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S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Warren Buffett uses his annual letter to warn about Wall Street and recount Berkshire's successes
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
MarketBeat Week in Review – 2/19 - 2/23
Taiwan giant chipmaker TSMC opens first plant in Japan as part of key global expansion
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
A collection of the insights Warren Buffett offered in his annual letter Saturday
MILAN FASHION PHOTOS: Gucci sparkles as De Sarno hits stride
PROOF: New One Ticker (Weekly) Payouts (Ad)
Google says its AI image-generator would sometimes 'overcompensate' for diversity
West Africa bloc lifts coup sanctions on Niger in a new push for dialogue to resolve tensions
S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Warren Buffett uses his annual letter to warn about Wall Street and recount Berkshire's successes
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
MarketBeat Week in Review – 2/19 - 2/23
Taiwan giant chipmaker TSMC opens first plant in Japan as part of key global expansion
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
A collection of the insights Warren Buffett offered in his annual letter Saturday
MILAN FASHION PHOTOS: Gucci sparkles as De Sarno hits stride
PROOF: New One Ticker (Weekly) Payouts (Ad)
Google says its AI image-generator would sometimes 'overcompensate' for diversity
West Africa bloc lifts coup sanctions on Niger in a new push for dialogue to resolve tensions
S&P 500   5,088.80
DOW   39,131.53
QQQ   436.78
Warren Buffett uses his annual letter to warn about Wall Street and recount Berkshire's successes
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
MarketBeat Week in Review – 2/19 - 2/23
Taiwan giant chipmaker TSMC opens first plant in Japan as part of key global expansion
Disturbing Truth About Biden's New Program To Seize Your Cash (Ad)
A collection of the insights Warren Buffett offered in his annual letter Saturday
MILAN FASHION PHOTOS: Gucci sparkles as De Sarno hits stride
PROOF: New One Ticker (Weekly) Payouts (Ad)
Google says its AI image-generator would sometimes 'overcompensate' for diversity
West Africa bloc lifts coup sanctions on Niger in a new push for dialogue to resolve tensions

The PNC Financial Services Group Q1 2022 Earnings Call Transcript


Listen to Conference Call

Participants

Corporate Executives

  • Bryan Gill
    Director of Investor Relations
  • William S. Demchak
    Chairman, President and Chief Executive Officer
  • Robert Q. Reilly
    Executive Vice President and Chief Financial Officer

Analysts

Presentation

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

Welcome to today's conference for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President 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 materials are all available on our corporate website pnc.com under Investor Relations. These statements speak only as of April 14, 2022 and PNC undertakes no obligation to update them.

Now I'd like to turn the call over to Bill.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Thanks, Bryan, and good morning everybody. As you've seen, we had a solid start to the year as we grew loans and securities, controlled expenses and our credit quality reserves and capital levels remain very strong. As we previously disclosed, noninterest income was below our expectations for the quarter. And while we expected these to be down sequentially, reflecting typical first quarter seasonality, the decline actually exceeded normal interest rate volatility and probably the Russian-Ukraine conflict adversely impacted certain of our Capital Markets among other areas.

As we look forward, we're clearly in an environment of uncertainty here. We're also in an environment with rising interest rates, which benefit banks with increased loan demand, which benefit banks and in PNC's case, a business or a bank that never changed its credit box and credit terms that really is a business that has a very or a bank that has a very solid mix of fee-based businesses and importantly a bank that has substantially expanded its geographic presence. I want to hit on that in a second just as it relates to our progress on BBVA.

And I would tell you, just I couldn't be more proud of what we've been able to accomplish over the last about 15 months in total now, but in particular over the last couple of quarters. And we still have a lot of work to do, but to put it in perspective, our staffing is largely complete and our calling effort, particularly versus the fourth quarter has increased substantially and our sales and pipelines are robust. Just to give you an idea, the activity behind this, in the legacy BBVA USA geographies, corporate commercial banking calls has doubled since the fourth quarter and sales have increased almost 50%.

As we expected across C&IB nearly half of these sales were actually non-credit related and related to BBVA USA geographies. We switched to the retail side. We're obviously focused on building customer relationships, just to give me an idea our sales per branch were approximately 60% higher in March compared to what they were in December with improvements across mortgages, cards and referrals to P&C investments.

In our asset management group, we're making great progress in strategic investments to hire key people and business development in advisory roles and importantly our client opportunity pipelines are really strong. From a balance sheet perspective, we continue to deploy our excess liquidity, as you've seen with solid loan growth and securities purchases. Smart loans grew $6 billion in the quarter.

Driven by the commercial side, we saw a nice increase in utilization. In fact, if we exclude the impact of PPP loan forgiveness, spot commercial loans grew $7 billion, the fastest organic quarterly growth we've seen since the commercial defensive draws that we saw at the start of the pandemic. And by the way, we've seen that growth carry into the early part of April.

We also remain active on the security side with net purchases of almost $6 billion during the quarter. From a balance sheet perspective, the securities were offset by unrealized losses due to rising interest rates, which Rob is going to discuss in a few minutes. This doesn't impact our regulatory capital or earnings. But during the quarter, we moved approximately $20 billion of our securities available for sale to held-for-maturity to limit future valuation changes to interest rate movements. Importantly, we saw a solid rebound in the yield on our securities.

Overall, we believe we are well positioned for the rising interest rate environment to deliver net interest income growth and NIM expansion throughout the year. And finally, during the quarter, we returned about $1.7 billion of capital to shareholders through share repurchases and dividends. And importantly, based on our performance, our strong capital levels and the Board's confidence in our execution of our strategic priorities, we recently announced a substantial increase to our quarterly dividend of $0.25 per share to $1.50 or 20%.

I just want to close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, as I said, we believe we are well positioned to continue to grow shareholder value as the economy normalizes, interest rates move higher and we realize the full potential of the combined PNC and BBVA USA franchise.

And with that, I'll turn it over to Rob for a closer look at our results and then we'll take your questions.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Thanks, Bill and good morning, everyone. Our balance sheet is, on Slide 3 and is presented on an average basis. During the quarter, loans increased by $2 billion or 1% and investment securities grew $6 billion or 5% and federal reserve cash balances declined $13 billion or 17%, reflecting higher securities and loan balances, as well as lower borrowed funds. Deposit balances averaged $453 billion and were relatively stable compared to the prior quarter.

Our tangible book value was $79.68 per common share as of March 31st, a 15% decline linked quarter, which was entirely driven by mark-to-market adjustments in our securities and swap portfolios as a result of higher interest rates. As a Category 3 institution, we opted out of recognizing AOCI and regulatory capital and as of March 31, 2022, our CET1 ratio was estimated to be 9.9%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. And as Bill just mentioned, our Board recently approved a $0.25 increase to our quarterly cash dividend on common stock, raising the dividend to $1.50 per share. Additionally, during the first quarter, we completed share repurchases of $1.2 billion or 6.4 million shares.

Slide 4 shows our loans in more detail. Average loans increased $2 billion linked quarter and on a spot basis, loans grew $6 billion or 2%. PPP loan balances continue to decline and impacted first quarter growth by approximately $2 billion on both an average and spot base. Looking at loan growth, excluding the impact of PPP loans, average loans increased $4 billion or 1%, driven by $5 billion of growth in commercial and industrial loans, partially offset by a $1 billion decline in commercial real estate balances. And average consumer loans were stable linked quarter.

On a spot basis, loans grew $8 billion. Commercial loans grew $7 billion, driven by higher utilization, as well as new production within corporate banking and business credit businesses. Notably, in our C&IB segment, the utilization rate increased 85 basis points and our overall commitments were 2% higher compared to year-end 2021. And consumer loans increased $900 million as higher mortgage balances were partially offset by lower auto and credit card loans.

Moving to slide 5, average deposits of $453 billion remained stable compared to the fourth quarter. On the right, you can see total deposits at period end were $450 billion, a decline of $7 billion or 2% linked quarter. All of the decline was on the commercial side where deposits were $10 billion lower, primarily driven by seasonal cash deployment. Partially offsetting the commercial decline, consumer deposits increased $3 billion, reflecting seasonally higher balances related to tax refund payments. Overall, our rate paid on interest-bearing deposits remained stable at 4 basis points and importantly, we remain core-funded with a loan to deposit ratio of 65% at the end of the first quarter.

Slide 6 details the change in our average securities and federal reserve balances. We've maintained high levels of liquidity over the past year, while opportunistically purchasing securities. This trend continued into the first quarter as we added primarily U.S. treasuries and agency RMBS. As a result, average security balances increased by 5% or $6 billion compared to the fourth quarter of 2021 and now represent 27% of interest earning assets.

Slide 7 highlights the composition of our high-quality securities portfolio, as well as the balance changes from year end March 31st. During the first quarter, we added to our portfolio with net purchases of approximately $6 billion. However, the increase in rates during the first quarter resulted in higher net unrealized losses of approximately $6 billion, and accordingly, our period end balances remained relatively stable. To moderate the impact of rising rates and security values and correspondingly AOCI, we transferred approximately $20 billion of securities from our available for sale portfolio into held-to-maturity at quarter end. Importantly, fluctuations in AOCI do not have an impact on our earnings. However, we are mindful of the AOC impact on tangible book value and we'll continue to evaluate potential opportunities to further transfers.

Turning to the income statement on Slide 8. As you can see, first quarter 2022, reported EPS was $3.23, which included pretax integration cost of $31 million CAD. Excluding integration costs, adjusted EPS was $3.29. During the first quarter, integration costs reduced revenue by $16 million and increased expenses by $15 million. First quarter revenue was down $435 million or 8% compared with the fourth quarter.

Expenses declined $619 million or 16% linked quarter and excluding the impact of integration expenses, non-interest expense declined 7%. The first quarter provision recapture was $208 million, primarily reflecting the impact of improved COVID-19 related economic conditions and our effective tax rate was 17%. So, in total, net income was $1.4 billion in the first quarter.

Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the first quarter of $4.7 billion declined $430 million linked quarter. Net interest income of $2.8 billion was down $58 million or 2%. Higher securities and loan balances, as well as increased security yields were more than offset by a $74 million decline in PPP revenue due to loan forgiveness activity and the impact of two fewer days in the quarter.

And net interest margin of 2.28% was up 1 basis point. As we recently announced and effective for the first quarter, we re-categorized the presentation of our noninterest income and provided an update to the related guidance. Consistent with those revisions, first quarter fee income was $1.7 billion, a decline of $296 million or 15% linked quarter. Looking at the detail of each revenue category, asset management and brokerage fees decreased $8 million or 2%, reflecting lower average equity markets.

Capital markets related fees declined $208 million or 45% driven by lower M&A advisory fees, mostly due to elevated fourth quarter transaction levels, but also some transaction activity in the first quarter. Card and Cash Management revenue decreased $26 million or 4%, driven by seasonally lower consumer spending activity. Lending and deposit services was essentially stable linked quarter, declining only $4 million. Residential and commercial mortgage non-interest income was $50 million lower, primarily due to decreased commercial mortgage activity. And finally, other non-interest income declined $81 million, primarily due to lower private equity related revenue and once again compares to elevated fourth quarter levels.

Turning to Slide 10, our first quarter expenses were down by $619 million or 16% linked quarter. Excluding the impact of integration expenses, non-interest expense declined $243 million or 7%. The majority of the decline was in lower personnel expense, primarily reflecting lower incentive compensation. We remain deliberate around our expense management. By year-end 2021, we achieved our objective to reduce BBVA USA's annual operating expense run rate by $900 million. And as we previously stated, we have a goal to reduce cost by $300 million in 2022 through our continuous improvement program and we're confident we will achieve our full year target. As you know, this program funds a significant portion of our ongoing business and technology investments.

Our credit metrics are presented on Slide 11. Nonperforming loans of $2.3 billion decreased $182 million or 7% compared to December 31st and continue to represent less than 1% of total loans. Total delinquencies were $1.7 billion on March 31st, but $286 million declined from year-end, reflecting lower consumer and commercial loan delinquencies. The majority of these decreases resulted from our progress in resolving BBVA USA conversion related administrative and operational delays. Net charge-offs for loans and leases were $137 million, an increase of $13 million linked quarter. Our annualized net charge-offs to average loans continues to be historically low at 19 basis points.

And during the first quarter, we reduced our allowance for credit losses by approximately $300 million and our reserves now total $5.2 billion or 1.8% of total loans. In summary, PNC reported a solid first quarter and we're well positioned for the remainder of 2022 as we continue to realize the potential of our coast to coast franchise. In regard to our view of the overall economy, we expect strong growth over the course of 2022, resulting in 3.7% average GDP growth. We also expect the Fed to raise rates by an additional cumulative 175 basis points through the remainder of this year to a range of 2% to 2.25% percent by year-end and all of this is consistent with the update in our recent 8-K filing.

Looking at the second quarter of 2022, compared to the first quarter of 2022, we expect average loan balances to be up 2% to 3%, which includes a $1.3 billion decline in PPP loans. We expect net interest income to be up 10% to 12%. We expect noninterest income to be up 6% to 8%, which results in total revenue increasing 9% to 11%. We expect total non-interest expense to be up 3% to 5% and we expect second quarter net charge-offs to be between $125 million and $175 million.

Considering our reported first quarter operating results, second quarter expectations and current economic forecast for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 10% and spot loan growth of 5%. We expect total revenue growth to be 9% to 11%. We expect expenses excluding integration expense to be up 4% to 6% and we now expect our effective tax rate to be approximately 19%.

And with that Bill and I are ready to take your questions.


Questions and Answers

Operator

[Operator Instructions] Our first question is from the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari
Analyst at Evercore ISI

Good morning.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Hey, John.

John Pancari
Analyst at Evercore ISI

Wanted to see if you could give us a little bit more color on how you're thinking about the capital markets revenues from here. Obviously, you saw a pretty good step down this quarter given the activity that broader markets saw clearly, just wanted to get your thoughts on how we can expect to think about the remaining quarters if you think you could see an increase from here? And if the capital markets outlook has impacted your full-year revenue view, is that baked in there as well? Thanks.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Yeah. Hey, John. It's Rob. Good morning. So, in regard to capital markets, you'll recall at the beginning of the year, our expectations for capital markets was to be down approximately 20% or so from '21 levels just because of the '21 levels were so elevated. The first quarter was slower than we expected even at those reduced levels, but for the full year guide, I have most of that back in there. So, most of what we expected to occur in the first quarter that didn't occur, it's still in the full-year guidance. So that's why we're still 9% to 11% growth.

John Pancari
Analyst at Evercore ISI

Okay. Got it. Alright. That's helpful. And then -- thanks, Rob. And then secondly on the deposit side just given the move-in rates that we're looking at here clearly lot of focus on deposit flows for the spot balances, you saw 5% to 2% decline in your deposits there. Can you maybe give us a little bit of color of what you're seeing in terms of the positive behavior here near term? Is that more commercially oriented in terms of the deposit that you saw in terms of the decline? And then can you talk about your betas that you'll see in the near term as rates rise and then further while after the first hundred Fed hikes? Thanks.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Yeah. Okay. This is Rob, again, John. So, on the deposits in the quarter, we saw spot decline and all of that was on the commercial side, which we see as largely seasonal. Consumer deposits on a spot basis were actually up, reflecting tax refunds and some seasonality there. So, that's the story on the deposits. For the full year, in regard to the betas, relative to what we expected at the beginning of the year, we have increased our betas consistent with the increase in the Fed rate hikes forecast. Along the lines of what we saw then the last cycle, maybe a little bit less just because we're working off such high levels, very quiet -- as you pointed out, very quiet on the first 100 basis points or so, but showing up if our rate forecast is correct showing up in the third and fourth quarter.

John Pancari
Analyst at Evercore ISI

Got it. Thanks. If I could ask just one more thing on the loan side and they mentioned higher line utilization on the commercial side. Are you beginning to see capex plans drive loan demand? And then lastly, are you seeing any of the volume coming back from the capital markets back to the bank loan market yet on the commercial side?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

I think the utilization as part of -- reflects part of the slowdown on the capital market side in bonds. Clients continue to be active. So, yes, some pickup in capex build and inventory. The other thing we're seeing beyond the utilization change, I think we saw a similar percentage increase in just new dollars out -- or sorry, not percentage, but notional amount increase of new DHE commitments out. So, some of it's utilization, some of its winning clients, utilization driven by capital markets being in a bit of disarray together with increased capex.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

And higher inventory levels, of course, yeah.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Yeah.

John Pancari
Analyst at Evercore ISI

Got it. Okay, great. Thank you.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Sure.

Operator

Our next question is from the line of Scott Siefers with Piper Sandler. Please go ahead.

R. Scott Siefers
Analyst at Piper Sandler Companies

Good morning. Thanks for taking my question.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Hey, Scott.

R. Scott Siefers
Analyst at Piper Sandler Companies

So, Rob, it was great to see you reiterate the full-year '22 revenue outlook. And I think you sort of addressed this in response to the capital markets question previously, but I was hoping broadly, you could just kind of partially guide between what comes from NII and what comes from fees? I think 90 days or so ago, you guys have been thinking maybe mid-single digit all in growth for '22 if I remember correctly, but just given sort of that change in reporting and others etc., just curious thought?

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Sure, so 9% to 11% total for the full year. Compared to the beginning of the year, net interest income has had bigger component of that because of the rate increases and the higher balances. So, we're looking at that to be inside of that 9% to 11%, the NII in the high teens. And then on the core fee piece, looking more towards flattish to maybe down low-single digits and most of the change there being on the mortgage outlook from the beginning of the year.

So, most of our fee categories are tracking to what we expected for the full year, including capital markets, as I just mentioned, but mortgage were off from what we thought at the beginning of the year because of rates. So residential and commercial mortgage we expected to be down low-single digits. We're now looking at maybe down 25% or 30% year-over-year. So that's where the fee change is largely resident.

R. Scott Siefers
Analyst at Piper Sandler Companies

Perfect. And you just captured my second question as well. So, thank you very much. I appreciate it.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Sure. Yes, sure.

Operator

[Operator Instructions] Our next question is from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Mike Mayo
Analyst at Wells Fargo Securities

Hi.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Good morning.

Mike Mayo
Analyst at Wells Fargo Securities

So you're guiding for 9% to 11% revenue growth, 4% to 6% expense growth. So, you're guiding now for 500 basis points of positive operating leverage. I'm just curious, are you tempted to spend some of that and invest more of those that spread? And I relate this -- I'm not telling you to do or not do, I'm just, there's always a trade-off, but I want to tie this back to your CEO letter, Bill, where your first goal was to gain share in especially your new markets and your second goal was to prove share with your customers. So, I guess, the concrete question is giving metrics to say what kind of share you'd like to improve by market and by corporate and consumer customer and to do that, are you tempted to spend some of that excess of the revenue growth over expense growth? Thanks.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Thanks for the question, Mike. In short, we don't have to. We've always been investing in our franchise. So, if you think about -- we talked about our new markets, as I said in my comments, they are largely staffed at this point. And so, if I think about our people spend, we're kind of where we need to be. If I think about our technology spend, we've been going hard at that for a number of years and we're more in the place of what can we actually get done in the sequence timeline than we are about, hey, spend more money. So you're not going to see increases against what we expected in that space. So anyway, short answer to your question is, no, we don't need to spend the money and not spending the money in no way detracts from the growth that I think we're capable of.

Mike Mayo
Analyst at Wells Fargo Securities

Another one. You are spending the money on investments and that's part of the guide.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Yeah. Another way to put it.

Mike Mayo
Analyst at Wells Fargo Securities

So it's baked in there. Can you put some numbers around your CEO letter, like I said, it's -- your three goals gained share by your markets, gained shared by customers and technology, at least for your first two goals where is the share today and where do you hope to get it to? You have not given that before. but it'd be nice to know is it bigger than a [Speech Overlap] or what?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

No, it's a fair question. I don't know that you were going to define share by share of C&I loans in a market. I think what we have to do and we're working on. Mike, is presentation of just progress in underpenetrated markets compared to what we execute in one of our mature markets and then tracking that for you. I think that's the best metrics. So, we look at loan balances, we look at fees, we look at percent of fees as a percentage of total revenues, we look at calling volume, we look at new clients, all the things you'd expect us to and we need to figure out and I'll commit to you that we will. We need to put out metrics, so you can track it through time. We do it internally.

Mike Mayo
Analyst at Wells Fargo Securities

And then lastly, as it relates to buybacks, you have the book value regulatory capital dichotomy here, which winds out when you think about buybacks?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Not sure I follow the question [Speech Overlap].

Mike Mayo
Analyst at Wells Fargo Securities

9.9% CET1 ratio, that's fine, that's good, but your book value went down, that's not as good. Do you still buyback the same amount of stock? Do you slow your buyback, you not buy next stock at all, the AOCI impact?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Yeah. So, if you're simply asking the question, do we view our available capital based on the 9.9%, the answer to that is yes. Right.

R. Scott Siefers
Analyst at Piper Sandler Companies

Okay. And then does that mean you continue the pace of buybacks or how do you think about that? We're going to be in the market. It's, obviously. I think it's more attractive today to buyback shares than it was towards the end of the year. So, we're going to be in the market. And I don't know what we've publicly said.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

No, that's right. The answer is, it is a regulatory capital that we look at Mike and the current pace that we've been on, we expect to continue, the average quarterly pace. We were a little bit more this past quarter.

Mike Mayo
Analyst at Wells Fargo Securities

Got it. Thank you.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Sure.

Operator

Our next question is from the line of Bill Carcache with Wolfe Research. Please go ahead.

Bill Carcache
Analyst at Wolfe Research

Thank you. Good morning, Bill and Rob. Following up on your deposit beta expectations being a bit lower this cycle given all the liquidity in the system. You said on the last call that you'd expect to see higher betas if the Fed shrinks its balance sheet dramatically, but that loan growth would be an offset to that. Could you help square those two points for us? And I guess just maybe discuss the risk that the pace the Fed has communicated could lead to higher deposit flight risk?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

So, I mean there are two opposing forces. Right. So, when the fed shrinks its balance sheet, which it will, even if they let it run off, they're saying, whatever that number is $90 million a month or a quarter -- it will pull deposits from the system. At the same time, when there is loan growth, it puts deposits back into the system and the reason for that if you think about it as it just leverage on the capital, assume everybody holds 10% on a loan, they borrow from us, say deposit somewhere else, it collectively builds deposits into the system.

Collectively, we think that's going to cause -- will cause deposit growth to slow, but we actually think deposit growth is still going to be positive for the system and for us. So, again Fed balance sheet shrinks, but at the same time, we're going to see loan demand, we expect to see loan demand, we have seen loan demand at a pace that would generate deposits. So, we're not particularly worried about that.

Now, what will happen of course is as the Fed gets rates substantially higher the betas are going to have to do a big catch up move, because all of a sudden, it's going to matter. Interest rates are going to get back to a place where people start paying attention again. I don't know what that level is. I don't know that we've ever come off of a base of zero and trying to play catch-up the last time we thought about that the Fed reverse course pretty greatly. So, we're going to have to see how that plays out, but I think deposits in the system will still be there. We just want to see the same growth we have over the last couple of years.

Bill Carcache
Analyst at Wolfe Research

Got it. That makes sense. And taking that thought process and going inside your outlook. Does that contemplate the possibility of maybe simply letting some of the liquidity that you're sitting on today outflow if necessary rather than paying up to keep it to fund loan growth?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Well, we haven't had to pay up, I mean, as you say. I think our average cost of fund stay at 4 basis points. So, some percentage of that on the corporate side in particular that will be -- that looks for direct substitutes from competitors or money market funds on a given day and we assume and in our forecast, we assume that that will have very high if not betas of one. And that's fine, that's part of our funding model. It's embedded in our forecast and we never -- we don't consider those necessarily core deposits even though they're core clients, if that makes sense to you.

Bill Carcache
Analyst at Wolfe Research

Yeah, if I can ask...

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

And that's 4 basis points on core deposits or borrowings [Indecipherable].

Bill Carcache
Analyst at Wolfe Research

Okay. Thank you. And that's helpful. If I could ask on CRE. Can you talk about the risk that tenants may remain good credits and continue to buy by their lease obligations through the end of their lease terms, but ultimately not renew because they just don't need as much space?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Look, I think that's one of our fears. I think we're going to see that weakness in office properties flow through over a longer period of time, but -- and I think by the way that's very market specific. So, I would tell you, for example, I think in Pittsburgh here, we're going to struggle with that. We don't have exposure --interestingly, we don't have a lot of exposure here, but practically, I think there'll be less people in the buildings in Pittsburgh and I think that's going to be the case in many metro areas around the country. And yes, I think that's going to cause lease rates to drop over time. And yes, I think that's going to impact office properties. But we're reserved for that, had been watching that. We pick our clients' carefully and at this point, we think most, if not all of them, have the wherewithal to make their way through that.

Bill Carcache
Analyst at Wolfe Research

That's helpful. Thank you. If I could squeeze in one last one. Bill you shared in the past a vision of giving consumers the ability to use Zelle at the point of sale for retail payments. Can you update us on whether that's something that you still support? And how do you think about the risk of cannibalizing or that could cannibalize your debit and credit volumes?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Look. I'm not going to speak on behalf of EWS the company simply because I'd say that's a collective decision from the ownership group of EWS. I think everybody's interest is to make payments easier, to make payments be more fraud resistant and look to be able to make some return on payments. We collectively look through all those things against the current rails. And as that payment landscape changes, we'll adapt with it. We are going to start using Zelle, we and a few of the other ownership banks to allow purchase for services and for small business. So, it will get out there into the Payit [Phonetic] merchant space, just at this point not direct competitor, the card rails for a variety of reasons, but not yet.

Bill Carcache
Analyst at Wolfe Research

Understood, that's super helpful. Thank you for taking my questions.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Sure. Next question please.

Operator

[Operator Instructions] Our next question is from the line of Gerard Cassidy from RBC. Please go ahead.

Gerard Cassidy
Analyst at RBC Capital Markets

Thank you. Hi, Bill. Hi, Rob.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Hey, Gerard.

Gerard Cassidy
Analyst at RBC Capital Markets

Can you guys -- I know you talked about the capital utilization rates going up, possibly customers with capital expenditure. But can you here with us, where are they now and what would you consider to be a normal rate of capital utilization at your organization?

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Yeah. And we've talked about this before, Gerard. Right now we're in the low 50s, up from the high 40s that we saw through the bulk of last year and normal -- just whatever normal is, we might expect somewhere in the mid 50s. So we're moving toward that, not there yet.

Gerard Cassidy
Analyst at RBC Capital Markets

And Rob, is there any difference have you discovered yet with the BBVA customer that C&I customer versus legacy P&C customer?

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

No, it's interesting. On the commercial side, that we were talking about that this morning, it's very, very similar in terms of the borrowing traits. So, there really is no difference in terms of the utilization of the lines. They're all up in sort of similar amounts.

Gerard Cassidy
Analyst at RBC Capital Markets

Very good. And then I know you mentioned in your remarks about transferring over some of the available for sale securities. I think it was $20 billion into the held-to-maturity, would they transfer it over at a discount? And then will that discount accrete into your capital over time?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Yes. Yeah, exactly.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

And again, [Speech Overlap] it doesn't affect earnings.

Gerard Cassidy
Analyst at RBC Capital Markets

Right, right.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

It's all going to pull. We balance between the flexibility benefit of available for sale versus the AOCI component of -- or benefit of held-to-maturity. So, we'll continue to look at that, but it will run its course and again doesn't effect earnings.

Gerard Cassidy
Analyst at RBC Capital Markets

Right, okay. And just lastly, I know you guys, when you did the BBVA transaction, you were quite excited about the money transfer businesses between, I believe it was, maybe Mexico and the U.S., can you share with us any color on how is that going? Is it going as well as you expected? Have you been able to expand it?

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

No, we've actually been really happy with it. It has expanded and we're currently looking -- it's through several countries in Latin America today and we're actually looking at expanding that through relationships into other countries there and I think into Europe, although I'm not certain about that. It's dependent on correspondent banking relationships in the receiving countries that are responsible for, know your customer, Gerard,

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

But it's a big business. We actually white label it for others and we're excited by it. We've been -- it's now mainstream on our consumer apps and importantly we're looking at some of that functionality to be tied into some of the things that we're actually doing on the corporate side.

Gerard Cassidy
Analyst at RBC Capital Markets

Great, thank you, Bill. Appreciate it.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Yeah.

Operator

And there are no further questions. I'll turn the presentation back to the speakers.

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

Okay. Well thank you very much. And if you have any follow-up questions, please feel free to reach out to the IR team.

William S. Demchak
Chairman, President and Chief Executive Officer at The PNC Financial Services Group

Thanks everybody.

Robert Q. Reilly
Executive Vice President and Chief Financial Officer at The PNC Financial Services Group

Thanks folks.

Operator

[Operator Closing Remarks]

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