Q4 2020 PNC Financial Services Group Inc Earnings Call
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Yeah, Yeah. Good morning, My name is Cathy and I will be conference operator today at this time I would like to welcome everybody to the PNC Financial Services Group earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session.
If you'd like to ask the question. During this time simply press the number one followed by the number for <unk> on your telephone keypad.
If you'd like to withdraw your question. Please press the one and then the number of three on your telephone keypad. As a reminder, the call is being reported I would now turn the call over to director of Investor Relations. Mr. Bryan Gill Sir. Please go ahead.
Oh, well, thank you Cathy and good morning, everyone welcome.
Welcome to today's conference call 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 dot com under Investor Relations.
<unk> speak only as of January 15th 2021, and PNC undertakes no obligation to update them.
Now I'd like to turn the call over to Bill.
Thanks, Brian.
Morning, everybody as you've seen this morning, we had a solid fourth quarter and full year 2020, amidst a challenging operating environment over the course of the year, we grew loans and deposits delivered positive operating leverage and executed well on all of our strategic priorities. Our balance sheet finished the year on a very strong position.
Good levels of capital and liquidity and significant credit reserves. In addition, we grew tangible book value per share of 17% year over year.
For the economy improved modestly this quarter and we're encouraged by the rollout of the vaccines. We continued to operate amidst the pandemic of low rate environment and weak loan demand and before Rob walks you through the full details of our results I wanted to share a few high level observations first.
The investments we've made over the years in talent and technology have allowed us to navigate this pandemic the related economic crisis on the widespread social unrest, while supporting our stakeholders and coming out stronger.
As a company in addition to taking the steps to help keep our employees and customers safe. We provided billions of dollars of credit to our clients. We granted $14 8 billion of loan modifications and registered more than 70000 loans worth approximately 13 billion through the federal government's first round of the Paycheck protection program.
And our team is actively working with our clients right now through the second round of PPP in response to the widespread social unrest and as part of our efforts to help address the stomach racism, we committed $1 billion to advanced social Justice and economic empowerment of months among black Americans on low and moderate income community.
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And as you are aware in the second quarter of 2020, we sold our passive stake passive equity stake in Blackrock and November announced our plan to redeploy those proceeds to acquire of BBVA USA.
The announcement, we spent a lot of time of Ppas of BBVA as employees and have become even more excited about our combination given their talent and high growth markets and the similarities in how we serve clients manage risk and support our communities.
This transaction will create a leading national franchise significantly accelerate our growth and enhance our profitability and finally I'd like to close by thanking our employees for their steadfast commitment to our customers through a very challenging year and with that I'll turn it over to Rob for a closer look at our results and then we'll take your questions great.
Bill and.
And good morning, everyone.
As you've seen we've reported fourth quarter net income of one $5 billion or of $3.26 per diluted common share, resulting in full year 2020, net income from continuing operations of $3 billion or $6.36 per diluted common share are.
Our balance sheet is on slide four and is presented on an average basis.
During the quarter lower utilization in soft loan demand drove a 7 billion dollar or a 3% decline in loans and low rate pressured investment securities, which declined $5 billion of 5%.
Our cash balances at the Federal reserve grew to $76 billion in the fourth quarter, our elevated liquidity position as a result of continued deposit growth as well as lower loan and securities balances.
On the liability side deposit balances averaged $359 billion and were up $9 billion or 3% linked quarter.
[noise] borrowed funds decreased $5 billion compared to the third quarter as we used our strong liquidity position to continue to reduce debt.
Our tangible book value was $97.43 per common share as of December 31.
An increase of 2% linked quarter and 17% year over year.
And as of December 31, 2020, our CET rate with CET, one ratio was estimated to be 12, 1%.
In regard to capital return our board recently approved a quarterly cash dividend on common stock of $1 15 per share or $500 million and consistent with the fed mandate, we had no share repurchases during the fourth quarter.
Our expectations for share repurchases in 2021 remains the same as we stated this past December that is will refrain from share repurchases, excluding employee benefit related purchases.
During the period, leading up to our pending BBVA USA transaction close date.
Specced at the mid summer 2021.
Following the close all else being equal and subject to CCAR 2021, we'd expect to resume share repurchases on the second half of the year.
Slide five shows our average loans and deposits in more detail average loan balances of $246 billion in the fourth quarter were down $7.3 billion or 3% compared to the third quarter.
This decline included a $5 3 billion decrease in commercial loan balances, which was broad based reflecting lower loan utilization in softer loan production, partially offset by higher multifamily warehouse lending.
In our C&I segment utilization rates are currently running at historic lows and approximately $2, 5% below pre pandemic levels as customers continue to maintain strong liquidity positions evidenced by high levels of deposits.
Consumer loans declined $2 billion in balances were lower across all consumer categories.
Compared to the same period, a year ago total average loans grew 3% or $7 billion.
As the slide shows the yield on our loan balances of $3 three 5% of three basis point increase compared to the third quarter, reflecting higher PPP loan forgiveness, and a shift in consumer loan mix.
And we continue to reduce the rate paid on our interest bearing deposits to eight basis points of four basis point decline linked quarter.
Average deposit balances of $359 billion increased $9 billion or 3% as a result of enhance liquidity of our customers as well as seasonal growth.
Year over year deposits increased $72 billion or 25% with strong growth in both interest bearing of noninterest bearing deposits.
As a result, our loan to deposit ratio has declined to a low of 66% at the end of the fourth quarter compared to 83% in the same period in 2019.
As you can see on slide six full year 2020 revenue was $16 $9 billion up slightly compared with 2019, driven by higher fee income ex.
<unk> declined $277 million or 3% and remained well control of.
Our full year provision was $3 $2 billion compared with $773 million in 2019, reflecting the economic effects of the pandemic.
Our effective tax rate from continuing operations was 12, 4% for the full year 2020.
Now, let's discuss the key drivers of this performance in more detail.
Yes.
Turning to slide seven you can see our total revenue has grown consistently over the past several years driven by our broad based business mix.
For the fourth quarter net interest income of $2 $4 billion was down $60 million or 2% from the third quarter, primarily due to lower loan and security balances and lower securities yields.
Full year 2020 of net interest income of $9 $9 billion was down slightly by $19 million year over year.
Higher earning asset balances and lower rates paid on deposits were essentially offset by lower yields on earning assets.
The fourth quarter net interest margin of 232% declined seven basis points linked quarter net.
Notably growth in fed cash balances represented a nine basis point decline, which accounts for more than the total linked quarter decrease to net interest margin.
Both full year and linked quarter net interest margin reflected the impact of substantially higher fed cash balances.
The size of that impact fourth quarter of fed balances averaged $76 billion exceeding our LCR requirement by approximately $55 billion. This level of excess liquidity represented 35 basis points of compression to our reported fourth quarter NIM.
Fourth quarter noninterest income declined $13 million of 1% compared with the third quarter.
Fee income of one $5 billion increased $151 million or 11% linked quarter, primarily driven by growth in corporate service fees of $171 million or 36% due to higher merger and acquisition of advisory activity.
Partially offsetting this growth was the decline in residential mortgage noninterest income of $38 million, reflecting a negative our MSR valuation adjustments and lower servicing fees.
The other noninterest income of $293 million decrease of $164 million linked quarter.
The decline was primarily driven by a negative 173 million dollar of visa derivative adjustment.
Related to the extension of the expected timing of the litigation resolution.
Importantly, we continue to execute on our strategies to grow our fee businesses across the franchise and those efforts helped to drive record fee income of $5 $6 billion in 2020, an increase of $190 million or 4% compared to 2019.
This growth was driven by higher corporate service fees, primarily related to increased activity in our advisory businesses and Treasury management as well as stronger residential mortgage noninterest income.
Partially offsetting this growth was the decline in both consumer services and service charges on deposits due to impacts of the pandemic, particularly in the second quarter as well as our ongoing efforts to simplify products and reduce transaction fees for our customers.
Other noninterest income declined $109 million year over year for 8%, reflecting lower private equity revenue and elevated 2019 gains on asset sales related to our asset management business, partially offset by higher net securities gains.
Turning to slide eight.
Our full year 2020, noninterest expenses were $10 $3 billion of decline of $277 million or 3% compared with 202019 as we responded to the crisis and we managed expenses down.
Taking a look at the fourth quarter expenses grew by $177 million or 7% linked quarter, primarily driven by an increase in personnel expense of $111 million due to higher incentive compensation associated with increased business activity.
And in addition, other expenses were up $55 million due to seasonality and the equipment impairments.
Importantly, we generated 3% positive operating leverage in 2020, and as a result of our efficiency ratio for the full year was 61% improving from 63% last year.
While the current environment presents revenue challenges, we remain deliberate and disciplined around our expense management. We had a we had of 2020 goal of $300 million in cost savings through our continuous improvement program and we successfully completed actions to achieve that goal.
Looking forward to 2021 of our annual CIP goal will once again be $300 million.
Slide nine is an update regarding specific industries, we've identified as most likely to be impacted by the effects of the pandemic our.
Our outstanding loan balances on the Covid high impact categories declined in the fourth quarter to $17 $2 billion as of December 31.
Compared to $18 $3 billion at the end of the third quarter, largely driven by commercial and industrial Paydowns.
Within the C&I identified industries nonperforming loans remained relatively low representing less than 1% of loans outstanding and charge offs have not been material.
That being said, we do expect to see further stress on these industry.
The lower half of the slide presents the highly impacted commercial real estate and related loan categories. These industries are experiencing experiencing the most pressure and downgrades continue to occur our two largest charge offs in the fourth quarter were related to loans in this category.
Overall for all of these Covid high impact loans, we remain well reserved and continue to carefully monitor and manage these exposures.
Moving on Slide 10. This is an update to our customer hardship relief, we continue to see a reduction of the number of consumers and small businesses requesting hardship assistance and importantly loans under modification that present credit risk to PNC continue to decline.
At the end of the year, we had $900 million of consumer and small business balances in some form of payment assistance with credit risk to PNC down from $1 $7 billion at September 30th.
On the commercial side, we're also continuing to selectively grant loan modifications based on each individual borrowers situation within our C&I segment less than a $150 million of loan balances were in deferral as of December 31.
When combining consumer and commercial customers loans, receiving assistance and posing credit rest of the PNC are approximately $1 billion, representing less than half a percent of total loans outstanding and as I previously mentioned are appropriately reserved.
Our credit metrics are presented on slide 11.
Total delinquent fees of $1 $4 billion at December 31 increased to $125 million or 10% consumer.
Consumer loan delinquencies increased $72 million, primarily due to government insured mortgages that recently exited modification status and commercial loan delinquencies grew by $53 million.
Nonperforming loans increased $201 million or 10% compared to September 30th.
This growth was almost entirely driven by a $193 million increase in consumer loans.
And within that $189 million related to residential real estate.
Primarily as a result of borrowers exiting forbearance and deferring payments for the end of the term.
Net charge offs for loans and leases for $229 million up $74 million from the third quarter <unk>.
Commercial net charge offs increased by $71 million to $109 million driven by specific commercial real estate related borrowers and included certain portfolio management activities.
Consumer net charge offs were relatively stable at $120 million.
Annualized net charge offs of total loans in the fourth quarter was 37 basis points, an increase of only two basis points compared to the same period last year.
As you can see the allowance for credit losses to loans was two point for 6% at quarter end down slightly from $2 five 8% last quarter, we believe that our reserves sufficiently reflect the life of loan losses in the current portfolio.
Slide 12 highlights the components of the change on our allowance for credit losses throughout the year and the fourth quarter reserves declined by $495 million.
Economic and qualitative factors represented $398 million of the decline has improvement of our economic outlook was partially offset by increased reserves within our CRE portfolio.
Correspondingly our allowance for loan losses on our total commercial real estate portfolio have increased to 3.06% as of December 31.
The remaining $97 million of the decline in reserves was related to portfolio changes, primarily driven by lower loan balances.
Our year end reserves of $5 $9 billion have increased materially year over year and as I mentioned before now represent 2.46% of loans.
Turning to slide 13, I wanted to spend a few minutes reviewing our recently announced the acquisition of BBVA USA with a focus on updates since the call in November.
We expect this transaction to add significant value to our shareholders and we're excited about the power of the combined franchises.
We remain confident in our ability to achieve the financial objectives, we laid out at the time, we announced the deal including the $900 million of expense saved through enhanced operational efficiencies through time, we do expect to generate additional meaningful revenue synergies, which will make the economics of the transaction even more compelling.
Since the announcement, we've continued to make steady progress towards completing the transaction, notably we've established cross functional business teams to support the integration of <unk>.
Admitted required regulatory applications and confirmed the mapping of the technology migration.
There's a lot of hard work ahead, but based on our due diligence as well as the progress. We've made the date working alongside the BBVA USA team, we're confident in our ability to execute and deliver on our objectives for this transaction will significantly accelerate our expansion efforts into attractive growth markets is financially compelling and leverages, our technology and <unk>.
Acquisition expertise.
In summary, PNC reported a strong fourth quarter and a successful 2020, and we're well positioned for 2021 and beyond.
During 2021 naturally the biggest variable impacting the economy will be the duration of this pandemic and along with that the efficacy of the government support plans as well as the vaccine distribution.
Our current expectations are for real GDP to return to pre recession levels by the end of the year and the fed funds rate to remain near zero throughout the duration of the year.
Looking ahead at the first quarter of 2021 compared to the fourth quarter of 2020.
We expect total average loans to be stable to down modestly.
Inside of that PPP loans are expected to be up approximately $2 billion.
We expect NII to be down approximately 1%, which includes the impact of two fewer days in the first quarter <unk>.
Excluding the impact of PPP net interest income is expected to decline approximately 3%.
We expect total noninterest income to be down mid single digits within that other noninterest income is expected to be between 275 and $325 million we.
We expect total noninterest expense to be down in the mid single digit range in the.
Regarding net charge offs, we expect first quarter levels to be between 202 hundred $50 million.
Looking at the full year 'twenty 'twenty, one guidance, we thought it would be helpful to provide our expectation for PNC is standalone performance, excluding any onetime costs related to the BBVA USA transaction.
For the full year 2021, compared to the full year of 2020 results.
We expect average loan growth to be down on the low single digit range.
The significant increase in loan utilization during the beginning of the pandemic elevated average loan balances in 2020, as you know, which created a difficult backdrop for the full year average loan growth comparison. However.
However, we do expect to have loan growth throughout 2021, resulting in low single digit spot growth for the year.
We expect total revenue to be stable.
We expect expenses to be stable.
This represents I'm, sorry, backed that up we expect revenues to be stable.
And this represents the current net interest income forecast of down modestly.
We acknowledged potential deposit growth and further rate steepening in excess of our current forecast. It is plausible and that's relative to revenues, we expect our expenses to be stable and we expect our effective tax rate to be approximately 17%.
Regarding the pending acquisition of BBVA USA as I mentioned, we recently filed the required applications and we're still targeting of mid year close subject to regulatory approval.
BBVA will not be releasing the results until later this month.
Therefore, we will not be providing updates of the previously disclosed financial metrics in estimates related to BBVA USA at this time.
However, in an effort to provide some context for the transaction in relation to our full year guidance, assuming we close mid year and excluding integration costs. We expect the acquisition to be approximately $600 million accretive to PNC is 2021 pre provision net revenue.
And all of that is consistent with our original assumptions.
And with that Bill and I are ready to take your questions.
Okay. Kathy could you. Please open up the line for questions.
Thank you to register for a question. Please press the one followed by the for on your telephone again that is the one followed by the for on your telephone tangled up on my mom on while we compile the Q&A questions.
Okay.
And our first question comes the line of Betsy Classic with Morgan Stanley. Please proceed.
Hi, Thanks, and good morning, Hey, good morning Betsy.
I had a question on the outlook here for revenue, our full year or stable and obviously, that's without that sort of standalone basis rate I just wanted to understand of how you get there and what's going on and given the fact that you know the guide for NII and the and the <unk> is down and so could you talk for what's what Youre doing.
Much of that is loan growth and yeah.
Yeah. Thanks.
Yeah, sure sorry for that and I'm glad you asked that question because I I that I included that in the in the forecast in terms of our guidance for the full year that we expect total revenues to be stable and inside that our current net interest income forecast is down modestly but.
But we do acknowledge potential for deposit growth and further rate steepening in excess of our current forecast. So there is potential upside there.
It's offset by higher fees.
In terms of total revenue yet in terms of the that's right that's right.
In regard of the NII.
The tough if you take a look in terms of the rate backdrop.
We had headwinds all during 2020, and we expect that to can you continue through 2021.
We will put more work more money to work on the securities balances, we do expect loan growth.
And there may be some room in terms of on the liability side to reduce some of those costs. So.
That's how that's how we get to the the NII component.
One of the one of the internal debates that we're having so the forecast stays as of the forecast this but one of the internal debates that theirs.
No winter on is this basic notion that as the fed continues the size of their balance sheet and grows that and we have loan growth.
Towards the back end of 2021 net drives deposit growth rate, it's a closed system and as that happens PNC benefits disproportionately at least has on I suspect will given some constraints on the largest banks on deposit growth, which in turn gives us NII.
No.
Kind of say find call the NII flat, but there's a there's a macro variable in here that'll hit the industry as a function of loan growth on what the fed does it's going to drive this opportunity.
Yeah, I get that Okay, maybe you could speak a little bit to the loan growth on where that's going to come from that's probably the biggest single debate point that we're having with investors right now.
What will drive it back up.
Rob can jump in here, but you.
A chunk of it simply comes back because utilizations are so low so as the economy not on some of our idle as the economy comes back on you just see utilization in the basic revolvers, we have but the other the other issues the de levering of the consumer.
Consumer balances at a pick up once the vaccine is widely distributed and people kind of go back to more normalized behavior of that remains to be seen but I think those are the two biggest opportunity sets.
And some consumer on the back end of the year that day is normalized.
Okay. Thank you.
And our next question comes from line of Scott <unk> with Piper Sandler. Please proceed.
Yeah.
Good morning, guys. Thanks for taking the claim is kind of true.
Hey, Robyn in the response to the last question you alluded to the possibility of of potentially.
Potentially investing a little of the securities portfolio I feel like you guys do the.
Such a mass of money just sitting at the at the fed.
This back up in higher rates, how much in your mind more attractive visit to two potentially investing some of that stuff. That's just sort of sitting there on a virtually nothing at this point.
Well, it's more attractive than it was a couple of months.
Yeah.
It is saying the rate.
The average security balances decline just as we got into the the <unk>.
Low low rates and the Prepays.
We have been.
Or aggressively investing money of recent will continue to do that we have a lot to go as you point out.
Don't do it all at once and you should assume it will accelerate into the steepening curve and and moderate into a flattening curve as you would expect but we have an awful lot of money to put to work in the mat.
Debt issue compounds again, if we get the deposit growth the.
At least I expect is going to happen across the industry given the macro factors and that's that piece that we're talking about that could be potentially above our current forecast yeah.
Mhm.
Okay perfect. Thank you and then the.
Second question I know, it's not huge for me, but I think where a lot of investors are trying to figure out what what is this new round of PPP kind of look like.
Sort of qualitatively how.
How are you guys thinking about your own participation in it.
To the degree that any.
Benefit is baked into the guidance for 2021, how does it how does that end up looking quantitatively as well.
Sure I can answer that so, particularly.
As it relates to the first quarter. So we.
We will participate in the second wave we anticipate that.
That the total balances because of the program in the smaller will be less in the first wave.
But to just give you numbers. We finished we finished 2020 with the average balances under the first PPP program of $12 $5 billion.
We expect a $2 billion of forgiveness in the first quarter. So that first wave would be about $10 $5 billion.
And then for the second wave.
We expect to originate approximately $4 billion in the first quarter so that.
Would take our total PPP in the first quarter two of about $14 $5 billion. So that's that's how I size of it and that's how I think it beyond that yeah, we'll have to see because.
The levels of forgiveness on how that goes is fluid.
Okay perfect Alright, thank you very much sir.
Yes.
As a reminder to register for a question. Please press the one followed by the for and our next question comes the line of Ken <unk> with Jefferies. Please proceed.
Hey, Thanks, Good morning, guys. If I can follow up on that last question. Rob can you help us understand I know, there's so many moving parts with part one of them break too.
Ted I think you had less forgiveness in the fourth quarter than you expected can you help us understand just like the PPP benefits of NII was in in 'twenty and then how much of are you expecting in 'twenty, one or how how much of that informs the.
Slightly down NII yeah.
Yeah, I think of you its probably best Kenya to look at the 20.
2021, first quarter and give you a number of that $14 5 billion debt, we expect to have in total PPP loans.
Of the NII will be approximately $140 million.
And inside that are 30% of these are approximate numbers approximately $30 million represents the forgiveness of that $2 billion that we expect from program one.
Got it and then there'll be some moving parts with regards to like run rating versus forgiveness for the years, Yeah. That's right and we will keep you posted but that's that's that's my best thinking for the first quarter, Okay, Great and the second question is following on your BBVA second half P. P. In our comments Rob just wondering is that 600 also inclusive of.
The initial saves you're expecting this year or is that just like a what theyre, bringing over kind of on on day one.
You know because you did say you were expecting some saves happening on the back half yes. It's that Ken is there are some states in the back half of it are included in that number.
Okay and is there anything changed with regards to your expected trajectory of <unk> from one of the timing around when do you think the saves would come in.
No no the our original assumptions are holding.
Okay got it great. Thanks, very much Rob sure.
As a reminder to register for a question. Please press the one followed by the for and I have a follow up question from the line of Scott <unk> from Piper Sandler. Please go ahead.
Hey, guys. Thank you for taking this one I guess one of the questions that I've gotten about you guys over the course of the last couple of months since the BBVA transaction was announced is just given the the somewhat different credit profiles between legacy PNC and the BBVA franchise, you know how much of that loan book that Youll carryover do you anticipate.
Keeping.
And will there be some sort of of runoff portfolio of that sort of in pairs.
What would eventually be a higher growth trajectory from that franchise or are we going to be sort of steady state in all of the kind of stuff, we'll get rationalized in the in the upfront market.
Theres a lot embedded in the question that there's parts of Bbva's balance sheet.
Yeah.
It's more sectors, it's not necessarily for credit risk, but the things we choose to focus on versus what we don't so there's parts of their balance sheet that will run off over time.
At the same time because of some many of our lending specialties in the presence will have on the market. We expect that we will grow.
<unk> balances of the new franchise, so you're going to see both our base assumptions assume a rundown I don't know when the trough is rob but of rundown and in balance sheet cash short period of time before we sort of offset it with new growth. Yeah 2018 at the beginning 2022 and 2000 Twenty's rate. So there is some revenue reconfiguration of along those lines.
But of course, we'll keep you well kept up to speed, we don't know on the bank yet so.
So that'll be something that you know once we close we'll be able to give you more color.
Yeah that makes sense of and I appreciate sort of the the early color. There. So thank you.
Yeah.
And our next question comes from line of Mike Mayo with Wells Fargo Securities. Please proceed.
Hi.
You had positive operating leverage last year your efficiency improved fourth quarter. It didn't look as good though was there any thing thats unusual.
And also your guidance for next year is for flat operating leverage when I know you guys pride yourself and having positive operating leverage on a core basis. Thanks.
Yes.
For me to answer that or will it hit all of the fourth quarter not sure of what the fourth quarter of those most of those expense of that jumped as you saw.
Where incentive compensation for much much higher activity, particularly in our Harris Williams unit. So those are good expenses when the Harris Williams and activity goes up that's the good thing, but there's obviously a.
Expenses associated with that and then there are some seasonal things that we expect but youre right for the full year. Our expense management was successful on full positive operating leverage for the year, which was our objective and we did that.
When you look at 2021, we're going to fight for it yeah, we're not we're.
We're not folding on that we've got revenue stable on the expenses stable. So it's going to require tight expense management.
But.
Now, we're going to battle for it.
Okay.
Okay and as far as BBVA.
Your loan loss reserve assumptions.
They have improved since the.
You had for the Pfizer vaccine that you didn't have them of derma or J&J. So when the outlook for you a little bit better on the same reasons you had reserve releases when you have a better outlook for BBVA group.
We didn't even actually have Pfizer of.
With one of those were put together so in theory.
Youre right, Mike well again, we don't wait on on the bank, they're gonna relief there either of these are in line, but as other.
Our assumptions, yeah, and our assumptions all else being equal yes.
Yes.
Right.
Okay. I guess, we just have to wait for BVA results come out and then we keep moving.
Hopefully, we get an update from you on okay. Thanks a lot.
Sure.
As a reminder to register for a question. Please press the one followed by the for on your telephone and our next question comes the line of Bill for catchy with Wolfe Research. Please.
Please proceed.
Thank you good morning, Bill and Rob I wanted to follow up on your comments about investing more of the securities portfolio into the cruise deepening some of the dynamics around QE have led agency MBS spreads over treasuries to turn negative and you guys along with most other banks have a substantial portion of your securities portfolio was invested in agency MBS. So it seems like the benefits of a steeper curve of it.
Tempered somewhat by those dynamics can you give a little bit of color on you know on where.
Where you're seeing the opportunity to invest on the security side and then maybe on the lending side. If you could remind us what percentage of the loan portfolio was anchored to the short versus the long end of the interest rate complex and you'll just frame. How we think about the benefits of PNC of a steeper curve on the lending side as well.
If you are way too far out of the week.
You should assume that for now in terms of where current spreads against the mix of the portfolio, we would otherwise normally be buying our reinvestment yield is about 80 basis points on how we get there I'm not going to go into detail on the front book, but that's another front book, that's that's part of on average what we would be purchasing.
The day.
The the fixed and floating component and the one and three month LIBOR component of our loan. So I don't remember those numbers off the top yeah. I mean, we're you know we're short on the AR on the commercial lines. They tend to be three year type commitments and on the yeah on the car and the consumer is floating.
The other thing that makes us somewhat unique is our entire debt stack.
As floating as well and you see that on our liability costs as one of the reason our wholesale funding cost has dropped.
Last time I looked much more materially on most of our competitors.
Got it and then separately on the unexpected as some investors have expressed a little bit of concern that after so many years of you guys, having the benefit of being able to reinvest the strong growth from blackrock into into the business that the loss of that strong growth is going to make it more challenging to continue to invest at the same pace without without.
The efficiency ratio, Rob I heard your CIP target sounds like they're on gains for the year, but I was hoping you guys could just broadly speak to that that notion.
I don't fully understand is driven by CIP, rather than satellite or actually I mean on our investment.
Capability, obviously it comes from just the firm growing and the recycling expenses, which will continue to do blackhawk's growth through time in terms of revenue to us.
It was helpful.
Of course, you know as we go forward here and assuming we close.
On the which is a good assumption of the BBVA acquisition, you know we have.
A whole new set of expenses of the effect of recycle that gives rise to this investment in red Oak revenue.
It won't slow down our investment at all.
Okay. Okay. Thanks, Thanks, guys.
If I can squeeze one more in on credit.
So I had a question on how to think about the excess capital as it relates to slide 12.
So in the absence of the BBVA deal the one could make the case that that 154% reserve rate on day. One is the level that we should revert to once we get past COVID-19 and so any level of reserves above that could be viewed as excess but can you speak to the reasonableness of that thought process and then maybe frame for us how to think about the on boarding of BBVA onto the slide.
And what it would mean for your reserve rate in excess of capital.
I don't I don't think of it.
Look our reserve as of today and the presumably their reserve as of today.
As reflective of best expectations of of the Florida economy here. So.
<unk>.
They'll release their results and you'll be able to look at the you know see ours I dunno, how are we flat sort.
The two parts of that question one was the BBVA USA overlay on that.
That's to come when their results come out I. The the second question just is sort of what is the normal level of reserves under Cecil.
You know one five for was our day, one accuracy, so level debt, where those normal times, maybe and if so that's the normal level the.
Understood. Thank you guys for taking my questions I appreciate it sure.
As a reminder to register for a question. Please press the one followed by the for it.
Yeah.
And our next question comes the line of Gerard Cassidy with RBC. Please go ahead.
Hi, Rob.
Hey, Gerard.
Can you can issue of this and I apologize if you addressed this already in the missed it.
Obviously prior to the BD. The transaction you guys were growing organically in the in the commercial footprint around the country is that strategy still underway or has that been put on pause as you integrate the BBVA transaction.
No no not on pause the Gerard so naturally in cases, where the BBVA USA footprint was where we were going to go that's part of that transaction, but.
You know everything else holds in terms of the opening offices, both consumer and commercial throughout the country.
The other thing Gerard as you know.
Going back to kind of the prior question on investments, we're actually ramping up investments in those markets. Prior to close so we're not going to wait to close before we.
Think about the totality of the products and services, we want on a particular markets, we're going to have an idea.
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On the day, we close income.
And then convert.
Very good you guys gave very good detail on your non performing assets and I noticed in table 11 that you had some of nation rise and the return to performing status.
Non accrual loans can you share on.
On this any color on what.
You had on bringing them back into performing status.
Oh, I think you know just in general.
In General Gerard. It's just you know some of these companies have adapted particularly on the commercial side of adapted to the new economy, and you know are actually performing well.
Simple as that.
Got it okay I appreciate it thank you sure.
There are no other questions at this time I will turn the call back over to you Mr. Gao.
Okay well. Thank you all for your support of PNC and we look forward to working with you in 2021. Thank you. Thanks, everybody. Thank you.
Thank you that does conclude the call for today, we thank you for your participation and ask that you. Please disconnect your lines have a great day.
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