Q4 2019 Earnings Call
Good morning, My name is Dina and I'll be your conference operator for today.
This time I would like to welcome everyone to the PNC Financial Services Group earnings Conference call.
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As a reminder, this call is being recorded Wednesday January 15th 2020.
I would now turn the call over took a director of Investor Relations Mr., Brian Gill Sir. Please go ahead.
Oh, Thank you and good morning, everyone welcome to todays conference call for the <unk> Chief Financial Services Group.
Just building on this call or PNC is chairman, President and CEO , Bill Demchak, and Rob Roley 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 todays earnings release materials as well those are actually see filings and other investor materials. These materials are all available on our corporate website PMT dot com under Investor Relations. These statements speak only.
As of January 15th 2020 in PMC undertakes no obligation to update them now I'd like to turn the call over to Bill.
Thanks, Brian Good morning, everybody.
Today that we reported full year 2019 results with net income of $5.4 billion or $11. A 39 cents per diluted common share for the full year. We increased earnings per share achieved record revenue improved our efficiency ratio and generated positive operating leverage overall it was an excellent here for PNC.
Capped by another solid quarter, we reported fourth quarter net income of $1.4 billion or $2, a 97 diluted chats per share.
During the quarter, we grew loans deposits at revenue and while our provision increased overall credit quality remained strong routes kind of take you through the full details of our financial results and just a second and we remain dedicated and diligent and our continued investment in our businesses and technology to drive long term growth.
Along these lines I was very pleased with the continued progress we made this quarter on our key strategic initiatives, including the national expansion of our middle market and retail banking efforts, we remain committed to growing our business, but also maintaining an efficient organization capable of achieving positive operating leverage I'd like to spend just a.
Minutes, a thank our employees for all their efforts to make 2019, a successful year, we achieved a great deal. This past year for our customers shareholders in the communities, we serve and none of it would have been possible without the combined efforts of our more than 51000 employees working toward our common goals.
As 2020 begins we expect to face uncertainty in the year to come from the economic environment to the ramifications of international trade disputes the geopolitical situation at a presidential election or election campaign in the U.S., but.
But we're excited about them <unk> momentum with which we have entered the year and along with our increased capital flexibility as a result of the tailoring rules. We believe our strategy focused on our customer or strategy and focus on our customers positions us well to continue to deliver for all of our constituencies and with that I'll turn it over to Robin I won't be happy to take your.
Yes.
Great. Thanks, Bill and good morning, everyone.
As Bill just mentioned, we reported full year net income of $5.4 billion or $11.39 per diluted common share and fourth quarter net income was $1.4 billion or $2, a 97 cents per diluted common share.
Our balance sheet is on slide four and is presented on an average base.
Total loans grew $1.2 billion to $239 billion linked quarter <unk>.
Compare to the fourth quarter 2018 growth was $13 billion were 6%.
Investment Securities of 83, and a half billion dollars decreased $1.7 billion for 2% linked quarter due to portfolio run off primarily in treasuries.
Year over year total security balances increased $1.4 billion for 2%.
Our cash balances at the Federal reserve averaged $23 billion for the fourth quarter up $7.7 billion linked quarter and $6.6 billion year over year, primarily as a result, a strong deposit growth.
That's grew $8.7 billion or 3% linked quarter, and 21 billion $21.3 billion were 8% year over year.
As of December 31st 2019, our Basel III common equity tier one ratio was estimated to be 9.5% compared to 9.6% at September thirtyth.
For the full year 2019, we returned $5.4 billion of capital to shareholders. This represented a 22% increase over 2018 and was comprised of $1.9 billion in common dividends and three and a half billion dollars from share repurchases.
Of note. The tailoring rules became effective January Onest 2020, and as a result will provide us increased flexibility in managing both our capital and liquidity levels going forward.
As we announced earlier this morning, we've received approval from the federal reserve to repurchase up to $1 billion and common shares through the end of the second quarter of 2020, which is in addition to the share repurchase programs of up to $4.3 billion approved by the fed as part of PNC 2019 capital plan.
I will provide us the ability to repurchase additional shares over the next two quarters the level of which will depend on market conditions.
Our return on average assets for the fourth quarter was 1.3% our return on average common equity was 11.5% and our return on tangible common equity was 14.5%.
Our tangible book value was $83.30 per common share as of December 30, Onest, an increase of 10% compared to a year ago.
Slide five shows our average loans and deposits in more detail average loan balances of $239 billion in the fourth quarter were up $1.2 billion compared to the third quarter.
The growth was driven by consumer lending, which increased $1.9 billion were 3%, reflecting higher residential mortgage auto and credit card loan balances.
Commercial lending decreased $738 million linked quarter as growth in our corporate banking business was more than offset by declines in our real estate business, primarily due to a $1.1 billion decrease in our multifamily warehouse balances.
Compare to the same period, a year ago average loans grew 6% or $13 billion commercial lending balances increased $8.6 billion and consumer lending balances increased $4.4 billion each growing by 6%.
Slide show the yield on our loan balances declined in the fourth quarter, primarily the result of lower LIBOR rates.
Importantly, the rate paid on our deposits also declined 15 basis points linked quarter and acceleration in the pace of the decline from the third quarter of 2019.
Deposits of $288 billion increased in both year over year and linked quarter comparisons the year over year increase of $21.3 billion were 8% reflected strong customer growth.
Linked quarter deposits increased $8.7 billion were 3% due in part to seasonal growth and commercial deposit.
Notably noninterest bearing deposits grew $1.5 billion or 2% in the fourth quarter.
It's comparisons benefited by 3.4 billion dollar increase related to the new sweep deposit product program, we began offering our asset management clients in September .
As you can see on slide six full year 2019 revenue was a record $17.8 billion up $695 million or approximately 4% driven both by both higher net interest income and noninterest income.
<unk> expenses increased $278 million or 2.7% and remained well controlled.
Importantly, we generated positive operating leverage of 1.4% in 2019.
Our full year provision was $773 million, an increase of $365 million compared to 2018, which was driven by strong loan growth and continued credit normalization in our loan portfolio.
Our effective tax rate in the fourth quarter was 15.1% down from the third quarter as a result of lower state income taxes and tax credit benefits for the full year. Our 2019 effective tax rate was 16.4% and reflected the lower fourth quarter tax rate.
Now, let's discuss the key drivers of this performance in more detail.
Turning to slide seven you can see our total revenue has grown consistently over the past several years driven by our diverse business mix.
Full year 2019, net interest income was approximately $10 billion a record for PNC and an increase of $244 million or 3% compared with 2018 as higher loan balances and yields were partially offset by higher funding costs.
Our net interest margin decreased in 2019% to 2.89% down eight basis points compared to 2018, driven by the declining rate environment throughout the year.
For the fourth quarter net interest income of two and a half billion dollars was down $16 million or 1% from the third quarter lower loan and securities yields were substantially offset by lower funding costs.
Net interest margin decreased six basis points to two 2.78% in the fourth quarter, mostly due to the effect of lower interest rates primarily LIBOR.
Although lower rates reduced our borrowing costs that benefit was more than offset by the downward impact of LIBOR on our commercial loan yield.
Full year 2019, noninterest income was up $451 million or 6% and increased $132 million were 7% in the fourth quarter compared to the third quarter.
Importantly, we continue to execute on our strategies to grow our fee businesses across our franchise and those efforts helped to drive record fee income of $6.4 billion in 2019.
During 2019 fee income increased $183 million were 3%.
Acting strong customer growth in our legacy and new markets growth was across all categories, except service charges on deposit.
At $12 million or 2% decline in service charges on deposit was reflective of our ongoing efforts to simplify products and reduce transaction fees for our customers.
Fourth quarter fee income of $1.7 billion increased $18 million or 1% compared to the third quarter.
Taking a more detailed look at the performance in each of our fee categories.
Asset management fees increased $40 million driven by higher earnings from PNC is investment and Blackrock.
Consumer service fees declined $12 million or 3%, reflecting seasonally higher credit card activity that was more than offset by a full year true up of credit card rewards.
Corporate service fees grew $30 million or 6% across various categories and included growth in our Treasury management product revenue.
Residential mortgage noninterest income decreased 47 million decreased by $47 million driven by lower benefit from our MSR hedge gains as well as lower loan sales revenue.
Service charges on deposits increased $7 million or 4%, reflecting seasonally higher customer activity.
The final component of our revenue other noninterest income increased $114 million compared with the third quarter. The growth was primarily driven by higher revenue from private equity investments and again, a $57 million related to the sale of our proprietary mutual funds, partially offsetting this was a negative visa derivative valuation adjustment of 40.
$5 million.
Turning to slide eight our full year 2019 expenses were $10.6 billion, an increase of $278 million or 2.7% compared with 2018.
As we continue to invest in our strategies technology and employees.
Taking a look at the fourth quarter expenses grew by $139 million were 5% linked quarter.
Personnel increased $68 million due to higher benefits, including especially your end grant to more than 51000 of our employees mainly in the form of health savings account contributions totaling $25 million.
Personnel also reflected higher incentive compensation associated with business activity in the fourth quarter.
Equipment expense increased $57 million, largely due to $50 million of technology related write off.
These write offs, primarily resulted from the benefit of the tailoring rule, which now allows us to decommission compliance and regulatory systems that are no longer required.
Our efficiency ratio for the full year 2019 was 59% improving from 60% last year.
As you know expense management continues to be a focus for us we had a 2019 goal of $300 million and cost savings through our continuous improvement program and we successfully completed actions to achieve that goal.
Looking forward to 2020, our annual see IP will once again be $300 million, which we expect to contribute to the funding of our business and technology investments.
Our credit quality metrics are presented on slide nine and remain historically strong.
Full year provision for loan losses totaled $773 million and net charge offs were $642 million in 2019, reflecting our strong loan growth and some credit normalization in our portfolio.
On a linked quarter basis provision increased $38 million in the fourth quarter due to both consumer lending and reserves attributable to certain commercial credit.
Net charge offs increased $54 million to $209 million in the fourth quarter compared with the third quarter.
Commercial charge offs accounted for $24 million or the increase driven primarily by a few specific credits.
And consumer charge offs grew $30 million, mostly related to our credit card and auto portfolios.
Reserves to total loans remained stable year over year at 1.14% compared to 1.16% at year end 2018.
Annualized net charge offs to total loans was 35 basis points in the fourth quarter and while up this is still well below our through the cycle average.
Notably the leading indicators for credit quality continue to perform well nonperforming loans were down $59 million or 3% compared to year end 2018 and year over year total delinquencies were up $19 million or 1%.
As you know we adopted Cecil for new accounting standards for credit losses effective January Onest 2020.
Based on our expectation of forecasted economic conditions and portfolio balances as of December 30, Onest 2019. The adoption will result in an overall increase of approximately $650 million or 21% to our allowance for credit losses at December 30, Onest 2019.
The increase is driven by the consumer loan portfolio has longer duration assets require more reserves under the Cecil methodology.
Our consumer reserve will increase approximately $900 million or 95% and our commercial reserve will decrease approximately $250 million or 12%.
These metrics include reserves for unfunded commitments.
We plan to include a full description and transition details in our upcoming 10-K disclosure.
As we move forward under Cecil It is a new accounting standard with many variables and as a result, we expect more volatility in our quarterly provisioning.
Allowance for credit losses will be determined using various models and estimation technique.
Utilizing for example, historical losses borrower characteristics economic conditions reasonable and supportable forecast as well as other relevant factors.
For expected losses and are reasonable unsupportable forecast period of three years, we'll use for macroeconomic scenarios and their estimated probabilities.
Given the multiple variables impacting provision expense under Cecil during 2020 will shift from our current practice of providing a quarterly provision guidance range to providing forecasted charge off level.
However in order to establish a context for the level of change in provision expense under Cecil for this upcoming quarter will provide a range for expected provision expense based simply on expected charge off level, plus Cecil reserve rates for net new loans.
This guidance will assume our economic scenarios and weights remain constant and should any of these variables change either favorably or unfavorably. Our actual provision expense may also very possibly materially.
In summary, PNC reported a successful 2019, and we're well positioned for 2020.
Throughout 2020, we expect continued steady growth in GDP, and we expect interest rates to remain relatively stable.
Taking these assumptions into consideration our full year 2020 guidance compared to full year 2019 results is as follows.
We expect loan growth to be in the range of 4% to 5%.
We expect total revenue growth to be in the low end at the low single digit range, which includes approximately 1% of net interest income growth.
We expect expenses to be stable and we expect our effective tax rate to be approximately 17.5%.
Based on this guidance, we believe will generate positive operating leverage of approximately 1% in 2020.
Looking at first quarter 2020, compared to fourth quarter 2019 results, we expect average loans to be up approximately 1%.
We expect total net interest income to decline approximately 1%, reflecting one less day in the quarter.
We expect fee income to be down approximately 3%.
We expect other noninterest income to be between 300 million and $350 million, excluding that securities and these activity.
We expect expenses to be down in the mid single digit range, and we expect provision to be between 225 and $300 million.
With that Bill and I are ready to take your questions.
Thank you.
Thank you at this time, if you'd like to ask a question. Please press that number one followed by the numbers for all your telephone keypad.
Please hold while we've compiled the culinary roster.
Your first question comes from the line of John Pancari with Evercore. Please go ahead.
Good morning.
Hey, good morning, John .
On the.
Provision guidance, the 225 to 300 for the quarter.
Can you give us a little bit more color I know.
Going forward, you're going to guide more on charge offs, and I've said, but regarding the quarter can you give us a little more color behind that to 25 to 300, how much of that.
Rick is the Cecil date to component and then how much that is reflecting underlying credit trends. Thanks, Yeah sure, yes sure John So.
For the first quarter guidance.
I kept it simple and we're just going to take forecasted charge offs, which we expect to be at the same level that we experienced in the fourth quarter 2019.
And then add to that the Cecil loan loss rate to the fourth quarter of 19 to our projected loan growth.
And that's the simple math.
Okay. Okay.
Okay. So and that is carrying forward like you said are assuming that fourth quarter.
George off level of 35 basis points of Trues up a fair amount from last quarter and from a year ago. So that's the normalization you're talking about where the can you give us more detail around that normalization I know you mentioned Carden auto but also you've had several commercial credits come up over the past several quarters that had been impacting used or a trend yes.
So you're seeing on the commercial side as well thanks.
John It's Bill you know, we talk about normalization and we have for years, where our charge off rate is below what we would expect to see through the cycle, but I would tell you are near term pressure on charge offs is more related to card and auto than anything else, it's not really related to.
Changing in the economy, we we dipped our toe into so you know the lower end of our credit bucket, probably a year ago and those event. Those vintages are starting to play through we have subsequently shut that down six months ago.
So it's going to work its way through the snake care, but but I don't actually see personally the that that charge offs are so much normalizing because of the economy per se as you know we have some elevated consumer stuff that will reverse through time. The other thing you know that we had a big debate and internally.
Just on what to guide as it related to provision going forward, because cecil and the impact to Cecil has so many variables on provision will be.
We can reasonably forecast charge offs, but of course outlook on economy mix of loan growth pace of loan growth.
And on many other factors ultimately impact how that provisions going to behave be on charge offs. So we're given at our best shot to three high or low right well its new that we'll see Seattle's new and it's been a lot of work as you know both in terms of what we've done as we ran through parallel in 2019 too.
Establish our transition amount, but going forward, we feel good about our framework, we've got a three year reasonable unsupportable forecast, we've got the four macroeconomic scenarios that will detail.
Our 2020 disclosures.
But to Bill's point, and what I said in my opening comments, there's just a lot of factors and then on top of that its new so theres just going to be some learning curve aspects to that sort of the practical application of Cecil real time.
The other CNS side, John we really haven't seen anything that you will see some specific credits were adding to.
By the way we've been doing this for five years, what's changed as the recoveries that we've gone through time, yes, Thats right way back.
From the crisis or gone so it's not so much that our new stuff is elevated and any changing point as our recoveries of drop.
Got it Okay. That's helpful and if I could just sounds for more on the margin side. The I know you gave the spread income guidance for the linked quarter end for the full year.
Expectation, but how do you think the margin will trajectory from here should we see some stabilization now that we have the pause. Thanks, yeah, Yeah, I think so I think say John .
We expect rates to be stable, we don't we don't have NIM guidance officially thats more of an outcome, but I think we'll we'll spend most of its if everything stays constant we'll spend the next year pretty much in this range, we could actually go up in a particular quarter as deposit costs are continuing to come down, but not a lot in either direction to one of the one of the things that hit US this quarter was.
Just elevated amortization Amazon are.
Premium mortgage securities, which we think has probably hit its peak.
But I think we'll be in this range up or down.
Okay, great. Thanks, Rob Thanks.
Sure.
Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.
Hi, good morning.
Hi, good morning.
Just wanted to ask.
A little bit more detail Rob about.
On the previous question, how should we think about one the opportunity to deploy what seems like an extra six to 7 billion of cash.
Opportunities you see for that that cash going forward and also deposit costs.
Turning down sort of balancing what has been a really successful initiative to go beyond your legacy footprint with reflecting lower rates.
Okay.
Well for the first part about that in terms of the new LCR requirements.
We have and will continue to work down our cash balances to the new requirement of 85%.
The first step as we talked about this on the third quarter call is to pay down some short term debt.
And then take a look going forward in terms of where we would deploy that.
Unfortunately securities yields aren't terrific. So I don't think we're going to move quickly in that direction, but that the simple as thing to do is to let some of our wholesale borrowings rock, which as well and that's what we've been doing such as well.
Can you to do that's right.
I'm not the deposit.
I was just going to say on that on the deposit side.
We have been reasonably aggressive and dropping rates.
It has still been able to grow balances both interest bearing in non interest bearing so we're going to continue to pursue that one of the things that it's happening in the background here of course as the fed over the last two or three months has been injecting cash back into the system through their repo activities, which means.
The the flight for deposits that was pretty intense is letting up somewhat as cash comes back into the system and I'm not exactly sure how that's going to play out.
Got it and just taking a step back.
Is there a different in terms of stickiness in terms of the deposits that you raised through let's say a high yield savings account versus checking account.
You are offering a cash incentive to open.
Uh huh.
So.
The national deposits have been much more sticky than we expected because at least as an individual Erik I kind of assume that.
Unless you converted it to a full time.
Count, which we've had some success at doing I assume people would shut those rates and move we actually haven't seen the.
Be the case, even though we have dropped we've worked really far below the competitive band on what we're offering.
No I'm sure, there's there's elasticities, but but thus far we haven't seen much movement.
The the upfront money on checking accounts, which all of us too.
You know where you open the account you swipe your debit card five times and and so for a couple hundred Bucks. There's there's a lot of mischief in that so so we've had.
The percentage of people, who basically are taking the cash going through the motions and never using the account.
Made that option less attractive to us and some other than some other things we're doing.
Oh, that's interesting okay. Thank you.
I would say I would just added that that deposits as we worked rates down across the board deposits have been stickier than what we would expect yeah.
Thank you when you see.
Yep.
Your next question comes on line of Scott Siefers waste paper Sandler. Please go ahead.
Morning, guys.
Good morning question.
And just wanted to ask on the billion dollar supplemental authorization was definitely got glad to see that but just in terms of how you came up with the $1 billion I imagine it ended up given the timing in the C CCAR cycle being as much artist science, but.
Just given where you sort of flushed out what does it say about sort of dry powder for the next cycle.
And or other preferences for capital use at this point.
Hi.
Rob can jump in here, but but the.
As we met as I mentioned the Goldman Conference.
Ask that we put in had nothing to do with tailoring. So it was basically capital that we had in excess.
You know from 19 independent of rule change.
As to the mild beyond the fact that 1 billion as a nice round number you have to remember that our existing program as a pretty big program, so adding to our existing program by much more than than than we ask for just didn't seem to make a lot of sense.
Okay all right.
The art of it rather the science of ahead [laughter] fair enough fair enough.
Then just separately I guess I can sort of back into it but I think you had.
Noted back in I think it was December when you sort of switch the anti outlook for 2020, given that the January profile and had suggested maybe up <unk> percent and 2020 I imagine that's still holds true, but any update on your thinking there and then just overall balance which becomes more self explanatory between <unk> and I and visa.
Dresses.
Yes.
I would still hold.
What's helping us areas, we are forecasting pretty good loan growth for 2020, our pipelines look good.
So when we do that we see up approximately 1% as achievable.
Okay.
Perfect and then maybe main fee drivers as you see them for the year.
Oh I think on the fees.
We're in good shape, we in our fee businesses are big they're all growing.
So I think we'll see a consistent trajectory that we've seen in 2019.
Just going through the broad categories asset management.
Asset management Blackrock.
The component the Blackrock component they'll do what they do the PNC component will have a little bit a lot of same store sales growth a lot of a little bit of a challenge in 2019 numbers, because we divested those businesses and effect sold some revenue.
The corporate services consumer services, we see saying on the trajectory that they've been on.
Residential mortgage could be off a little bit that thats pretty small for us.
And then service charges on deposit, we see as being kind of flat because.
We'll see more client activity, but as I mentioned in my comments, we are working toward eliminating a lot of those new since fees that our customers.
Uh huh.
The experience and we want to get get ahead of that says that will kind of offset one another.
But these are good.
Alright, well, thank you very much I appreciate it.
Sure.
Your next question comes on line of John Mcdonald with Autonomous Research. Please go ahead.
Hi, guys are two follow ups.
In terms of consumer lending new you have a long term goal to remix.
Towards a little bit higher contribution from consumer lending.
Does the c., so or are the experience dipping your toe in the auto Condor you mentioned.
In some of the lower spectrum does either of those change your appetite or the degree to which you might be growing consumer loans.
No I would.
I mean, a couple of comments that the issue the issue, we had by going to little bit down and our risk bucket.
By the way that's about a huge amount it's kind of flowing through.
Our two supposed to do that.
Test and learn and see and we learned we didnt like it we move on but we are growing independent of that if you just look at the balances that we've grown in card.
In in auto and then in resi and even home equity I guess this quarter first time charters I'm in a while.
They're executing really well and that'll continue the issue for C. So of course is.
In today's environment, it's an easier answer to say, yes, we'll keep growing home equity in resi on the balance sheet.
Because the loss rates the loss content is so low even in the seasonal reserve the challenge will be in a more pressed economy in an environment, where charge offs of losses are higher will you be booking loans.
That effectively cause negative income into your you booked them and.
That's a discussion we'll have at that period of time I do think as I've always said the c. So in general will hurt consumer lending, particularly when its needed most as people pull back because of the financial pain from their reserves, but in today's environment I don't see and to your question. John We have no. We have no change in terms of our strategies for growth because of seasonal.
Yes, great and the experience like you had you just fine tuning where you are targeting based on the experience of what you had last year.
That's right, Okay, and then in terms of the C. One that you ultimately target does tailoring.
Affect how you think about what we should run out overtime and if you made any kind of fine tuning on that and just kind of remind us.
The target range Rob.
Yes sure. The so Taylor is obviously going to add some flexibility to our capital ratios.
In terms of tailoring alone, we see our capital raised 81 ratio gone up about 60 60 bips.
That's including opting out of AOCI, which hurts by about 20 basis points.
And with cease all seasonal effects 81, that's another 1920 basis point so.
Net net net tailoring fee. So we see our capital ratio going up about 40%, so where we are today.
So that adds a lot of flexibility.
Basis points, I'm, sorry, 40 basis 0.999 as for nine tied to nine nine ish.
So that's a lot of flexibility we've talked about a target in the 8% to 8.5% range. So.
We've got room.
Got it okay great.
Thanks, very much skus.
Sure.
Your next question comes online.
In regard Cassidy with RBC. Please go ahead.
Hi, Bill.
Hey, John .
Can you guys give us some color I jumped on the call late so I apologize if you touched on this.
Rob you mentioned the outlook for loan growth ensures that actually one of the better.
Yes numbers, we've heard from your peers.
Right and you shared with US some of your peers have told us that seem to be a change in.
Business confidence, if you will or sentiment in the fourth quarter with these trade deals looking like they are coming together can you guys share with us for your customers are telling your commercial customers are telling you about how they feel about business returning Tony.
Well as it relates to trade I think theres, a lot of wait and see as to what's really there.
And how it impacts people, so I don't know that.
People have really change they've been in you've seen it in manufacturing and capex they've been a bit on the sidelines eventually they're going to have to spend simply to replace stated stuff.
But I don't know that we've seen that yet our growth on the see an eye side continues to come from specialty business as that are at our.
Geographic expansion and.
And probably one of the things that makes us a bit of an outlier.
Just in terms of growth is once we turn consumer positive, which we've done.
You know the totality of the the loan book is growing and we just haven't had does little faster, yes, thats right and it's and it's pretty balanced in terms of our outlook and the pipelines look good.
Very good in fact that was going to me and my second question Bill can you guys kind of share with us how much of the.
Projected growth or what you think you'll see in 2020 is coming from your existing footprint versus what's coming from these new markets that you've penetrated.
They have seen the yes.
Well I.
I mean, the new markets are accretive to our loan growth in terms of percentages, but they're working off pretty small small base. If they are they are a a healthy percentage of our growth yeah.
Far outpacing the legacy books and they add.
I'm not going I guess, a percentage, but I've seen that they add to the total native no question.
And I guess lastly on the other than you guys being handsome good guys, what what's going on how are you guys winning these customers in these new markets. This is just better products that you have that the your <unk>.
Your competitors don't have food for the customers that you're targeting.
Itself, it's a number of factors.
Let's start with really good people.
It includes bringing to our new markets are the totality of PNC with their regional President model with our community involvement.
Yes, it's dependent on our products, we show up in a market we get embedded in the community centers of influence we go in with our foundation and grow upgrade we.
Pick the clients we want to cover.
Bank long term and were very patient, we will call on them.
For two and three years.
Before we get a shot on goal.
When we get that our products are very good particularly.
In comparison to some of those the smaller in market players.
We've been doing those go and all the way back to the RBC acquisition and it works we use the same playbook in each market that we go into we talk about breakeven.
Inside a three years, we've been able to do that with all the vintages.
We'll keep going.
Yes, sure nitrate added that not sit at the four there is this just.
Great receptivity.
These corporate clients and prospects of the PNC, calling effort and once that dialogue goes as Bill said and we compete well.
The other thing that I would just remind you again and this is important.
The potential criticism that somehow we are out just participating in other loans.
It is not at all accurate when you look at our.
Cross sell rates in those markets, they're pushing 50% fees of total revenue.
Which is which is not wildly off what we do on our legacy markets.
Take and signifies a relationship rather than just.
Purchasing loans Bill.
Great very insightful. Thank you.
Yes.
Your next question comes on line ask Ken Aston with Jefferies. Please go ahead.
Hey, Thanks, guys.
Just a question on the expense side, Rob I heard you say that you know kind of re upping the 300 see IP and also.
Kind of continuing to move at Ics overall expense growth down to flattish right, which is your change over the last couple of years and I'm, just wondering under underneath that or some other things also starting to taper down in terms of I wouldn't dare say that you guys are changing your investment pace, but what else is helping underneath the surface clamped down on that.
Overall rate of expense growth that gets you closer to flattish. Thanks.
Well sure I mean, it it is that I know, we're not we're not we're not backing off of our investments or anything along those lines. We just think that the continuous improvement program that we haven't place.
He is the strength of the company that we can achieve in essence, 3% cost savings.
To fund these investments on annual basis and that's.
That's something that we've been very good at and that will continue so I don't think there's a whole lot that's changing under that.
Okay got it.
And then just one more follow up on the on the kind of balance sheet mics per spread sense. So you mentioned that the low rate environment doesn't have a lot of right now in trust.
Before we go right, so you're growing loans, alot, which added you're able to pay down wholesale debt. So does the mix of earning assets continue to push more towards higher yielding loans on you just kind of keep the portfolio in check how do you balance.
I'm sure that are in a a little bit in that direction, but it's not it's not that dramatic.
The.
I mean at the end of the day.
We.
We're under invested today, we're certainly going to invest runoff will probably grow one other things going on in the background here is on the received six swap side because the curve steepened out while we had largely gotten out of or lowered our position. We're back into that so you can't just look at the securities book in terms of the way we're.
Actually investing against the yield curve you can think about it in terms of cash, but it's not necessarily the sole tool used to manage the balance sheet.
Okay and that means that you're back into a meaning that you're more protected against lower from here right. Given those are you getting back into it.
Yes, yeah.
Right, Okay I got it understood. Thank you.
And as a reminder to ask the question. Please press star one satisfy the now or on your telephone keypad.
One moment please for the next question.
And your next question comes from online as Matt O'connor with Deutsche Bank. Please go ahead.
Hi, guys.
So obviously a lot of commentary just on the strong capital and you generate a lot of capital.
We think about like various uses of capital towards buybacks dividends, maybe you could talk about some of other potential uses the only been pretty clear, how you feel and bank deals, but what about loan portfolios. We've seen some branch divestitures from other people doing deals acquired technology fee.
Deal opportunities just kind of a whole portfolio of options. Thanks.
Oh.
I mean, it's a fair question then you should assume that.
You know we look at.
Loan portfolios would continue to do so we look at a lot of stuff, we look at product to add ons and you've seen us do that small size.
In terms of capabilities in the see an ice space things, we would do in retail.
Yeah.
And we'll continue to be rational actors in terms of how we spend the capital.
We have been pretty clear on.
Thoughts on depository institutions and that hasn't really changed.
So we'll we'll let this play out.
It's nice if you think about the environment that we're going into notwithstanding the strength of the economy. The volatility of kind of what comes in an election year.
I think having a lot of capital and being able to generate a lot of capitals are really good thing.
Simply because of the opportunities that are likely to present themselves here.
And then just long term and you've talked about trying to boost growth on the consumer side and obviously over the years there have been either asset generators available or good credit card portfolios and you haven't done any of those.
But she worked out kind of next five plus years.
It does seem like back to be an opportunity for your you've got always deposit.
I know you're not a huge fan of holding a ton of securities Theres other options, but any change in thinking about that again like you know looking out long term every now is not the right time in the cycle, but.
That is how.
One big for us between your balance sheet and say you must be.
Yes look you never say never but.
You know my experiences the consumer the consumer asset generators that come up for sale are broken.
Number one and number two we arent the house to fix up.
Right we are.
You know a prime lender in consumer that's focused on customer experience, we aren't a sub prime lender, which typically most of these people plan.
We don't understand it we don't want to be that person. The fact that if there for sale they blew up they didnt understand at either.
You know suggests to me that all else equal.
You know you won't see us.
You want to oversee us do that no you never say never but but.
That is my likely goes.
Okay. Thank you know that we said that for some time, but that's not to view the flip side of the other way of.
The see an ice side, we're really good of fixing busted seeing high.
Right. So so big portfolios that are troubled or lenders that are troubled show up with big portfolios that is something we pursue.
That's in our wheelhouse.
Got it thank you.
Yes.
And your next question comes from the line of Saul Martinez with can you be US. Please go ahead.
Hey, guys good morning.
A question on on provisioning and Cecil.
So your your.
I think your reserve ratio is about I think ended the quarter to about 115 or 116 I think.
And with Cecil that true you treat on January 1st that gets Trued up well show up in the first quarter results, but it'll get trued up based on the fourth quarter to one for is I think about provisioning going forward and some of the dynamics around that reserve ratio.
How do I think about rose and sort of the marginal growth of your portfolio versus that 1.4% or you growing in loans that have materially high on average have materially higher loss content than 1.4, and how do we think about that that mix change in terms of how to think about provisioning versus charge offs in a triple outrage.
Show evolution.
Yes, Yes, you will drive yourself and say [laughter] I mean, I can tell you think will think through all else equal.
Yes.
The issue is if we grow.
So to the in the same categories today, you wouldn't necessarily have to say lost count because for example, we shut off the lower.
Go scored consumer.
Yes, if we shift to secured products and see an eye versus unsecured products it shifts.
Are you more cards than we do resi mortgages.
This thing is going to be really hard to predict and what we have to do and we will do is give you an effect a provision attribution each quarter. So that you understand as part of your closure.
But as part of the disclosure et cetera.
Right and what your eye care like.
Yep.
I think remember as we have more reserves right here day one yeah.
Sure I'll go into one.
So now we got a lot of reserves.
Got it no fair, but like you know to the extent mix is changing and there's no change in your strategy and then the trajectory, which has seen auto cards Grove disproportionately, albeit from a lower lower base.
I would think that if that trend continues youre your loss content in your expected losses over time, assuming all else equal, which I know is.
Unrealistic I mean.
Can we assume that you're you're a trip below ratio given current trends should move higher from here.
The challenge with is the assumption that the absolute growth and consumer will somehow keep pace with the absolute growth patency and I would shoot Walt simply because.
Disproportionately larger so so yes consumer will grow but you've got to remember that that's balanced by a larger cnine book growing for us to spot right. That's right right. So the balance growth is much bigger just from yeah got it makes sense.
Yes.
Okay. All right. That's that's very helpful. Thanks.
Sure. Thank you.
There are no further questions.
All right well, thank you everybody and we'll see in the first quarter. Thank you.
This concludes today's conference call you may now disconnect.
Okay.