000,000 or 1% compared to 2023.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

As a result, we generated positive operating leverage on a reported basis as well as adjusted for non core expenses. 4th quarter non interest expense of $3,500,000,000 increased $179,000,000 or 5%. As I mentioned, the quarter included $79,000,000 of non core expenses, which reflected $97,000,000 of asset impairments, partially offset by an $18,000,000 reduction to the FDIC special assessment. The asset impairments included a number of items and were primarily related to various technology investments. Core non interest expense increased $100,000,000 or 3 percent linked quarter largely due to seasonality and higher marketing spend.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

As you know, we had a 2024 goal of $450,000,000 in cost savings through our continuous improvement program, which we exceeded. Looking forward to 2025, our annual CIP target is $350,000,000 and this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 11. Non performing loans decreased $252,000,000 or 10% linked quarter driven by lower C and I and CRE NPL. Total delinquencies of $1,400,000,000 were up $107,000,000 or 8% compared with September 30.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

The increase was primarily driven by commercial loan delinquency, the majority of which have already been or are in the process of being resolved. Net loan charge offs were $250,000,000 The $36,000,000 linked quarter decrease was driven by lower office CRE charge offs and higher commercial recoveries. And our annualized net charge offs to average loans ratio was 31 basis points. Our allowance for credit losses totaled $5,200,000,000 or 1.64 percent of total loans on December 31, down one basis point from September 30. Slide 12 provides more detail on our CRE office portfolio.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Our office CRE balances declined 7% or approximately $500,000,000 linked quarter as we continue to manage our exposure down. Criticized loans and non performing balances also declined as pay downs and charge offs outpaced new inflows during the quarter. Net loan charge offs within the CRE office portfolio were $62,000,000 down from $95,000,000 in the 3rd quarter. Despite this decline, we continue to see stress in the office portfolio given the challenges inherent in this book and the lack of demand for office properties. As a result, we expect additional charge offs, the size of which will vary quarter to quarter given the nature of the loans.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Our reserves on the office portfolio increased to 13% as of December 31, up from 11% the prior quarter. The increases in reserves reflects the continued valuation adjustments across the portfolio. Accordingly, we believe we are adequately reserved. In summary, P and C reported a solid 4th quarter, which contributed to an overall successful 2024 and we're well positioned for 2025. Regarding our view of the overall economy, we're expecting continued economic growth over the course of 2025, resulting in approximately 2% real GDP growth and unemployment to remain slightly above 4% through year end.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

We expect the Fed to cut rates 2 times in 2025 with a 25 basis point decrease in March and another in June. Looking ahead, our outlook for full year 2025 compared to 2024 results is as follows. In regard to loan growth, while a lot of indications point to accelerated growth, we've not built that into our guidance. As a result, our guidance reflects spot loan growth of 2% to 3%, which equates to stable average full year loans. We expect total revenue to be up approximately 6%.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Inside of that, our expectation is for net interest income to be up 6% to 7% and non interest income to be up approximately 5%. Non interest expense to be up approximately 1%. And we expect our effective tax rate to be approximately 19%. Based on this guidance, we expect we will generate substantial positive operating leverage in 2025. Our outlook for the Q1 of 2025 compared to the Q4 of 2024 is as follows.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

We expect average loans to be down approximately 1%. Net interest income to be down 2% to 3%, which includes the impact of 2 fewer days in the quarter, fee income to be stable, other non interest income to be in the range of $150,000,000 to $200,000,000 excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be down 1% to 2%. We expect total non interest expense to be down 2% to 3% and we expect 1st quarter net charge offs to be approximately $300,000,000 And with that, Bill and I are ready to take your questions.

Operator

Thank you. We will now be conducting a question and answer Our first questions come from the line of John McDonald with Truist Securities. Please proceed with your questions.

John McDonald
John McDonald
Senior Research Analyst at Truist Securities

Hi, good morning. I wanted to start off with a take on industry deposit growth and trends in 2025. What are you guys seeing for the industry this year? And then maybe some comments on P&C's ability to gain some share in retail deposits, particularly as you start densifying some of the expansion markets?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Hey, John. Good morning. It's Rob. Yes, so on deposits in terms of our outlook for 2025, we do see growing deposits slightly 1% to 2% over the course of the year. We do expect some seasonality though on commercial deposits where they'll go down a little bit in the Q1 and then grow from there.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

As far as our organic efforts in the expansion markets, things are going really well and things continue along those lines. I'm sorry, Bill, the DDA growth that Bill talked about at the beginning bodes well for us.

John McDonald
John McDonald
Senior Research Analyst at Truist Securities

Okay. Thanks, Rob. And then in terms of the NII guidance, maybe just some thoughts on the cadence and the drivers, obviously, down in the Q1. And then how do the drivers align to pick up sequentially and kind of get you that 6.7% for the year?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes. So a couple of things on that. And then I'll just repeat what I said in the opening comments. Our guide for the full year and for the Q1 is very conservative in terms of loan growth. Average loans for the full year are stable, spot up 2% to 3%.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

So we want to emphasize that in terms of how we calculate our full year NII and for the Q1. Inside of that, obviously, it's a continuation of the fixed rate asset repricing that we've talked about a lot and the continued dynamics around the floating rates and deposits. In the Q1, we do call for NII to be down 2% to 3%. 75% of that decline is fewer days. And then the balance is just some lower seasonal commercial deposits that I talked about both interest bearing and non interest bearing, which is typical.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

And then again, I emphasize no loan growth in our Q1 NII guidance.

John McDonald
John McDonald
Senior Research Analyst at Truist Securities

Okay. And does the fixed asset reprice kind of pick up as you go through the year? Is there any kind of weighting to that throughout the year?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

It's pretty balanced. It continues on the path that we're on. So it will continue through 2025 and beyond that for that matter.

John McDonald
John McDonald
Senior Research Analyst at Truist Securities

Okay. Thank you.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Sure.

Operator

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

R. Scott Siefers
R. Scott Siefers
Managing Director at Piper Sandler Companies

Thank you. Good morning, guys. Thanks for taking the question. Let's see, Rob, so you've emphasized a couple of times, not a lot of loan growth baked into the guide, which I appreciate. Just curious now that the dust has kind of settled on the election, maybe just updated thoughts on, how you might see demand developing?

R. Scott Siefers
R. Scott Siefers
Managing Director at Piper Sandler Companies

It's pretty clear that's not going to be a requisite to hit your numbers. But just what are your clients thinking saying could we evolve something into the second half of the year? How are you thinking about kind of the major touch points you'll be looking for?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We've gotten this question for 4 quarters. A lot of indications that would suggest the utilization ought to increase. And I would say, we're growing clients, we're growing DAG. We're just utilization decreases, it's causing balances to fall. Under the presumption that the new administration acts pretty clearly as it relates to what they're going to do with tariffs and other things kind of right out of the gate, so people know where they stand.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Presumably, you'll start seeing investment and utilization increase. But we've just as we've said before, we've kind of gotten tired of trying to pick that point in time, yes, where things go up and just be conservative about it.

R. Scott Siefers
R. Scott Siefers
Managing Director at Piper Sandler Companies

Got you. Perfect. All right. Thanks, Bill. And then, Rob, in the past, you've talked about the company being able to generate sort of a 3% normalized margin. I guess, I'm curious, I mean, so much of the ramp in NII seems kind of programmatic through the year. Is that 3%, is it too ambitious to think that's something that you might be able to hit this year? Or would we have to just going to take a little bit longer than that to develop?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes. So we've talked about that. We don't provide NIM guidance because it's an outcome. We do expect NIM to continue to increase through the course of 2025. We've approached that 3% level in the past and I think it's logical to assume that we get close to that.

R. Scott Siefers
R. Scott Siefers
Managing Director at Piper Sandler Companies

Okay. All right, perfect. Thank you very much. Appreciate it.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Sure.

Operator

Thank you. Our next questions come from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian
Erika Najarian
Managing Director & Equity Research Analyst at UBS Group

Yes. Thank you so much. Rob, just to clarify, just because as you can imagine, this is a big conversation that was happening with your investors this morning. In terms of your response to Scott's question, based on the mechanics, you can approach that 3% as an exit rate for the year. Again, like I know you don't give a NIM guide, but it seems like from a mechanical standpoint, that's what I just want to confirm that's what you're telling us.

Erika Najarian
Erika Najarian
Managing Director & Equity Research Analyst at UBS Group

And in terms of the 2 cuts they have embedded in your guide, I think a few folks have maybe one cut. Does that really matter if you have 1 cut or 2 in terms of your outlook for net interest income?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

So the second question first, no, it doesn't. We're very neutral to rates. We've said that. So 25% is sort of locked in from a rate perspective. And then on your first question, yes, confirmed, approaching 3% by the end of 2025.

Erika Najarian
Erika Najarian
Managing Director & Equity Research Analyst at UBS Group

Great. And my follow-up question here is how, Bill, maybe you think about the demand construct for lines of credit in the rate environment that the forward curve is pricing in. So with a higher neutral rate than we expected and maybe some flatness, we don't have that now, but maybe some flatness from SOFR to the Belly. How do you expect that in terms of impacting whether or not companies seek out to finance their projects through lines of credit versus going to the capital markets? And how much of that dynamic is embedded into your more conservative guide?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

The conservative guide is simply because we don't have visibility in what would otherwise cause the change yet. The nuance of whether somebody goes to capital market or a line of credit is a function of price. I mean, we can get a line of credit could be swapped into fixed and capital markets can issue fixed. So I don't know that that's a particular driver. Higher rates generally could have and have had, I imagine, an impact on the total amount of line somebody carries just because carrying inventory and working capital is more expensive.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

And I'm sure that's at least part of the impact as to why utilizations are lower today than they were pre COVID.

Erika Najarian
Erika Najarian
Managing Director & Equity Research Analyst at UBS Group

Got it. Thank you.

Operator

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

John Pancari
Senior Managing Director & Senior Research Analyst at Evercore ISI

Good morning. Just on the fee income side, want to see if you can unpack the 5% growth outlook a bit for 2025, maybe just looking at the most noteworthy drivers. I know you've talked about the capital markets opportunity quite a bit in the past as well as treasury and cash management and other areas. So if you could just help us and think about what are the largest drivers of that 5% outlook? Thanks.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes, sure, Scott. Yes, just in the order of how we report our fees by categories for 2025 Asset Management, we would expect to be up mid single digits Capital Markets and Advisories up mid to high single digits Card and Treasury Management up mid to high single digits Lending and Deposit Services up maybe low single digits. And then lastly, mortgage, we expect to be off approximately 10% or even more. That's a small component, but that's our best thinking at the moment.

John Pancari
Senior Managing Director & Senior Research Analyst at Evercore ISI

Got it, Rob. Thanks for all that. That's helpful. And then separately on capital on the buyback front, I mean, you're at the 10.5% CET1 level. You bought back $200,000,000 in the Q4.

John Pancari
Senior Managing Director & Senior Research Analyst at Evercore ISI

How should we think about a reasonable pace as you look at 2025? And if the $200,000,000 level appears reasonable, could that level be sustained if you do see that pickup in loan growth from your conservative off of your conservative expectation?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes. I think, yes, the answer to that second part is yes. So we can sustain that. And the current plan is to continue at the levels that we've been doing. You saw $200,000,000 in the Q4.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

So between $100,000,000 $200,000,000 is where we've been averaging and that's what I would expect going forward.

John Pancari
Senior Managing Director & Senior Research Analyst at Evercore ISI

Okay, great. Thanks, Rob.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Thank

Operator

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

Mike Mayo
Mike Mayo
Managing Director at Wells Fargo

Hey, Bill. I guess I've been asking this question for the last 3 or 4 calls, so why break the streak? Loan growth, so you're giving your NII guide assuming not much loan growth, just average 0. And I know you're getting out of the forecasting business and so you just say it's basically 0 and here's your NII guide and you're guiding for 400 basis points of operating leverage and that's that. Having said that, with all the caveats and the answers you gave before, what do you think is really happening?

Mike Mayo
Mike Mayo
Managing Director at Wells Fargo

Is all the loan growth just going to debt capital markets or your corporations just sluggish or what's going on?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

It's not going to capital markets. I mean there's a part of our book in the large corporate space where utilization has probably dropped more than most because of their ability to hit capital markets. But it's across all the sub segments from smaller commercial to middle market through to even our specialty businesses and asset based finance for whatever reason, Mike, utilization is lower. And part of that's got to just be total cost, part of it's got to be we've been running into a lot of uncertainty, right? We've been calling for this landing for the better part of 2 years and people would like to have landed and got on with it, I think, before they invest a lot of capital.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I think, you know, located 3 quarters ago, if not 4, we kind of said, we're going to quit forecasting this. We don't need it. We showed you numbers. We beat those numbers. And loan growth kind of ended up where we thought 3 or 4 quarters ago, which was not great.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I don't know that it's going to be not great in 'twenty five. I just don't know what it's going to be. So you plug in any number that you want. Right.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Or importantly when it's going to be.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes. I mean the important thing to remember Mike is that we're not going to behave differently than any other bank. We're not changing what we're doing. We're not getting out. We're not getting in.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We're not we have a giant stock of revolving credit that will move with the market. And I just don't want to promise you a number that has a big unknown to it.

Mike Mayo
Mike Mayo
Managing Director at Wells Fargo

Got it. And then just as a follow-up, Bill, you've never been shy whether you testified to Congress or with your views of your CEO letters. There's a new administration. I think they're listening. So if you were talking to them and you do indirectly through the different industry groups, what would you hope to see changed as it relates to the regulation at PNC?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

A couple of different themes. One is I think the government has to get off of the assumption that somehow the banking industry is the piggy bank to cure the ills in the world. All of the silliness around canceling fees and rebating and all the other stuff, I think they got to get back to following the law and I think that will be a good thing. Of course, the industry is sued on a number of those proposals and I would expect that we'll have some success with that. I think they need to focus and we repeatedly emphasize it this notion of focus on the core risks.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We spent too much energy on things that do not affect the safety and soundness of a banking institution and not enough as we saw a year ago on things that do. And I would hope to see that we'll see some change inside of that. There at some point they'll redo Basel III. My best guess is that'll be a neutral outcome. I don't think it's going to cause things to go lower.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I don't think it's going to cause them to build up. There's going to be some changes to the stress test that maybe reduces volatility, but personally I don't expect big changes in the outcome. And that's kind of it. Let us do our job. The banking industry does a lot of good for this country.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

And I think by and large the industry is in a really good place over the next couple of years.

Mike Mayo
Mike Mayo
Managing Director at Wells Fargo

All right, great. Thank you.

Operator

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

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Hi, thanks so much. Good morning. So first question, just one more on the loan growth. I wonder how much of the C and I weakness is a function of pay downs, right? Because companies can go term out pay down their C and I loan.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

But now with so far 3 year 2 year, 3 year, 4 year, 5 year portion of the curve pretty flat, would is there any changes going on there? Could you discuss how much that is impacting the overall number?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I don't think at all. I mean, the shape of the curve is largely irrelevant. A company figures out how long they want to borrow for and whether they want to do it fixed or floating and they can achieve that either through a bond in the capital market swap or a loan that's swapped the other way or whichever way they want to do it. So I think this is raw demand for capital. I think as I said for large corporates, the spread component in the capital markets is really attractive.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

So that's driven by spread and demand in public markets as opposed to some notion of expense.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Okay. All right. Okay. So really originations are really low. Okay. And Josh, thank you.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Well, actually that's not right either. Originations are high, utilization is low.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

So Betsy, our unfunded commitment growth has been strong all year, including in the Q4. So those are lines that our commercial customers are establishing that they're paying for, which is probably the strongest indication of borrowing intent.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Okay. So separate question just on liquidity. I think, Rob, you mentioned the liquidity number that you've got at the Fed and with rate cuts anticipated coming up. And I know your LCR ratio is super high. You have a really, really strong liquidity.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

You're best in class on liquidity by far. I'm just wondering are we leaving some money on the table by keeping all that there? Is there any within your outlook for NII this year, do you keep all that liquidity at the Fed this year or is there some redeployment that's expected at some point?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

That's actually a fair question. If we knew with certainty that there really wasn't going to be any loan growth, then we would probably deploy the cash in a different form that would have a slightly higher yield. So there is an interplay there that probably isn't in our guidance and is fair.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Okay. Thank you.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

And reflects our optimism, even though it's not in our guidance.

Betsy Graseck
Betsy Graseck
Managing Director at Morgan Stanley

Right.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes, right.

Operator

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

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Hi, Bill. Hi, Rob.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Hey, Gerard.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Hello.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Can you guys share with me understand the competition from the capital markets. You guys have been dealing with this for 40 years. The private credit area seems to have obviously gained a lot of attention these last couple of years. And I kind of wonder when Basel III Endgame originally came out in July of 'twenty three, a lot of banks had to kind of reassess their risk weighted assets. We heard about risk weighted asset diets and stuff.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

And I'm wondering if the private credit guys took advantage of that. Do you bump into them much out and maybe in the large corporate you might build, but do you guys see them in the middle markets at all or no, it's really just the large stuff that they tend to swim in that ocean?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

That's you're hitting on 2 different things. The risk weighted asset diet that many people went on was structured credit sales effectively using credit derivative to ensure some bottom tranche on autos or middle market. Low yielding assets. So that was much more of selling the riskiest tranche of some pool of credit I already hold to get regulatory capital arbitrage. The private capital movement of capital basically moving into credit is the next investment vehicle.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

It's interesting, we had this conversation with a bunch of bank CEOs at a conference meeting we had where none of us kind of said we ever like we haven't seen a deal we've lost that we wanted. However, we have seen we haven't competed away at levels that we just wouldn't match. So at the margin, it matters. It's one of the reasons at P&C, we formed this partnership with TCW So that in some of those instances, instead of losing the client in that case, we keep the client, fund them through a different vehicle and keep all the TM and fee related stuff. On the operating system.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes, today. But it's not none of that like whatever is happening in private credit for all the headlines that has nothing to do with why our loan growth is lower than it's been historically.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

And you guys have been very strong in the asset backed lending area. Do you see other competitors in that arena or no, it's just the traditional asset backed lenders that you've competed against for years?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

We're pretty much it's the traditional people. I mean, any when you talk about asset backed lending, asset based, it's a big operational business. It's hundreds of people. Our field finance. Yes, it's hundreds of field auditors across the country.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

It's very difficult for a fund to say, okay, I'm going to enter that business because it's a giant operating business that goes along with it.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Okay. And then just as a follow-up on the rollout of you talked about building out the new branches and the plans for doing this. Are there where do you head first? Is it in the Southwest? Is it the West Coast?

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Or what's the layout that we should expect as you build that out over the next number of years?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Hey, Gerard, it's Rob. Yes, I would say, it's in all the places that you would expect. The recent sort of step up has a focus on South Florida, the Miami area, but of course, in our expansion markets in Texas, Arizona, Colorado, those are the places.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Got it. So nothing here in Portland, Maine then?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

No, we are. We're going to get back to you on that one.

Gerard Cassidy
Gerard Cassidy
Managing Director at RBC Capital Markets

Okay. Thank you, guys.

Operator

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

Bill Carcache
Equity Research Analyst at Wolfe Research

Thanks. Good morning, Bill and Rob. Following up on the you mentioned, Bill, that you're close to rolling out your online banking platform. Is that in relation to your expansion markets? I was hoping you could maybe just speak to how that complements your existing physical and digital channels?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

It's one of the pieces of the puzzle of basically making everything we do cloud native and micro service based. So it will be a better experience for our customers in the sense that it's more easily navigable, there's more self-service. But the biggest thing that it does for us is it allows us to change and introduce products on the fly. So we can pull what used to be a 6 month process to update something on online banking, we could literally do overnight with a new system. Highly complex, a big investment that we've been at for a couple of years.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

And ultimately, it just it will raise our scores with consumers on online. One of the things to go on a little bit here, when we do customer surveys and get feedback, experience with P and C, we score off the charts on our branch experience and we're no better than average with our online and mobile. And we need to do better than average, which is why we're pursuing this.

Bill Carcache
Equity Research Analyst at Wolfe Research

That's helpful. Rob, I wanted to ask if you could discuss what drove the valuation adjustments that led to an increase in reserves for the office portfolio? How are you thinking about the risk of similar adjustments leading to incremental reserve building from here, particularly if we don't get any more cuts?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes. So as I mentioned, we're adequately reserved in terms of how we look at things. Credit looks good. Commercial non CRE in particular improved during the quarter. Our outlook improved, consumer is pretty good.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Within the CRE office space, we've got some moving parts there. The good news is that the outstandings are coming down. We're managing it. There's some idiosyncratic pieces there where the reserves moved a little bit in percentage, but really not a big change there. We just continue to work through it.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I think we have every quarter we have the same discussion around the reserve in the sense that we have a high percentage relative to many of our peers in terms of what we reserve. And we do that largely because there really isn't a market established yet like a clearing market where properties trade. There just hasn't been that much that has moved. There's been extensions. There's been pay downs.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

There's been a variety of different things, but there's not a stabilized market, which is why we remain concerned and remain well reserved.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

And the good news for us, as you know, Bill, it's a small percentage of our overall loan. So there's some lumpiness in there from quarter to quarter. So we actually our charge offs on office went down in the Q4 from the Q3. Didn't expect that. We do expect more. So we just need to work through it.

Bill Carcache
Equity Research Analyst at Wolfe Research

That's helpful. Thanks. If I could squeeze in one more on your hedging strategy. Can you discuss the uptick in forward starting swaps that we saw this quarter and how you're thinking about potentially putting on new forward starters as we look ahead from here?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes. I mean, it's actually pretty straightforward. So, our roll off of fixed rate assets, and we've put that out publicly before securities or loans. When we look at the forward curve available at any given point in time, we can choose to lock in that rate on that replacement yield. So if it's a treasury that's going to mature in a year and a half with a 2% coupon, I can effectively choose to buy that treasury forward at a 4.5% coupon.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Treasury forward at a 4.5% coupon. And so we've been gradually biting off. That's why we say we're really comfortable with where we are in 'twenty five because we've used swaps like that to effectively lock in these maturing fixed rate assets. And we continue to look at and will start biting off pieces of 'twenty six and 'twenty seven because it continues what we see through 'twenty five ought to continue through the next couple of years if rates follow the forward curve. So there's big opportunity there and you'll see us using that tool to lock some of that in over time.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Throughout the balance of 25 as we lock in the future years?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes.

Bill Carcache
Equity Research Analyst at Wolfe Research

That's helpful. Thank you for taking my questions.

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
Matt O'Connor
Analyst at Deutsche Bank

Good morning. Can you guys remind us, do you have any targeted capital level either on the stated PGT1 or adjusted for AOCI?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

We don't hey, Matt, it's Rob. We don't have a stated target. But obviously, we continue to build levels. We're 10.5% CET1, 9.2% on the revised or minimum requirement 7. So we've got a lot of flexibility, but we don't have an explicit target and part of that is because the rules are still influx.

Matt O'Connor
Matt O'Connor
Analyst at Deutsche Bank

Okay. Yes, I mean, it seems like I know it's been kind of covered, but it was impressive that the adjusted capital was stable despite the move in rates. So you gave a lot of disclosure on the securities book, the duration didn't really extend. So it feels like with sluggish loan growth and your buyback assumptions that the capital ratios will continue to bail off already high levels?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes.

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

Yes.

Matt O'Connor
Matt O'Connor
Analyst at Deutsche Bank

And then separately on the expenses, I mean, obviously, the operating leverage is strong, but the kind of 1% growth includes some of the lumpies in the base. And I guess the punch line is on a core basis, the expenses are going up 3%. And obviously, you're leaning into some areas on investment. Is that kind of a good medium term run rate? Or is it just maybe a step up for a short period of time as you fully load those expansion efforts?

Robert Reilly
Executive VP & CFO at The PNC Financial Services Group

I think you've got a handle on it. We got it up to the 1% off the reported numbers just because it's easier that way as we talk about it through the balance of 25. But expenses up in that 3% range is typical for us and obviously reflects on a core basis, obviously reflects a lot of investment.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes. It's importantly, the investment that we are making is not at all catch up to something we should have done. This is new branches, it's new technology, it's larger data centers that are more resilient. It's everything positioning us to accelerate our organic growth. So these are all dollars spent to make money.

Matt O'Connor
Matt O'Connor
Analyst at Deutsche Bank

Got it. Makes sense. Okay. Thank you.

Operator

Thank you. Our next questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Hey, good morning. I guess, maybe Bill, remind us of your thoughts around, so we talked about regulations earlier. Absent a significant pickup in loan demand, it doesn't seem like the operating backdrop on the revenue side is going to be that great for the banks. How does that inform your view in terms of the window of opportunity from a regulatory political backdrop to do a transformational M and A. And you've talked about it in the past in terms of competing with the big banks, having sort of a national presence.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Like what are the odds where those opportunities come up and you actually tap into that? Understanding will be disciplined, you know the math, so appreciate all of that.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes. I think, look at the margin, it's my guess is it's gotten easier to get a deal approved, although I think we could have been approved with the old administration. The challenge is and you're going to hear this on every earnings call, everybody is an acquirer, nobody is a seller. There's wind at the back on bank earnings is a function of the rate turnover. Credit is not bad.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

So I think the mindset you run into is, hey, we'll hang out, we'll make more money next year and we'll worry about whether we have a long term franchise somewhere later. It's not our problem today. And that's an environment where as an honest buyer that's growing, it's tough to force an outcome and we don't intend to try to do that.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Got it. All right. So your response is like short term as in overtake shareholder value creation in terms of

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Look, I think, yes. So I think the structural issues in the banking industry are just violently apparent when you look that the deposit shifts to the largest banks, the growth in DDA accounts. By the way, we grew DDA this year at a pace we haven't maybe ever. But we're one of a handful of banks across the whole industry that was actually able to do that. And so when you just look at the fundamentals underlying the amount of the cost of funding, the increased balances of broker deposits, lack of fee income and products to sell that some of the smaller banks run into, you know, you ought to see consolidation yet we're in a period where everybody thinks they're going to be the consolidator. So I don't know what's going to happen.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

Fair point. I agree. And I guess maybe just a quick one, following up on credit quality. If we don't get any Fed rate cuts, employment holds up okay. Is it your sense that credit quality is generally okay? There are no real stress points in that backdrop?

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes, I think that's right. Our expectation is my expectation for a while is kind of playing out. We're going to I don't think even with thinking a couple of cuts, we're going to be there for a while and I think the back end is under pressure. So what happens through time is a lot of the locked in low interest rates that the corporate America has done, will roll off and you'll see their debt coverage ratios decline a bit down the road, but not their solvency, not actual loss content because of the strength of the economy. So I think we're absolutely fine.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

I let me I think the Fed has landed this and we're in a good place.

Ebrahim Poonawala
Ebrahim Poonawala
Managing Director - Head of North American Banks Research at Bank of America Merrill Lynch

That's all. Thank you.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Yes.

Operator

Thank you. There are no further questions at this time. I would now like to hand the call back over to Brian Gill for closing comments.

Bryan Gill
Bryan Gill
EVP, Director of Investor Relations at The PNC Financial Services Group

Well, thank you, Daryl. And thank you all for joining our call today and your interest in P&C. And please feel free to reach out to the IR team if you have any follow-up questions.

William Demchak
William Demchak
Chairman & CEO at The PNC Financial Services Group

Thanks, everybody.

Robert Reilly
Executive VP & CFO at The 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.

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