Q3 2020 PNC Financial Services Group Inc Earnings Call
Please continue to standby your conference will begin momentarily we thank you for your patience.
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Good morning, My name is Frank and I will be your conference operator today.
At this time I would like everyone welcome everyone to the PNC Financial Services Group earnings Conference call.
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After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the number one fall by that number four on your telephone keypad. If you would like to withdraw your question. Please press the one and then the number three on your telephone keypad.
As a reminder, this call is being recorded.
I will now turn the call over to the director of Investor Relations Mr. Bryan Gill Sir. Please go ahead.
Oh, well, thank you and good morning, everyone. Welcome to today's conference call for the PNC financial services group not parts.
Participating on this call are Pncs, 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 FCC filings and other investor materials. These me.
These materials are all available on our corporate website beauty dotcom under Investor Relations. These statements speak only as of October 14th 2020, and PNC undertakes no obligation to update them now I would like to turn the call over to Bill.
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Thanks, Brian and good morning, everybody, I hope, everybody safe and well.
You have seen that the Minsk and ER.
<unk> continued uncertainty on many fronts PNC delivered solid third quarter results. We grew revenue led by noninterest income, which included a bounce back in consumer fees on higher volumes, we managed expenses, which allowed us to generate positive operating leverage of over 4% in both the quarter and year to date period and our previous.
And for credit losses was substantially less than last quarter. The flipside net interest income fell from the second quarter, given the low interest rate environment and weak loan demand.
Despite growth in customers and commitments our loans outstanding declined due to lower utilization rates, including the pay off of commercial lines.
Got it that were drawn early in the pandemic.
While we continued to experience strong deposit growth. The current environment has made it more challenging to put those deposits to work.
Well the provision and charge offs were down quarter on quarter Nonperformers continue to rise, especially in the high impact cobot areas that Rob is going to discuss that a little bit more detail.
Notwithstanding these challenges we feel that PNC is well positioned with very strong capital liquidity and loan loss reserves Needless to say there are several significant upcoming events, including the next round of stress tests, the election, and PPP forgiveness that may impact the industry, and our borrowers, which underscores the importance of our strong position.
We're confident that the actions we've taken position us to both support our clients and communities and take advantage of potential investment opportunities if they arise to enhance shareholder value.
I want to thank our employees, who despite the various challenges it up and pandemic continue to execute on our strategic priorities, including ongoing investments international expansion and digital offerings.
All while helping our customers navigate financial hardship and other challenges during the quarter, we opened retail solution centers in Nashville, Houston, Denver, Boston, and Dallas and filled out corporate teams and the recently opened Seattle and Portland markets and 2021, we will continue our middle market expansion into San Antonio Austin and sand.
Diego the ability to expose our model to these demographically attractive markets continues to generate strong returns.
That I'm going to turn it over to Rob for a closer look at our third quarter results and then we'll be happy to take your questions great. Thanks, Bill and good morning, everyone.
As you've seen we've reported third quarter net income of $1.5 billion or $3.39 per diluted common share.
Our balance sheet is on slide four and is presented on an average basis on the.
On the asset side total loans declined $15 billion to $253 billion linked quarter.
Investment securities of $91 billion increased $2 billion or 2% linked quarter, but.
But on a spot basis declined $7 billion, primarily due to significant prepayment activity and maturity maturities at quarter end.
Our cash balances at the federal reserve to average $60 billion compared with $34 billion in the second quarter. The increase was the result of continued deposit growth and the full quarter impact of proceeds from the sale of our equity investment in Blackrock on the line.
On the liability side deposit balances averaged $350 billion and were up $15 billion or 5% linked quarter.
Borrowed funds decreased $10 billion compared to the second quarter as we used our strong liquidity position to reduce borrowings primarily with the federal home loan bank.
And our tangible book value was $95.71 per common share as of September thirtyth, an increase of 2% linked quarter and 16% year over year.
As you can see on slide five our capital reserve and liquidity positions remain strong as of September Thirtyth 2020, our CE tier one ratio was estimated to be 11.7%.
Our board recently approved a quarterly cash dividend on common stock of $1.15 per share and as you know the fed is authorized dividends for the fourth quarter again subject to amounts not exceeding the average of net income for the preceding four quarters on this.
On this basis, our fourth quarter, our fourth quarter dividend is 26% of that rolling number.
In regard to share repurchases and in accordance with the federal Reserve's Directive will continue to suspend repurchases through the fourth quarter of 2020.
Our loan loss reserve levels are 2.58% up slightly from 2.55% at the end of June.
Our liquidity coverage ratios continued to significantly exceed the regulatory minimum requirements as we remain core funded with a low cost deposit base.
Slide six shows our average loans and deposits in more detail.
Average loan balances of $253 billion in the third quarter were down $15 billion or 6% compared to the second quarter.
This decline reflected a $13.7 billion decrease in commercial loan balances.
New loan production was more than offset by broad based lower utilization.
And our Cfivea segment virtually all of the drawdowns that occurred in the first quarter has since paid back and our utilization rates are currently running approximately 1% below pre pandemic levels.
Consumer loans declined approximately $1.3 billion across all categories, except for residential mortgage which increased.
Compared to the same period, a year ago average loans grew 6% or $15 billion.
As this slide shows the yield on our loan balances of 3.32% a five basis point decline in the second quarter and the.
And the rate paid on our interest bearing deposits was 12 basis points and 11 basis point decline linked quarter.
Average deposit balances of $350 billion increased $15 billion or 5% commercial deposits grew reflecting the enhance liquidity positions of our customers and consumer deposits also grew primarily due to government stimulus and lower consumer spending.
Year over year deposits increased $71 billion or 26%.
As you can see on slide seven third quarter total revenue was $4.3 billion up two and up to $205 million linked quarter or 5%.
Net interest income of two and a half billion dollars was down $43 million or 2% compared to the second quarter as lower.
As lower earning asset yields and a decline in loan balances more than offset the benefit of lower funding costs and an extra day in the quarter.
Our net interest margin decreased to 2.39% down 13 basis points linked quarter, reflecting the impact of higher balances held with the federal Reserve bank, which averaged $60 billion for the quarter.
Net cash balances in excess of our LCR requirements were approximately $40 billion, which represent a 25 basis points of compression to our net interest margin.
Noninterest income of $1.8 billion increased $248 million or 16% linked quarter.
Fee revenue of $1.3 billion increased $62 million or 5% compared to the second quarter.
Asset management revenue increased $16 million or 8%, primarily due to higher average equity markets.
Consumer services consumer services and service charges on deposits in total increased by $100 million due to higher consumer activity and a decrease in fee waivers.
Corporate services declined $33 million or 6% as higher Treasury management product revenue was more than offset by lower advisory related fees.
Residential mortgage revenue declined $21 million or 13% driven by both lower servicing fees and lower loan sales revenue.
Other noninterest income of $457 million increased a $186 million and included a positive valuation adjustment of private equity investments compared with a negative valuation adjustment in the second quarter of a similar magnitude departure.
The positive valuation adjustment was partially offset by lower capital markets related revenue.
Noninterest expense increased $16 million or less than 1% compared to the second quarter.
Provision for credit losses was $52 million, a decrease of $2.4 billion as the provision expense for our commercial portfolio was largely offset by a provision recapture in our consumer portfolio.
And our effective tax rate was 9.8% lower rate was primarily related to increased tax credit during tax credits during the quarter for the fee.
For the fourth quarter, we expect our effective tax rate to be approximately 13%.
Turning to slide eight during the.
During the third quarter, we generated positive operating leverage of 4% in both the year over year quarter and the year to date comparison as it is.
As a result, our efficiency ratio improved to 59% in the third quarter of 2020 compared to 62% for both the prior year third quarter and the nine months ended September Thirtyth 2019.
While the current environment presents revenue challenges from low rates and pandemic related pressures, we remain deliberate and disciplined around our expense management.
As we previously stated we have a goal to reduce costs by $300 million in 2020 through our continuous improvement program and work.
And we're confident we will achieve our full year target as.
As you know this program finds a significant portion of our ongoing business and technology investments.
Slide nine as an update regarding specific industries, we've identified as most likely to be impacted by the effects of the pandemic.
Outstanding loan balances as of September Thirtyth to these industries were $18.3 billion or $16.4 billion, excluding PPP loans. These bad.
These balances declined 7% compared to the second quarter, primarily due to pay downs.
While we still have an experienced material charge offs in these industries, we do expect to see charge offs increase over time should current economic trends continue.
Commercial and industrial loan balances in this category totaled $10.5 billion on September Thirtyth.
Declining approximately $1 billion or 9% compared to the prior quarter.
Nonperforming loans in these industries remained relatively low at 1% of loans outstanding, but we're continuing to see downgrades with the greatest stress continuing to be in leisure and recreation.
Looking at the lower half of the slide commercial real estate loans in this category totaled $7.8 billion at the end of the third quarter declining $300 million or 4% compared to the prior quarter.
Nonperforming loans increased approximately $180 million and downgrades continue to occur primarily in retail and lodging.
Correspondingly our reserves on our total commercial real estate portfolio have increased to 2.17% from 1.33% in the second quarter.
Moving to slide 10.
We have seen a significant reduction in the number of consumers and small businesses requesting hardship assistance at.
At the peak this summer we had granted modifications to more than 300000, consumer and small business accounts, representing approximately $13.7 billion of loans.
$6.9 billion of these loans were government guaranteed or invest around which present very little credit risks to PNC.
The remaining $6.8 billion of loans that did present credit risk more than $5 billion have rolled off payment assistance and 92% of those accounts are current or less than 30 days past due.
As a result, we had $1.7 billion of consumer and small business balances in some form of payment assistance as of September thirtyth.
Those balances approximately 85% are secured and more than 60% of these accounts have made a payment in their last cycle.
On the commercial side, we're also continuing to selectively grant loan modifications based on each individual borrowers situation.
Within our Cfivea segment, approximately $700 million of loan balances were in deferral as of September Thirtyth.
When combining consumer and commercial customers loans on deferral posing credit risk to PNC approximate 1% of total loan outstandings.
Our credit metrics are presented on slide 11.
Net charge offs for loans and leases were $155 million down $81 million from the second quarter.
Commercial net charge offs were $38 million and consumer net charge offs were $117 million, both down linked quarter and.
Annualized net charge offs to total loans was 24 basis points.
Total delinquencies of $1.2 billion at September Thirtyth declined $72 million or 5% consumer consumer loan delinquencies decreased $41 million and commercial loan delinquencies declined $31 million.
Nonperforming loans increased $209 million or 11% compared to June thirtyth.
The increase was primarily driven by commercial real estate borrowers and the high impact COVID-19 industries.
As you can see the allowance for credit losses to loans was 2.58% at quarter end up slightly from last quarter, we believe that our reserves sufficiently reflect life of loan losses in the current portfolio.
Slide 12 highlights the components of the change in our allowance for credit losses year to date, which have increased $3.4 billion since December 31 2019.
As a result, our allowance for credit losses to total loans was 2.58% and our allowance to nonperforming loans was 276%.
Our reserves have increased materially this year due to the adoption of Cecil and significant changes in the macroeconomic outlook during the first half of the year.
In the third quarter portfolio changes, primarily driven by lower loan balances reduced reserves by $158 million.
In addition, our economic outlook improved modestly during the quarter, but this was offset by increased reserves for both commercial and consumer borrowers adversely impacted by the pandemic.
In total this resulted in a $150 million decline in our reserves to $6.4 billion.
In summary, PNC posted solid third quarter results and we believe our balance sheet is well positioned for this challenging environment for the fourth quarter of 2020 compared to the third quarter of 2020, we expect average loans to decline low single digits, we expect net.
We expect net interest income to be stable.
We expect core fee income to be stable.
We expect other noninterest income to be between 275 and $325 million, resulting in our expectation that total noninterest income will be down in the high single digit range.
We expect total noninterest expense to be up approximately 1%.
And in regard to net charge offs, we expect fourth quarter levels to be between 202 hundred $50 million.
Importantly, after taking all this into account we are on pace to deliver positive operating leverage between three and 4% for the full year of 2020 and.
And with that Bill and I are ready to take your questions.
Okay. Thank you.
At this time, if you would like to ask a question.
Please press the number one followed by the four on your telephone keypad.
Please hold while we compile the Q and a roster.
Our first question comes from John Pancari with.
Evercore ISI. Please proceed.
Good morning, guys.
Hey, good morning, John.
On the.
Loan loss reserve it looks like you release reserves a bit during the quarter, although your HCR percentage increase given.
Given the loan balance decline is it fair to assume that if we do see charge offs.
Continued to increase from here like in the fourth quarter. For example that we would expect that you probably still will not match those charge offs would provision and accordingly.
We continue to put up the loan loss reserve releases.
Theres a lot of variables fiftyk.
Kind of go into that answer John but.
Remember.
Again, when we put up the second quarter reserve the assumption based on our economic forecast in the model. So that was that we covered all of the losses, we knew about at that point in time.
At the margin the economy's gotten perhaps a little bit better.
Forecast and so we're kind of.
Charge offs go up we're using in effect the reserves that we provided for in the second quarter. So that all else equal should continue unless we have.
You know deterioration from our current forecast and what the economy is doing.
But the general principle is all.
Else equal as loans run down in charge offs go through that's what we've reserved for.
Yes, Thats right Thats helpful got it and then on that on that same topic.
Charge off trajectory.
Just just given what you are.
You expect in terms of the ongoing migration you saw you indicated that the nonperformers saw some pressure.
When do you expect that you will see the greatest pressure and charge offs is billed as this plays out are we looking more like the first half of next years, where we get the greatest upside pressure in terms of loss content.
Thats.
Again, it depends on a lot of things not the least of which is this what fiscal stimulus they put out there if any.
But all else equal it probably start showing up in the second half of next year.
You know my own belief is we're probably going to see more pressure.
Covance sensitive industries real estate earlier on and the consumers flow through.
As we as we get into the back half of next year, but but but it all depends you know were for the consumer number in my view is going to be highly dependent on weather.
They provide more fiscal stimulus, which I I think they absolutely need to do.
Hey, John I would just add.
Thank you know, it's all speculation at this point, but.
Mid 2021.
Feels right.
Got it that's helpful. If I if I could just ask one more on the just to ask the M&A question in a different way Bill if we get a biden victory next month and the political environment potentially could move more against a big Bang.
Big banks deals how does that influence your appetite for a for a larger deal could you pursue smaller bank deals given out or possibly just view buybacks more attractively just want to get your thoughts.
Hi, look you're making a whole bunch of assumptions.
In there that the.
Regulation as I understand it as it's written in the law as I understand it is written is basically to to the extent that we were to do a deal and not caused us.
Cause a systemic risk to the to the economy ultimately has to go through approval process and be approved they can delay it. They can hold hearings that can do all sorts of different things, but basically it gets approved so even in.
Even in a change in administration the assumption that somehow.
They they either change laws.
This particular issue.
Even if they switch governors that.
The regulatory process is still the same so.
So I don't know that that's a real risk I would say that.
As we've always said that the smaller deals.
Our off the table, but.
But they require.
Yes.
Fair amount of work for for less total return in effect could we do a bunch of them yeah, we could do a bunch of overtime.
Okay. That's helpful and things to play out I'd say, John a lot of things to play out and met our thinking generally hasnt changed.
Right right got it all right. Thank you.
Our next question comes from Ken It was done with Jefferies. Please proceed.
Hi, Good morning, guys. Thanks for taking the question just a question on questions on on on Eni you know just nice to see that you guys are expecting an IDE to be stable sequentially and I'm. Just wondering if you can help us flush out like what parts of the loan book are you still expecting to see come down.
And how is that being offset with other parts of the kind of earning assets statement in terms of being able to keep the b III stable. Thanks.
Yeah, Hey, Ken Good morning, Yes.
Yes, so when we take a look at the Eni stable, there's obviously, the earning asset side on the liability side I think we've made a lot of it we've made up a lot of ground on the liability side I think we can still do some more there.
When we look at the fourth quarter in terms of loan balances.
Commercial we see we still see being relatively flattish and again this all depends on what happens.
And consumer we could see some uptick there, particularly if there is some stimulus.
I think the other factor for us and for the industry in terms of the fourth quarter will be the rate at which PPP loans are forgiven.
We have an expectation built into our guidance that about half of those half of what we have will be forgiven and that's built into our guidance in the fourth quarter and then the other half in the first quarter of 2021. So that's probably the biggest play in terms of how Eni and.
Total loans drop funding.
Funding costs, I said that yes, I said that on the front end down that God and we've had the microcutter more revenue that.
Right.
My follow up actually Rob is on that PPP front, Tom can yes loan yields were actually stable.
Down one basis point I was wondering if you can help us understand the contribution from PPP related interest income this quarter versus last and again, how that plays through in terms of the yields and the forgiveness and fees and all that it gets really tricky right. Thanks.
It does it does get a little tricky I'd say, a good number for us in terms of our guidance would be about $100 million in eni related to PPP forgiveness in the fourth quarter. So that that will help you size it.
Straight senile loan spread I think we're up seven deals yield spreads up deals or deals still growing.
As we roll down at a lower level, yes, thats right.
So that $100 million can on that on that PPP do.
Do you have just what that was in the third quarter versus the 100.
Yes, it was very much smaller.
Understood.
Okay. Thanks, guys.
Our next question comes from Erika Najarian with.
With Bank of America. Please proceed.
Hi, good morning.
Another firm that is going through this.
Downturn.
Validly JP Morgan was essentially chomping at the bit in terms of.
Yes appetite for buybacks once the fed lift hits restrictions and Bill I'm wondering given the amount of excess capital you're sitting on if the fed does lift at this restrictions by the first quarter second quarter of next year. How patients are you going to be in terms of thinking about your inorganic opportunities.
Versus buying your back buying back your stock here at a narrower premium to tangible book than the stock usually enjoy.
So you should assume that we would otherwise be on the market, but you should also assume that we will be patient.
In in.
Looking at acquisitions through time, you know that the environment notwithstanding cover the environment for banks is going to be tough going forward for the all the obvious reasons. So.
So we continue to think that theres going to be a lot of opportunities out there. The other thing with respect to buybacks.
The only thing.
Thank you ever know for certain is trying to spend as much capital as we have all in a big hurry almost never works out makes sense. So we'll be in the market.
To a certain degree, but but but not enough that it changes our focus on the opportunities that we see in our.
Expansion through acquisition.
Got it.
That's correct, it's quite conceivable, we could do both yeah.
Yep Yep got it impacts on revenue.
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And as a follow up question.
This management team has always been a head in terms of.
Warning us about the excesses that we are building up in the system pre coven and I'm wondering as we think about the charge offs ever coming as a follow up to John's question do you think that the current programs from the government and the fed have effectively redefined cumulative credit losses lower for this cycle or.
Really just kicking the realization down the road.
Look they definitely helped but.
With PPP effectively running out.
With carrier sacked having run out we're going to see an acceleration.
We did a survey into small business is smaller commercial and I think 60% of the respondents if I'm remembering this right basically said if this continues for another year they'll be out of business alarmingly, yes.
Incredible percentage.
You know and and a lot of those guys have gotten by either through PPP or simply drawing on reserves and operate in noted on sustainable level and Something's got to give my guess is and that's why we kind of talk about charge offs ramping up this week.
Get into kind of the mid back half of next year. My guess is it's still.
Yes, there's going to be a lot that's going to show up.
Got it thank you.
And future fiscal support is a big variable yes.
Our next question comes from Gerald Cassidy with RBC. Please proceed.
Hi, Sheryl morning, Good morning, good morning, Jeremy.
Good morning, guys.
Thank you.
Bill can you give us some thoughts obviously you guys pointed out.
60 billion up at the Federal Reserve and clearly that's weighing on your net interest margin like your peers.
Because of the influx in deposits can you kind of give us some color if that level. If your customers just don't start using their deposits and its now heading into the second quarter of next year is there anything you can do to shift that money out of there to get a higher yield without taking too much interest rate risk.
There's actually 70 billion there I think on a spot basis.
Okay.
No.
Look you are seeing it.
Not just on the deposit side, but our utilization rate on credits down 1.6% I think from the pre coded levels.
The economy, just isn't running right. So so corporates are using less on their lines, they're carrying less inventory theyre doing less investment.
They're holding more cash.
You know and I don't know that that necessarily a base, particularly with the size of the fed's balance sheet looking like it's going to remain at least stable into.
In terms of redeployment.
It's hard to find something that you see in size that offers a good risk return.
Are doing a lot of things at the margin.
Both on the lending side and some some of the specialty finance areas and even on the security side.
That offer a lot of value, but there are not enough to dent that amount of that amount and its actually fast right yeah.
And.
Trying to force that outcome.
So so right we could just go out by 70 billion worth of 10 years, its 70 basis points.
And so it makes a lot of money for some short period of time, it's just a it's a lousy risk return tradeoff. So we'll be opportunistic but my best guess is we're going to be sitting on a lot of cash for pretty long period of time as will the whole banking industry.
Very good and then moving over to the credit.
Obviously, you guys have been through cycles before is there aside from.
What has caused this down cycle, we all know is quite unique when.
When you look at the commercial credits that you've been forced to write down where the commercial real estate.
And forced to write down there have been many different or any differences between what you saw in the last cycle of the 19 nineties cycle in terms of write downs that has surprised you or is it just version into the past downturns.
No I mean.
You go all the way back most real estate.
Problems historically came from projects so office buildings that were built.
That were never occupied so you can you can remember Boston when you could see straight through downtown because nobody was that that's where the big losses. Historically have come from this was an instance, where real estate is struggling even though.
Larry everything is leased up.
Right, but but you have you know if you think about retail nobody's nobody's paying rent right. So so malls are getting killed and they were already on a decline.
Sales hotels are obviously a lot of things that you know in a normal downturn would have probably still cash flowed and been fine are struggling from a cash flow basis interestingly in this one.
Versus the other ones that the loan to values.
For the Acis, notwithstanding the lack of cash flow.
Still look pretty good yeah. So this is this is a real estates come up with yet another way.
So these are hurt the industry again.
Very good thank you for the color.
Yes.
As a reminder to register a question. Please press the one followed by the four on your telephone keypad.
Our next question comes from Bill per cash with Wolfe Research. Please proceed.
Thanks, Good morning Bill.
Hi, Good morning Bill.
Bill you said.
In response to John and cards earlier question that the can the consumer number will depend on whether there's more physical fiscal stimulus would you expect stimulus can be less beneficial on the commercial side.
Okay.
Mhm.
It's a fair question.
Depends if they redo PPP in some form that obviously helped out.
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Thousands and thousands and thousands of smaller business commercial borrowers and kept people employed.
The consumer side, you know one of the things we've watched and have talked about before is that the extra $600 that came in from the cares act for unemployment benefits allowed consumers to substantially build cash balances and pay down debt.
Now that that has gone away.
You're basically seeing the.
The balance excess they had in their DTA accounts decline, which is why I'm worried about consumers.
But but no I look if they did right if they redid PPP.
It would substantially affect the amount of small business commercial charge offs. We've had small business you guys already know this with small business commercial people who have.
Less access to other forms of capital.
Really getting hurt in this environment.
Yes.
Got it Thats very helpful. I guess following up on your comments. It seems like there may be greater willingness among banks to work with borrowers were experiencing financial difficulties, but maybe there is a bit less patients for example with them.
Some say CMBS conduit set up by private equity companies and that raises the question of whether the likelihood of foreclosures higher outside of the banking system do you think thats the case and if so do you think it could result in growing pressure on commercial real estate prices.
And then maybe sort of just the cap off like how can you share your thoughts on how effective vaccine by say mid 2021 would impact your view of what the ultimate loss content within CRD Theres a lot there but.
Just look I understand sort of dependent on.
So so at the margin.
Thanks have always been more willing to work with borrowers.
Contractual CMBS relationship where.
The Midland where as a fiduciary working on behalf of.
The various credit tranches, having said that.
Weve actually been surprised by.
The the current.
Turnover that we've seen in our special servicing portfolio of Midland. So we have a.
We've actually seen a couple of things one the b piece buyers being willing to work with borrowers probably in a way they haven't in past environments and to to the extent that they say no take the asset there is a lot of capital on the sidelines from traditional B piece buyers, who are who are.
Who are who are effectively writing it off in one fund and Rebuying and another one.
So the turnover, it's been been been pretty high there there.
A bit to my surprise Theres, a pretty active secondary market for.
Real estate properties at the moment.
Probably doesn't carry through to all types I imagine there is not a good bid for strip malls, but.
For other types of properties Theres, theres look materially or point that the nature of this pandemic crises and these loan to values to sort of support.
The covert vaccine I have zero per the predictions assumptions.
When asked how and whether it works and all the above so I'll just pass out.
We know, which you know on that.
Yes.
That's fair if any squeeze in one last one bill can you share your thoughts around the direct neo banks, the sort of the times others out there that operate exclusively online without traditional branch networks and the sort of post kobin environment, how you see their presence impacting the competitive environment over say the next three to five years and then is there.
Potential benefit to deploying some of the Blackrock proceed the neo bank are those sort of capabilities real things that you think you can build on your own.
I'm trying to contain myself.
I wish we had the opportunity to two.
You know basically not have to make any money and grow customers by giving stuff away and running our back office. Upon a third party bank system. That's written in cobalt for 50 years ago.
But we don't have that luxury.
The.
There.
The Tech Tech.
Tech capability of these guys Theres nothing that they have that we don't have nothing that they have with it we can't produce if we wanted to have.
Our platforms are much more modern than their platforms are all running on third party banks, which is a whole another issue that drives me insane.
[music].
You know and they basically.
I'll do free accounts, no overdraft and simple simplification, they find very low balanced customers.
And I just don't think long term that model works I think that delivery multiple delivery channel model that includes real care centers and customer service.
We see that through our MPS scores through ATM delivery networks through branch delivery networks and through topline digital is going to win.
Our technology without.
Without that.
Look, it's kind of cool and their grow and lots of customers, but like a lot of things that are not making money at it.
Banking is a business that you ultimately need to make money yet.
Sorry, there is my rant.
That's great good question.
Okay.
Appreciate it thank you.
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Our next question comes from Mike Mayo with Wells Fargo. Please proceed.
Hi.
Hey, Mike on it Mike.
So bill.
Bill you certainly have been ahead and expressing concern about that.
The way this co that situation plays out or how.
How do you feel just in the last three months.
On the one hand.
You see the fixed income market securities, which have come in and I know you know that market yes.
You have low line utilization, which means probably that firms aren't quite ready to go bankrupt.
You see.
Your charge off rate being exceptionally low.
On the other hand, who knows.
The second way that the W or how that plays out so just what's your temperature on the outlook over the next couple of years and do you have.
Do you have salt cellar seller's remorse for selling Blackrock or do you say you know what I feel even better today.
So.
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Hi.
A couple of things going into this we look at the corporate side notwithstanding.
Realization being down corporate America is Levered four times today, we went into the crisis Levered three times, which we all thought was high.
None of that none of that has changed.
The one thing that that.
Gives me a little bit of comfort certain ROE certainly relative to my initial concerns on this environment as I think we've decided defined the downside Mike.
So when we went into this we really had no idea.
Of what in fact, the downside could be we didnt know mortality rates.
There were no real treatments for for Covance.
There was no vaccine on that so all of that.
So all of the things we didn't know how to define the downside. So I think the best thing I can tell you is I think we have to define the downside is that we you know at this time.
This play muddle, along pretty much where we are in the economy.
And I think that plays out through time, and I think losses grind out through time as we said we think at this point were reserved for that environment.
Two I have sellers are more us I don't and not surprisingly I've I've gotten that question I think.
Theres a lot of things I regret and life with hindsight.
And all else equal I wish we were selling Blackrock today at 650 Bucks as opposed to when we sold them at the start of this thing, but I think with the information we have in our hands.
It was the right decision I hope that people and I know a number of our shareholders bought Blackrock when we sold it I hope you bought it.
Road that stock up that was always your choice.
We were always going to be left with this basic notion that eventually we were going to have a tax burden that looks like it's going to come to fruition. Eventually we're going to have regulatory pressure. Eventually another eventually we already had a concentrated asset.
That was outside of our control and I'd much rather deploy that capital into something that is within our control.
So I wouldn't change that decision based on what.
What we knew at the time and what our strategic direction is what I think the opportunity set is going forward I still remain.
I'm trying to.
Trying to find the right word here, but confident.
That having capital in this coming environment is going to be incredibly valuable and open up a lot of.
Inorganic opportunities for us.
Which just to your point this there's a lot of the game left to play there.
Anybody who thought we'd have the S&P, where it is today.
When we sold Blackrock.
Give me a call because all invest some money with it.
Just.
But that was that was you know if I made a mistake and I've made many of my life that was probably my one mistake.
And do we have any other questions.
This is Mike Darren.
There are no further questions at this time.
All right well. Thank you everybody, we'll see again in the fourth quarter Yep. Thank you.
This concludes today's conference call you May now disconnect your lines have a great day everyone.
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Okay.
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