Q1 2021 PNC Financial Services Group Inc Earnings Call
Berkeley low utilization levels based on the strength of the US economy. We would expect to see loan demand improve and ultimately Drive utilization rates higher over time. We continue to execute well against other strategic priorities including our National Expansion, which will significantly accelerate through our pending acquisition of BBVA USA. We're making good progress on BBVA integration planning and are on track for a mid-year closed pending regulatory approval. We haven't found any significant surprises regarding the quality or nature of business and our employees are working effectively with their counterparts and everything including the technology conversion with the quality of BBVA markets, especially in their largest market in Texas, excuse me, in the quality of their largest markets, especially in Texas, and it's proving to be everything we hoped it would be as we plan for the integration of USA. We continue to invest in and leverage our own technology so that we can better serve our club.
Earlier this week PNC launched LoCash mode, which fundamentally changes the banking experience for a virtual wallet customers by by allowing them to avoid overdraft fees through Thursday and account transparency and control LoCash mode represents a shift away from the industry's widely used overdraft approach which drives customer dissatisfaction and which we believe is unsustainable. We firmly believe this differentiated approach will drive significant growth in new and existing customer relationships over time as we execute our National Expansion strategy LoCash mode allows a virtual log customers to see and control what's happening in their checking accounts in real time. If a customer's balance is negative or about to go negative. They have at least 24 hours sure. They're negative balance by determining whether certain payments are processed that otherwise might result in overdrafts. This payment control is a significant differentiator that we believe will help customers avoid overages.
Please of approximately 125 to 150 million dollars annually.
Full twenty one full year 21 Revenue Outlook anticipated this fee reduction as did our estimate of bbva's ppnr contribution to PNC as a result as a result is not impacted by this change. I'd like to close by thanking our employees who continue to support our clients and communities through the various COVID-19 challenges by executing on our value-added relationship models and well that I'll turn it over to Rob for a closer look at results and then we'll take your questions. Thanks Bill and good morning. Everyone as you've seen we reported first-quarter net income of 1.8 billion dollars or $4.10 per diluted common. Share our balance sheet is on slide three, and it's presented on an average basis.
During the quarter loans declined by eight billion dollars or 3% do to lower utilization and continued soft loan demand investment Securities grew approximately seven hundred million dollars or 1% off quarter. However, on a spot basis basis balance has increased $9 or 11% as we accelerated our purchase activity near the end of the quarter due to the steepening yield curve our average cash balances at the Federal Reserve grew to $85 in the first quarter driven by continued deposit growth and lower loan balance on the liability side deposit balances average $365 billion dollars and we're up six billion dollars or 2% blank order borrowed funds decreased $3 compared to the fourth quarter due to the runoff and Redemption of debt obligations.
Are tangible Book value was $96.57 per common share as of March 31st a decrease on a linked quarter basis primarily due to a decline. In fact over year tangible Book value increased 14% And as a March as of March 31st, 2021 or cet1 ratio was estimated to be 12.6% off regarding Capital return our board recently approved a quarterly cash dividend on common stock of a dollar fifteen per share or approximately five hundred million dollars. And as you know, we continue to suspend our share repurchases during the first quarter as we await regulatory approval for our pending BBVA USA acquisition, assuming a mid-year closed we exactly expect to resume a purchases and the second half of the year.
Slide for shows are average loans and deposits and more detail average loan balances of $238 in the first quarter were down eight billion dollars or 3% compared to the fourth call a commercial loan balances declined 5.4 billion dollars or 3% as overall utilization rates declined to historically low levels beyond that paycheck protection program balance has remained flat as origination to offset by loans forgiven and within our commercial real estate business multifamily Warehouse lending declined seasonally by to two billion dollars.
Consumer loans were down 2.3 billion dollars with lower balances across all consumer categories as loan demand continued to soften do the higher consumer cash levels on a loan balances was 3.38% a 3 basis point increase compared to the fourth quarter. However, the increase reflected elevated commercial real estate prepayment fees and higher PPP loan forgiveness during the quarter the rate paid on our interest bearing deposits is now six basis points a 2 basis-point decline linked quarter.
average
It's increased six billion dollars or 2% driven by enhance consumer liquidity primarily related to government stimulus payments in the year-over-year comparison, total average loans decreased 50% or five billion dollars primarily due to the elevated drawdown that occurred during the first quarter of 2020 deposits increased $76 or 26% And again, we're driven a cash balances of our customers as a point of context consumer checking account balances are on average roughly 40% higher than this time a year ago as a result of our. And loan-to-deposit ratio has declined to a historic low of 63% at the end of the first quarter compared to 87% in the same period in 2020.
So I find details of the change in our average Securities and Federal Reserve balances over the past year security balances of eighty-six billion dollars in the first quarter increased $2 or 2% off compared to the same period a year ago over the same time or fed balances have increased nearly five-fold driven by significant government stimulus as well as the proceeds from the sale of our Equity investment in BlackRock as most of you know during 2020. We were patient and deploying this excess liquidity while interest rates remained at historically low levels. However, with the recent yield curve steepening, we expect rated R rate of purchasing increasing our spot balances by nine billion dollars with another $9 of Ford settling Securities, as of March 31st, average security balance is now represent approximately 50% of interest-earning assets and our expectation is to build these balances to approximately twenty-five to thirty percent by year-end.
As you can see on slide 6 net income of 1.8 billion dollars grew 25% compared to the fourth quarter reflecting strong pre-tax pre-provision earning and a substantial Asian recapture. First-quarter. Revenue was four point two billion dollars up slightly compared with the fourth quarter driven by higher non-interest income, which was 44% of total revenue in the first quarter wage expenses declined 134 million dollars or five percent and remained. Well controlled the provision recapture of 551 million dollars reflected improved forecasted economic conditions and lower loan balances.
Now, let's discuss the key drivers of this performance in more detail.
Turning the flight seven this chart illustrates. Our Diversified business makes total revenue increased $12 compared to the fourth quarter of 2020 net interest income of 2.3 billion dollars was down seventy six million dollars or 3% primarily due to lower loan balances and two fewer days net interest margin of 2.27% decline five basis points reflecting the impact of higher fed cash balances importantly. We think Nim has bottomed this quarter and expect it to slowly rise through throughout 20 21 non-interest income group of eight million dollars compared with the fourth quarter fee income of 1.4 billion dollars decreased 102 million dollars or 7% Most of the decline was driven by lower corporate service fees related to elevated fourth-quarter merger-and-acquisition advisory activity additionally consumer services and service charges on deposits were down slightly reflecting seasonally lower activity and higher.
Boomer cash balances
growth in both Asset Management fees and Residential Mortgage Revenue partially offset some of the declined
Southern. Interest income of $483 million grew $190 and included higher revenue from both private equity and underwriting link quarter growth also reflected the impact of the $170 negative Visa derivative adjustment in the fourth quarter compared to the same period of year ago total revenue declined $116 as a decrease in net interest income from home interest rates and volumes with partially offset by growth in our broad-based fee businesses.
Turn into flight eight expenses were down by $134 million dollars or 5% link quarter across all categories primarily due to disciplined expense management seasonality here over your expenses increased $31 or 1% and remained well-controlled during the first quarter. We generated 5% linked quarter positive operating leverage off and as a result our efficiency ratio for the first quarter was 61% We remain deliberate around our expense management. And as we previously stated we have a goal to reduce costs by three hundred million dollars twenty Twenty-One through our continuous Improvement program and we're confident we'll achieve our full-year Target. As you know, this program funds a significant portion of our ongoing Business and Technology Investments off.
Our credit metrics are presented on slide nine and reflect Improvement and all these three major categories non-performing loans decreased $148 or 6% compared to June 31st commercial non-performing loans declined by $174 or 19% which reflected portfolio activity as well as improved credit performance consumer performing loans increased twenty six million dollars related to residential Real Estate and Home Equity loans as a result of borrowers exiting forbearance total delinquencies of one point 1 billion dollars a month 31st decreased $217 or 16% consumer loan delinquencies declined 203 million dollars primarily due to lower Auto and residential real estate off the loan delinquencies decrease by $14 net charge-offs for loans and leases were $146 a decline of 83 million dollars linked quarter commercial net charges.
Cost of $51 decreased by $58 million dollars driven by lower lower lower gross charge-offs and consumer net charge-offs of $95 million dollars declined by twenty-five million dollars primarily in our Auto and credit card portfolios. Annualized net charge-offs a total loans in the first quarter was 25 basis points a decrease of 10 basis points compared to the same period last year slide ten shows the $724 reduction in our allowance for credit losses during the during the first quarter portfolio changes represented $251 of the decline primarily driven by lower loan balance.
400
Twenty-three million dollars of the release and reserves was related to economic and qualitative factors Improvement. Our economic Outlook was partially offset by increased reserves within our cre portfolio particularly in office is directly impacted by koven in total. Our quarter-end reserves were five point two billion dollars representing 2.2% of our loans.
Turning the flight eleven. I want to highlight the progress. We made toward completing the acquisition of BBVA USA. Notably. We filed all major regulatory applications and have completed a number of our key proposed objectives. We're on track to close the acquisition mid-year and remain confident in our ability to achieve the financial objectives. We laid out at the time that we announce the deal.
In summary PNC reported a strong first-quarter in regard to our view of the overall economy. Our current expectations are for GDP to surpass pre-recession levels sometime during the third quarter and for the FED funds rate to remain near zero throughout 20 21 looking at the second quarter of 2021 compared compared to the first quarter of 2021. We expect total average loan balances to be stable. We expect nii to be up approximately 2% We expect fee income to be up approximately 3 to 5% We expect other interest income to be between 300 million and $350 excluding net Securities and Visa activities. We expect total 9 inches expense to be stabled and we expect second-quarter net charges to be between 150 million and two hundred million dollars looking at the full year 2021 guidance. We expect PNC Standalone to remain stable year-over-year in regard to both Revenue age.
Kansas we do expect Revenue benefits from the higher rate environment and increase Securities balances. However, average loans will continue to be a drag through at least the first half of 2021. We acknowledge some of choice exists in Spot Loan growth during the second half of the year, but that remains to be seen and as a result is not included in our guidance.
Regarding the pending acquisition of BBVA USA. We're increasing our expectations for the full year benefit to PNC 20-21 pre-provision net revenue from $600 to seven billion dollars primarily driven by refinements to interest rate assumptions consistent with last quarter. This expectation excludes integration costs and assumes a mid-year close in age that still and I are ready to take your questions.
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 connect the Q&A monster. Thank you.
Our first question comes from Betsy graseck with Morgan Stanley. Please proceed. Hi. Good morning. Good morning. Okay, so I asked questions one on your nii guide you mentioned, you know up approximately 2% That's for the first quarter, you know, but then in the commentary around
Walker sorry, right and then in the commentary around your securities book you were highlighting that you're you know planning to raise Securities book to what twenty-two page twenty-three percent by your end. So I just wanted to you know, kind of get your sense as you're building towards your goal by year-end. Should we be anticipating that this rate of change of improvement in second-quarter? And I I is something that you know, we should be expecting could persist if the forward curve sticks around where it is, you know in three and four Q as well.
Sure. So yes, and again that was for the second quarter on the nii guide the know when when we take a look at the the full year and this is part of our guidance in terms of Revenue being stable for the full year. We do expect some more nii from our Securities book as we increase the balances and that's going to be offset by a little bit less longer than what we were expecting at the beginning of the year. So that's where we come out in terms of stable in regard to the building up of the Securities book. I mean, it's it's three things really one. We have put more money to work because they curve huh? Ye Ethan second. We're going to continue to do that in a measured way. And then third you know for the foreseeable future will be running as a percentage of our interest running asset Securities balances, you know at a higher level so long historical e we've been you know, approximately in the 20% range where we're guiding toward more the twenty-five to thirty percent range and that's the only thing I would add is you said it's kind of a goal. Yep.
Really a goal is just our expectation that that's given to carry right now and how much cash we're sitting on that that you know, what the reason we put that in there is that our security balance is frankly for the whole industry are likely to run higher as a percentage of our total assets than they have historically and we'll keep adding to them throughout the year opportunistically as we've done a you know, that you see that in the actions. We took late in the fourth quarter or sorry late in the first quarter, you know, if we were simply trying to drive in we could have downloaded those purchases or lower yields and and had a flat we didn't do that. We waited waiting waiting turns out to be in the right thing and you'll see us do that. You've seen them do that, but you'll see us continue to do that through the course of the year.
I totally get it. It's such an unusual environment here with the loan-to-deposit ratio. So low and and you know, what's going on with the liquidity in your book so that that makes a lot of sense and and them being stable for the full year with the loan commentary just made I mean part of that is a function of the PPP roll off that's expected. Is that is that fair? Yeah in part. Yeah, that's all part. That's a built-in and then on Thursday you were go ahead the biggest growth specifically is is you know, when the inventory start the inventory Guy starts for our corporate customers utilization is running, you know as much as eleven points below the peak, you know, maybe five points below sort of historical averages and even though the economy is really kind of taken off here for whatever reason we haven't seen the typical inventory bill in capex that you would see in this month.
Anime, you know, I guess just hesitancy.
Waiting for more certainty on the on the pandemic but when that happens and it will happen it almost mechanically has to happen. You're going to see pretty appreciable loan growth. We just don't know when that's going a particular as it relates to twenty Twenty-One. Yeah. Got it. All right, and then just separately on the USA projected off that 700 million up a hundred million from your prior guide. What's driving that Delta? Yeah, as I said my comments Betsy. This is Rob it it's largely refinements in our assumptions Iraq interest rates and some general troops, you know, relativity assumptions that we had at the time that we announce the deal, but just based on our prior conversation. Is it more that you're expecting they have more wage activity and they're booked and you saw Sara Lee no,
Now there's so many little things, you know rates moved in our favor, you know, we're doing really well on expense opportunities. Yeah whole variety of things and they ended up. Yeah, that's right, true up some lease options that we made last November and you know, the environments change a lot in our knowledge. I mean our knowledge, that's right. That's right back. Okay. All right. Got it. All right. Thanks. Bill. Thanks a lot. Appreciate it. Oh sure.
Our next question comes from John McDonald with autonomous research. Please proceed. Hey Bill wanted to follow up on the loan growth thoughts. And you know, it's just kind of you know, thinking out loud here, but could we see the inventory, you know in the capex pick up but you know still not kind of see loan demand because corporates have a lot of cash other Alternatives in Supply. You know, how much is that a factor to do you think going on right now that will obviously impact our large corporate book, which I think you know at the moment has its lowest utilization rate ever, but the bulk of our book, you know, remember some ninety plus percent of our clients are private companies and so our middle-market commercial book really doesn't have access to the public markets and that cash build that you're seeing in large corporate. So I do think you'll see utilization their increased by the way. We've seen utilization.
Increases in our asset-based lending books, but they're small kind of the first place you would expect to see it. So that's encouraging.
Got it in Rob. Did you say that you're not building in a second half pick up too much expectation. Yeah, that that is what I said. Yeah, because at this point it's you know conjecture walk-in Rob follow up for you. Obviously, your Capital ratios have gone quite high. Is it fair? And I know you don't want to get into deal assumptions and all that but is it fair to us? You know mm to think that you'll end up close the deal with higher Capital than you know, the 9.3% ProForm or just given where you're starting from now and could you remind us to just what CET wage is appropriate, you know as a target for you guys longer-term. Yeah. Sure sure on on the Thursday for today's purposes. We're tracking at or above all of our assumptions including the c e t 1 ratio. So yeah, my estimations are that it will be higher than that nine 3, but we'll get into that detail once once we owned a dead.
in regard to our
I guess you know, we've always had around eight and a half percent. That's that's been the sort of the level that we felt comfortable with. Obviously. We've been a lot higher than that. So there's relevance of that number isn't as strong, you know, as it was a few years ago.
Okay. Thanks.
John you're asking a question. Are we going to have Access Capital that can be deployed in share BuyBacks and other things in the answer is yes. That's right. Yeah, and the deal doesn't change or you know, how you think about the right Capital level for the company? No, no got it.
Our next question comes from Scott siefers with Piper Sandler, please proceed. Thank you for calling questions and maybe to revisit the loan growth thing. I mean you guys are seeing same Trends as everybody else, but you guys are unique in terms of how much of the the country you see. Are there any Geographic differences on utilization or sort of uh hesitancy on inventory? Cuz I mean certain parts of the country just you know, didn't necessarily shut down. They reopened earlier more quickly etcetera. Um it gets do you guess I'm just curious if there's any differences either geographically or anywhere.
Not particularly know we haven't seen Geographic differences utilization as well, you know across-the-board. Yeah. I think I think one of the issues is supposed to have been so disrupted that people actually can't build inventory. Yeah. We're you know, we're we're strangely being held back by demand and production capacity.
Yeah, yeah, it definitely makes sense. It's just such an unusual phenomena, but I appreciate the appreciate the thoughts there and then maybe just more of a ticky-tack one the other education so it was a you know, very very strong quarter this quarter. I think the the guide is a bit higher than is typical in the second quarter. Just maybe sort of the Nuance. Um, Robin just sort of how are you how are you thinking about that line going forward? Yeah, you know, that's we get some volatility on that, you know, quarter-to-quarter because there's a lot of elements there, but the guy to the 300 of the 350 is you know, what we expect to occur in the second quarter. Yeah. Okay. All right, perfect. Thank you.
Our next question comes from Erika najarian with Bank of America. Please proceed.
Hi, good morning during this earnings season. We we've asked a lot of questions as analysts of No One loan growth is going to recover from a cyclical standpoint, but I'm wondering given you know, the deal expected to close in the year and as we think about you know, how this could potentially help. Maybe they'll talk through. You know, how these newer markets could potentially, you know, give you an even better opportunity to capture loan growth recovery ones that come
Think that's going to be the case, but I think one of the things we've been careful to do and and sort of framing our expectations for you guys around BBVA was we recognize that there are parts of their balance sheet that we would likely shrink both because of concentrations across the the combined firm but also because there's some sectors they don't wash offset by our growth in these new markets. So, you know in the out years I get really bullish about our growth potential but you know for the first year or so we're going to and we've we've this is all in sort of the numbers that we gave you there's going to be a little trade-off of will be growing the business we want is we shrink some of the business we want. So the real celebration is probably a couple of years down the road.
Got it. And you know you have made more progress on towards closing the deal, you know, can you give us a cent of you know, you suck feel like there's not going to be a significant amount of investment that you that you have to put into the combined franchise in terms of Technology package in other things. So, you know, obviously some of you know investors are thinking about another deal that had closed from prior where there was a large Investments been that was a little bit of a surprise to see question. I won't talk about what other people are doing, but I'm pretty much have this nailed down we know and it's all in the numbers we've given you we are going to invest in, you know certain capacity for their brains.
Is for example on you know connectivity faster routers. We're going to expand some that compute capacity we have in our Cloud. Um, but all we've given you and it's not a big deal was all all on the deal dysfunctions and all those things are are proving to be correct.
Got it. Thank you.
Our next question comes from Ken Houston with Jeffries. Please proceed. Hey, good morning guys. Just wanted to follow up on on the Eastside 325 growth in a second off of was pretty good numbers to begin in the first just wondering if you could help us understand you just where you're expected growth is coming from and what do you think's going to you know lead lead that forward. Thanks. Um. Yeah, I I would say on the fees as we look forward to the second quarter it relative to the guide corporate services and consumer services, you know will be up we'd expect and sort of mid single-digit range. And then the other fee categories Asset Management mortgage and service charges on deposits probably low single-digit. So that's sort of how we get get to that range.
Okay, great. And then just as a follow-up on mortgage obviously, not a big.
Bigger line for you guys, but just given some changes in the business. You guys have been making and the relatively new platform. Just you know, do you do you see share gain opportunities and is the fight just against gain-on-sale margins tons of just you know, how you can continue to build over time. Oh, yeah. I mean, we you know mortgages and the as big of a percentage of our businesses as others, but we're very excited about we built in the opportunities that we have, you know, particularly, you know, the market will do with the Marvel do but particularly around building out the the purchase side in terms of our, you know, our consumer customers of which will be expanded with the acquisition.
Okay, last little follow-up. Just I know you guys don't really give give us a number on just premium am inside the bond book, but can you just help us understand? Is it been a drag is it you're buying office. So buying some premium bonds to just how should we just think about that big picture? It's come down. It's come down a little bit and we'd expect it to continue to come down a bit.
Even with like and it isn't even with the purchases.
Okay. Got it. All right. Thank you. Sure.
Our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed high in terms of the guidance for the acquisition. So from 600 million to 700 million. The bank index is up 40% since November 15th when he announced the deal so long, I guess it seems logical that your benefits are going to be greater, especially with a you know fixed price. So what does that mean for twenty twenty-two years and the ultimate savings, I mean mathematically, you know, it's if you look at the industry and you look at BBVA, of course, it should be higher at this point. It was it's good timing. Can you say what it means the next cut a couple of years? I'm trying to figure out where you're going with that Mike. I mean we're going to once we yep.
Once we close the deal, you know, we'll give you some updates on numbers and so forth. You know, I I guess what I would say to you is is you know, we remain I remember now, so even to a greater extent really excited by the out your growth potential of this deal, you know, we we tend to do a deal you give kind of choice year-and-half where the guidance went all the marbles are thrown up in the air and you're working on cost savings and integration the potential of the franchise in these markets is phenomenal the potential for cross-selling for growth of new clients is phenomenal and and we're really excited by that. I guess I'll just wait till you close it and you get more information for twenty-three two guys and and we'll have so okay. Well, let me just let me get some concrete numbers from you. I love what you're saying about the Loan Data. I just bought.
Data, so when you say you're eleven points below Peak utilization and Five Points below.
What are those numbers and you also say corporate lending utilization is the lowest ever. What's that percentage if I could have those that'd be great. So the only one I can think of right off the top of my head is our corporate finance utilization is 57% of the peak number and I think I saw some strange at that at that wage over there. Yeah, you know and that's a function of all the corporate cash that the eleven point drop was off of the high utilization. We saw my with all the dross during the first quarter of last year, which is why the average is, you know, maybe five percent and and it's it's hit, you know, certain areas have been impacted more than others Municipal utilization is way way down. As I said Corporate Finance is way way down even our asset based business which typically runs fairly High utilization is really dead.
Just given the the the lack of ability to build inventory. So so, you know, I don't know if you remember the number but we've messed around with if you kind of regress, uh economic growth, you know, retail sales a whole bunch of other different things against an inventory levels against loan know. It's an r squared up over eighty and it should be growing today. Yeah. We just haven't seen it. I can't give an answer as to why.
And then last one you said private companies are over ninety percent of your your customers as a percentage of loan balances how much that's funny cuz you say Thursday and balances. It's I'm going to say it's half. Yeah, that's right. That's right. That's a better number.
And then I have to obviously on the institutional corporate time.
And just just I mean, I guess you're just being conservative or what cuz you're saying it has to quote mechanically has to happen. It's in the process. You're starting to see an asset-based lending but not building it in your expectations. Even for the four square this year. So is that just you being conservative or you know, it's us saying look like we could sit here to tell you all the flashing of these calls on the back half of the year is going to be great. Everything will be wonderful. I hope they're right and if they're right will do really well, you know, but I can't promise you that off for you specific timing what we show you is the stuff. We don't I know that mechanically our loan balances are going to grow as the economy improves and they build inventories. I can't tell you the timing of that by the wage be else can either
All right. Thanks a lot.
As a reminder to register a question, please press the one followed by the four on your telephone keypad. Our next question comes from Gerard Cassidy with RBC wage proceed. Good morning Bill. Good morning, Rob. Hey Drive.
Can you guys talk about you know your deposit balances, of course or up dramatically, you've given that to us in Bill you've talked about the utilization, you know of your customers with the liquidity wage is that the number one driver of possibly taking deposits down or some of your custody bank is not necessarily your. But the custody Bank open for a higher rate to bring their balances down how how much would Rising short-term interest rates help you guys bring down your deposit balances to get the loan-to-deposit ratio in more of a historical, you know relationship without having the loans having to grow dramatically. I don't think Rising short-term rates has any impact at all. I think, you know as a practical matter of deposit balance is in the industry or driven by the size of the fed's balance sheet and fiscal transfers coupled with loan growth, lung growth will actually drive more deposit balances once a month.
See a pick-up in that and I think excess liquidity in the system is here to stay for a long period of time because I don't think the FED is going to shrink their balance sheet anytime anytime soon. So I I think we're going to be in a there's a structural change in banking which is going to have more liquidity higher security balances for an extended period of future very good, which obviously I agree with you guys on that as well shifting over to the allowance for credit app is in your slide think of a slide ten you give us good color on the levels and what drives those with the portfolio changes and the economic qualitative factors recognizing BTA is going to influence this number by the you know on the out years, but when you look at the reserves and you compare them to the day one reserves back in January 1st, 2020 wage
I show here you still well above them. And if the economy over the next twelve to eighteen months is even going to be better than what we all thought on January 1st. 2023 pandemic that would suggest Reserve Bank should come down. Do you think you'd get close to that day one level or is that just too low? Oh, no, I think I think you can I think you can get there to that level. It's just a question like that you pointed out in terms of timing so long, you know our reserves right now reflect our current forecast if subsequent forecasts are more bullish or more optimistic, you know, we'll we'll continue on that Trend but I the timing how we fast we would get their jobs, you know, her earlier comments difficult to be precise about. All right. Thank you, sir.
Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed. Good morning. Could you talk about your interest rate positioning post the actions you plan to take in the Securities portfolio. And then also after you fold in BBVA USA Irish just moving pieces, but you know, what would your expectations be in terms of how I said sensitive you are factoring those those two things in
We're going to sell enough being a sensitive. I mean largely because even with our suggested building, you know, the the deposits were going to have with the FED are going to be quite large. I would tell you that are you know duration of equity and and measured us sensitivity life has decreased as a function of the rise in rates, but that's less about what we're doing and more about the negative convexity in a bank balance sheet.
Okay any way to kind of just frame how meaningfully leverage will be two rates? May I guess both the short and long end?
No, I mean I just put another way like you have a lot of Leverage to Rising rates now, but as you grow the Securities book believe that we're hardly going to agent it. I mean the chart you see the chart we have in there we used to do see our cash balances versus security balances. But any loan growth you want in there. We're buying we're not buying the long end of the curve and we have a massive opportunity to deploy that but you know as we always do we're going to increment our way in by the way incrementing our way in is what gets us to that 25% off. Okay, and then separately I'm probably getting a little ahead of myself here because we think after the BBVA deal closes, you know, you've clearly shifted your view to wanting branches nationally and with a thought be to lead with Organic growth or you know, ma'am.
Basically folding them into your platform. Would you be ready to do another deal maybe quicker than than than normally what we certainly mechanically would be ready to do unless I think you know, like all things it's a function of of where you create value if it's cheaper to go organically, which it was for a bunch of years, then then we would choose that route wage. Um, I I I personally believe that we will see opportunities in smaller institutions, you know, simply because of the massive wage in technology and the cost of technology that we've seen to serve customers. So it's I think low rates not a lot of loan growth big technology costs are going to give us opportunity to continue to create a scale and we'll have those capabilities. Yeah. Okay. It's helpful. Thank you.
Our next question comes from a bill carcache Achi with wolf research. Please proceed.
Thank you. Good morning morning. You discuss how you guys are thinking about pent-up demand Dynamics for your consumer has commercial customers, you know, where's their greater gearing to the reopening and how to access savings and excess liquidity on both sides shape shape review.
Well sort of our outlook for Consumer lending. Is that sort of what you're getting around to find your question? Yeah. Yeah, I guess just thinking about as we look to like, you know sort of these pens home and sort of like the reopening and like, you know kind of animal spirits being Unleashed as you look to the second half of the year and all of that being a positive, you know for a loan growth. Like how does that differ between the consumer and the commercial side? Like there's a lot of liquidity sitting around and you know commercial balance sheets. There's you know consumer has a lot of savings does that sort of delay like the rebound and balanced growth on each side or both sides going to be affected similarly or or or differently, maybe my perspective. I see where you're going. I think consumer lending is going to drag cni increase right? I think a customers are really flush with cash. You've seen retail sales. I think they continue to accelerate by the way, but but what's happening is that people who don't borrow are buying and the people who were dead.
Normally borrow are sitting on fiscal payments that they're going to have to burn through over time before you see balanced growth. We're seeing massive transaction volumes. So we see it in our swipe fees in effect, but I don't know that you're going to see balanced growth. I think consumer will lag commercial and I get back to this place where you know inside of commercial but the the smaller non-public companies and even some of the smaller public companies will continue to rely on bank balance sheets to feel their growth wage. That is helpful it. Maybe I can Circle back on a question that I'd ask you while ago about sort of the the financial technology players like the times of the world and and maybe just a specifically on you know, any color that you can give on perhaps how active you are discussions with Regulators regarding sort of the uneven playing field with many of these players particularly still some of these some of these birth
Benefiting from things like unregulated debit interchange, which was never intended for them. It was more for like the small cats most smaller smaller Bank exemptions that that was intended for, you know, most durable. And and so, you know, I guess is there any expectation of a leveling of the playing field do you do you see in the future or is this sort of a competitive landscape that is sort of the new reality?
So it is a topic of Interest both on the political and Regulatory side less about competition in more about safety and soundness and data protection and fraud and and not I'm not referring to chime specifically, but rather new entrants into the page space the exponential increase in fraud we've seen because of less robust know your customer rules and and frankly probably just because of the COVID-19 environment dead Polo that is gathered the attention of of politician and Regulators the competition side. We're happy to compete. You know, I'm somewhat shocked actually. Nobody's asked me a question about LoCash. But if we rolled out this this, you know yesterday day before that product is dead.
hold of years of
Knology investment that allows us I think is the only institution in the world to have effectively real-time capability of what's going on in our customers accounts and number for showing them what's going on in their accounts and therefore empowering them to choose what's going on in their accounts. No fintech has that go back to you know, because they rely on these small bang their back office which in turn are relying on thirty-year-old cobalt-based Mainframe based batch processed not very exciting core processors. But yeah bring on the competition at some point they need to make money but and and and you know to justify their existence our challenge is Faith is presenting and we think we do this a great proposition to our customers with these it is in the very best products and I think we have the technology backbone to do that. So, yep.
Just worried about competing with somebody. I'm more worried about safety and soundness to the system and data and disruption to our customers who don't understand where data is being shared and who has access to them.
That's very helpful. I was going to ask about the new service but I saw you talking talk about it on CNBC. So I figured I'd I'd I'd seen saved my question if I could squeeze in maybe one last one treasury Department's of any of your clients even remotely considering the idea of of you know, having some allocations of Bitcoin. We've seen some, you know, some some businesses using that direction in with the coinbase IPO, you know, I guess it's sort of seems like, you know, it's a bit, you know out of left field, but but if perhaps you could argue is becoming more mainstream and and so I'm just wondering if is that something that you're you're treasury function is preparing for and then, you know, maybe on the west side or any well client expressing interest in gaining exposure to crypto Assets in any thoughts on how you guys are, you know, our position for any potential emergence of crypto is a potential asset class, especially in the aftermath of that would be working on this long before coinbase one.
Public fact we we talked to coinbase about partnership and and custody for our wealth clients, you know, practically, uh, we've had a a Works package around this both for our corporate clients and treasury but also for our wealth clients from you know, the technology stretches and a big deal for us. It's more of a compliance-based issues that you would expect and then importantly choosing the right partners that that that you would choose as a trading transfer platform in the custody platform. So that's an open and continuing dialogue here and suitability and fiduciary again, you kind of Imagine That for wealth clients would be a lot of disclosure around. Yeah. That's your own risk. Right? Right, right. Thanks Bill and I appreciate your taking my bath.
A follow-up from Mike Mayo with Wells Fargo Securities, please proceed.
Hi, the fintech comments. Got me to ask another question. If you think about some of the players the bankers in the industry, I'm starting to set up bilateral relationships even multilateral relationships with some big Tech and that's an option versus going directly for the consumer. Especially I'm going National. Now. Are you looking to continue permanently with getting customers directly or you looking to partner more to lower your customer acquisition process and go more broadly kind of like banking as a service as a plan B. We're going to get him directly look like I think when you actively offer your products.
As the low-cost provider to somebody else who owns the relationship you've just sold yourself you sold your soul to the devil. It's it's the beginning of the end of your franchise and whatever special we need to own the customer relationship and we need to deserve the own to own the customer relationship through an offering that doesn't need that fintech platform on the front end.
It's that that the alternative to that right and this is this is you've heard Jamie talk about this as well. If tech gets into the space and owns client relationships off. Then we become a commodity provider industry with 5,000 participants. This is a it's a disaster. You can't default to that end game. You have to own the customer.
And when you think about the the risk with data to the extent customers, you know open Banking and of customers often to share their data with other providers month just for sure hand more or how do you defend against that?
I think there's still a lot of appropriate focus on data to see if you'd be I know is working on this as our you know, various politicians and other Regulators. We need safety and soundness around dated. That is the biggest systemic risk at the moment in my view and people talk people talk about fiber but what they're really talking about is data and disruption of account flows payment flows because data is corrupted, you know, the consumer that by the way is solved ultimately through tokenized API based off with or authorization at the bank for what the consumer wants to share not through screen scraping.
And and you know, we're working our way. We're working our way towards that I think that's the ultimate end game but the consumer has to be empowered to share data, but the data they want and back and to share it when they want not all the time and not everything and not and not to places that are otherwise in my view of not regulated in terms of you know, their controls around and looking to monetize that data in some way.
Got it. Thank you.
There are no further questions at this time.
Okay. Well, thanks Frank bill. Would you like to make any closed, Thank you. Everybody. Look forward to talking to you at the end of the second quarter. Stay safe. Looking forward to summer. I hope you're doing the same. Take care. Okay. Thank you. Disconnect. Have a great day, everyone.
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