Q4 2021 PNC Financial Services Group Inc Earnings Call

January 18, 2022

To accomplish this and to combine our organizations in a way that will provide growth opportunities for years to come the acquisition positions us with a coast to coast presence along with our continued organic growth strategies, including our recent expansion into Las Vegas, We now have a presence in all of the top 30 U S markets. We're excited about the <unk>.

<unk>. This presents and we are confident in our ability to generate growth by executing on our main street relationship based model that said, we recognize that we have a lot of work to do in building out the new and expansion markets, which will be our primary focus in 2022, BBVA, obviously impacted our results for the full year and Rob will walk you through the <unk>.

Details excluding BBVA, we generated record revenue highlighted by strong noninterest income with broad based contributions across our commercial and consumer businesses. We also maintained outstanding credit quality and a very strong capital position, while we continue to opportunistically deploy some of our excess cash into higher yielding securities.

Out the year, we remain well positioned with substantial excess liquidity to capitalize on a rising interest rate environment. Our reported results for the fourth quarter reflected the impact of almost $440 million of BBVA integration costs. Excluding these we generated nearly $1 6 billion of net income and solid returns importantly, <unk>.

Splitting the impact of PPP loan forgiveness, we saw decent underlying loan growth trends and some uptick in utilization rates, which is very encouraging as Rob will discuss in more detail critical to our long term success has been the quality and stability of our talent and we pride ourselves of being an employer of choice given the recent dynamics of the.

Actually increased competition for talent in part due to the great resignation, we experienced greater wage pressure during the fourth quarter and I expect that to persist into the coming year naturally we will look to offset these increases with our continuous improvement efforts, which include driving further automation and rethinking core processes.

We continue to invest in technology to enhance our capabilities in an increasingly digital world customers are looking to their financial providers to offer innovative tools that help them manage their money in ways that are faster smarter and more convenience whether that be expanded use cases, Brazil, where transaction volumes are up 50% or low cash.

So for example by providing account transparency and control of low cash mode is substantially reduced customer overdraft fees and related complaints I'll close by thanking our employees for their hard work and steadfast commitment to our customers and communities because of our employees. We had a remarkable year and are well positioned to serve all of our stakeholders in 2000.

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

Thanks, Bill and good morning, everyone.

Our balance sheet is on slide five and is presented on an average basis.

Overall year over year balance sheet growth was primarily driven by the acquisition of BBVA USA.

Loans grew 18% investment securities increased 49% and deposits grew 26%.

Looking at the linked quarter changes.

Loans for the fourth quarter were 289 billion, a decline of $2 4 billion or 1%.

Excluding $4 $7 billion of PPP forgiveness activity loans grew $2 3 billion or 1% and I'll cover the drivers in more detail over the next few slides.

Investment Securities increased $7 billion or 6% as we maintained higher purchasing activity throughout much of the quarter. Okay.

Accordingly cash balances at the federal reserve declined by $5 billion.

On the liability side.

The balances declined $1 6 billion as higher commercial and consumer deposits were offset by runoff deposits related to the strategic repricing of certain BBVA USA portfolios during the third quarter.

And that negatively impacted fourth quarter average balances.

On a spot basis total deposits as of December 31 increased $8 billion or 2%, reflecting the continued strong liquidity positions of our customers.

At year end, our tangible book value was $94 11 per common share and our CET. One ratio was estimated to be 10, 2%, which are both substantially above pro forma levels, we anticipated when we announced the deal.

During the quarter, we returned approximately $1 $1 billion of capital to shareholders via common dividends of $500 million and share repurchases of $600 million.

Given our strong capital ratios, we continue to be well positioned with significant capital flexibility going forward slide six shows our average loans and deposits in more detail in the fourth quarter loans declined $2 4 billion as growth in commercial and consumer loans was more than offset by a decline in PPP loans of $4 7 billion.

Excluding the impact of PPP commercial loans grew by $2 $2 billion or 1% driven by growth in corporate banking and asset based lending during the fourth quarter. We continued to see a slow and steady increase in utilization rates within our corporate and institutional banking business.

And along with that expanded pipelines taken together. These factors are driving our expectations for higher loan growth in 2022.

Consumer loans increased modestly linked quarter as higher residential real estate balances were mostly offset by lower home equity and auto lines. Finally, as I mentioned PPP loans continued to decline due to forgiveness activity and as of December 31st $3 4 billion of PPP loans remained on our balance sheet App.

Deposits of 453 billion declined by $1 $6 billion linked quarter for the reasons I previously mentioned.

Overall, our rate paid on interest bearing deposits remained stable at four basis points.

Mid seven details to change in our average securities and Federal reserve balance as.

As rates increased at the end of the third quarter and throughout the fourth quarter. We continued to Opportunistically add securities to our portfolio, primarily U S treasuries as a result.

Securities balances averaged $128 billion in the fourth quarter, an increase of $7 2 billion or 6% compared to the third quarter 2021, and now represent 26% of interest earning assets.

We continue to have substantial excess liquidity with fed cash balances, averaging $75 billion during the fourth quarter, which we believe positions us well for a rising rate environment.

As you can see on slide eight fourth quarter 2021 reported EPS was $2.86, which included pretax integration costs of $438 million.

Excluding integration costs adjusted EPS was $3 68.

As expected during the fourth quarter, we incurred essentially half of our total anticipated deal integration costs, which reduced revenue by $47 million and increased expenses by $391 million.

Since the announcement of the acquisition, we have now incurred approximately 95% of the total $980 million expected integration costs, including $120 million of write offs for capitalized items, excluding the impact of integration costs linked quarter revenue was down $31 million or <unk>.

1% expenses increased $48 million or 1% and pre tax pre provision earnings declined $79 million or 4% to.

Our fourth quarter provision recapture was $327 million, reflecting continued improvements in the economic environment.

Net income excluding pretax integration costs of $438 million was $1 $6 billion in the fourth quarter.

Now, let's discuss the key drivers of this performance in more detail.

Turning to slide nine these charts illustrate our diversified business mix.

Total revenue for the fourth quarter of $5 $1 billion decreased $70 million linked quarter, reflecting lower noninterest income.

Net interest income of $2 9 billion was up slightly primarily a result of higher securities balances.

Net interest margin was stable at two 7%.

As I mentioned, the integration costs reduced noninterest income by $47 million, which included $19 million of lease exit costs 17.

$17 million of Treasury management fee waivers and $11 million of overdraft wafers.

Fourth quarter fee income, excluding integration costs was $1 $9 billion and declined $39 million or 2% linked quarter.

Looking at the detail asset management fees increased $3 million or 1% primarily related to higher average equity markets consumer services grew $12 million or 2% due to higher brokerage and credit card revenue corporate service fees increased $14 million or 2%, reflecting higher loan syndication activity.

As well as continued elevated corporate advisory activity.

<unk> mortgage noninterest income declined $46 million, driven by lower our MSR valuation adjustments and loan sales revenue.

<unk> charges on deposits decreased $22 million, primarily a result of converting BBVA USA customers to pnc's product in overdraft pricing structure.

Other noninterest income excluding integration costs were stable linked quarter as the impact of $1 million positive visa derivative fair value adjustment in the fourth quarter compared to a negative adjustment of $169 million in the third quarter was offset by lower private equity revenue.

Turning to slide 10, our fourth quarter expenses were up by $204 million or 6% linked quarter. The growth was primarily driven by a $156 million increase in integration expense.

Excluding the impact of integration expenses of $391 million noninterest expense increased $48 million or 1%. The growth was largely within personnel costs driven by higher employee benefits expense and increase in our minimum hourly rate of pay as well as elevated incentive compensation related to strong fee activity.

We had a 2021 goal of $300 million in cost savings through our continuous improvement program and we successfully completed actions to achieve that goal looking forward to 2022, our annual CIP goal will once again be $300 million.

Importantly, as of year end 2021, we completed all of the actions that will drive $900 million of savings related to the BBVA USA acquisition, which we expect to be fully realized in 2022 and is reflected in our expense guidance that I will provide in a few minutes.

Our credit metrics are presented on slide 11.

Nonperforming loans of $2 $5 billion decreased $48 million or 2% compared to September 30, and.

And continue to represent less than 1% of total loans.

Total delinquencies of $2 billion on December 31 increased $516 million or 35%. Obviously this was a large increase or.

It was primarily driven by BBVA USA conversion related administrative and operational delays, which we expect will largely be resolved within the first half of 2022 net charge offs for loans and leases were $124 million, an increase of $43 million linked quarter.

Commercial net charge offs declined $5 million offset by an increase of $48 million in consumer inside of the higher consumer net charge offs auto grew $28 million and other consumer increased $13 million, reflecting conversion related impacts as well as seasonality.

Our annualized net charge offs to average loans continues to be low and in the fourth quarter was 17 basis points and during the fourth quarter, our allowance for credit losses declined $471 million, reflecting continued improvements in the economic environment at quarter end, our reserves were $5 $5 billion, representing one point.

92% of loans.

In summary, PNC reported a strong fourth quarter, which concluded a successful 2021, and we're well positioned for 2022 as we continue to realize the potential of our coast to coast franchise.

In regard to our view of the overall economy, we expect strong growth over the course of 2022, resulting in three 5% GDP growth. We also expect for 25 basis point increases in the fed funds rate in 2022, beginning in May followed by additional increases in June September and December .

<unk> ahead, our full year guidance for 2022 includes the impact of 12 months of BBVA USA results compared to only seven months in 2021, taking that into account our outlook for full year 2022 compared to 2021 results is as follows.

We expect average loan growth of approximately 10% and 5% on a spot basis.

We expect total revenue growth to be 8% to 10%.

We expect expenses, excluding integration expense to be up 4% to 6%.

And to be clear here. This includes five additional months of BBVA USA operating expenses, which equates to a full year increase of approximately $500 million.

And we expect our effective tax rate to be approximately 18% based.

Based on this guidance, we expect will generate solid positive operating leverage in 2022.

Looking ahead at the first quarter of 2022 compared to the recent fourth quarter 2021 results.

We expect average loan balances, excluding PPP to be up approximately 1% to 2%.

We expect NII to be down approximately 1% to 2%, reflecting two fewer days in the quarter and a decline of approximately $75 million in PPP related interest income.

We expect fee income to be down 4% to 6% due to seasonally lower first quarter client activity as well as elevated fourth quarter fees in certain categories. We expect other noninterest income to be between 375 and $425 million, excluding integration costs as well as net securities and Visa Act.

Yeah.

Taking our guidance for all components of revenue into consideration, we expect total revenue to decline approximately 3% to 5%.

We expect total noninterest expense, excluding integration costs to be down approximately 4% to 6%.

And during the quarter, we expect to incur $30 million of integration expense.

Finally, we expect first quarter net charge offs to be between 101 hundred $50 million.

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

Thank you well now begin the question and answer session. If you would like to register for a question press. The one followed by the four on your Touchtone phone, you'll hear three pumps to acknowledge your request.

If your question has been answered and you'd like to withdraw your registration press. The one followed by the three.

As a reminder, this conference is being recorded.

Thank you.

Our first question comes from the line of Dave George with Baird. Please proceed with your question.

Hey, guys. Good morning, I had a question about capital.

And capital allocation you you obviously finished the year at <unk>.

Tend to CET, one which is ahead of kind of your initial targets when you announced.

BVA and your stock is at 2324 of tangible book and I know you've talked about taking the the cash dividend payout. So just kind of curious bill how youre thinking about capital allocation in the new year, and then I've got one follow up.

You kind of answered your own question because we're consistent.

All else equal in this environment.

First focus on the potential of loan growth and using it as a good way.

Our bias strong bias towards the dividend.

But we'll still be in the market to repurchase shares and I think.

You will.

Probably see us accelerate some of the things we're doing on the smaller side in terms of.

Product activity bolt ons into <unk>, and so forth none of that by the way that those acquisitions won't add up too much but.

An important part of.

Just to add in core capabilities as we go into a digitized world.

Okay. Thanks for that and then a question on your guidance and particularly on NII I know you mentioned you've got four hikes.

And there I assume you're just using the forward curve in the securities as a percentage of earning assets up to 26% I know bill you've talked about being 25 to 30 do you expect continued liquidity deployment just kind of curious how much liquidity deployment is embedded in that number. Thanks.

So our economists expect four hikes I actually think it's going to be more aggressive than that but.

Liar.

The only one vote.

Our our forecast is.

At this point pretty much on the forward curve at this but.

I think the plan Rob I Wonder if you can talk to the plan.

Gradually add duration throughout the year.

There wasn't any magic to it and we didn't really build in in Rob's guidance.

Some assumption that we would go at it even more aggressively.

If rates reacted and the range that we had that 25% to 30% range. Dave is still the range thats in our guidance.

Okay. Thanks, Ross I appreciate it.

Sure.

Thank you and next we now have a question from the line of John Kerry with Evercore. Please proceed with your question.

Okay.

Good morning, guys.

Hey, good morning, John .

On the.

Revenue guide for the full year equal to 10%.

Wanted to see if you could help unpack that a little bit in terms of how you view the NII trajectory for the year.

What type of growth, we think is reasonable versus the.

The trajectory on the fee income side of things given some of the dynamics you flagged. Thanks.

Yes, sure John so so.

So full revenue full year revenue up 8% to 10%.

Break down those components net interest income.

Low teens.

And that does that does factor in the rate increases that we spoke about in the comments opening comments.

And then on the fees mid single digits.

Year over year so.

Those two together gets you to the 8% to 10%.

Got it alright. Thanks, that's helpful and then on the on the loan growth front.

Just given the 10% end of period loan growth expectation certainly.

Implies acceleration that you indicated that you are seeing.

Can you give us a little more color on the growth trends.

Thank you is achievable on the commercial side versus consumer and maybe what are you expecting to be the biggest drivers of that acceleration as you look at the loan book.

Yes sure so.

So for the full year guide, it's 10% average, but probably a better indicator is the spot just because of the acquisition dynamics on the average number so spot up from period end, 5%.

And we see a continuation of what we started to see in the fourth quarter, which was some expanded utilization in the commercial book.

Picking up through 2022, and then a little bit less on the consumer side.

Tumor customers are still pretty flush with cash.

Loan demand there certainly in the first half of 2022, we expect to be softer than the commercial side.

Got it that helps thanks, yes, I meant to say.

Average on the growth.

That's good color. Thanks, you.

You bet.

Thank you.

And now we have a question from the line of Erika Najarian.

Ian <unk> with UBS. Please proceed with your question.

Hi, good morning.

Good morning Erika.

Wanted to follow up on the questions on what's embedded in the NII Guide Robbie answered the question on.

What you are assuming for liquidity deployment, but what are you assuming in your NII guide about the trajectory of deposit beta.

And what do you think will actually happen.

Well in terms of our guidance, Eric what we what we apply in terms of beta is what we've seen in past cycles.

Which generally speaking will be a lag on the front end. So yes, my expectation of what we built into the guidance is that we will see some beta increase but not not until the end of 2022 and it probably would be more of a factor in 'twenty three.

Just because of the levels of liquidity and deposits that we have.

Got it okay. So if I'm comparing it to your previous deposit data.

In terms of let's say in 15 to 16 to 17 actually the first 100 basis point your guidance assumes a slower ramp than that that's right that's exactly right.

Got it and the second follow up question is for Bill.

One of your peers, Jamie had you know obviously given you.

You know our guidance for higher expenses.

In 2022, pointing to accelerated investment spend as we think about this 4% to 6%.

Obviously some of this is the BBVA baseline, but how did you frontloaded some of the investment spend in 2022 in other words as your investors start thinking about P&C profitability in a more normalized rising rate environment is for it.

6%, so an appropriate guide post for future for future growth and expenses going past 'twenty two.

No.

Oh.

No. So so to unpack the guide for next year.

<unk>.

Thank you.

PNC legacy expenses are up.

Maybe a percent.

Non BBVA USA.

And so.

Did we did we pre packed investment we've said all along that we've had a steady state and actually a fairly high level of investment in our core business and then you'll remember in the guidance for BBVA.

$900 million of cost saves that was netted number against investments, we're going to make to build out those markets. So inside of everything you're seeing there actually has a lot of investment already built into it.

And of course, our continuous improvement of 300 million offsets invest.

Investments and that's something that we've been doing for a number of years.

Got it.

We've had it's worth noting we've had some debate internally.

The continuous improvement number cannot be larger because I think we all see opportunities in the operating environment.

As we move forward with with BBVA. The challenge is continuous improvement is something you know you can do whereas right now we're still in the process of we know it's there we just don't know where yet.

Once we kind of lock it down and could track it shows up in continuous improvement.

That won't stop us from going after exactly.

Got it thank you.

Thank you and we now have a question from the line of Betsy <unk> with Morgan Stanley . Please go ahead.

Hi, good morning.

Hey, Betsy.

Okay. So two questions one just on how we are thinking about the reinvestment in the securities portfolio as we think about the NII guide as well, maybe you could give us a little sense of.

The.

Pace that you're thinking about reinvesting I mean, what's baked into your NII guide because as we know the forward curve does suggest we're going to be hitting two pretty soon so do you wait for that or do you just.

Start to leg in even at current rates.

Oh.

We will.

But again throughout the course, but remember what's in our guide on Securities doesn't Dent our liquidity profile. So what we have in our guide here is kind of steady deployment working towards.

The 25% to 30% will add balances it doesn't even that the potential of what we could do with liquidity.

The fed cash balances yeah, yeah.

You saw that it is.

It's a baseline budget boring the rates do this we do the following.

If there is.

If rates go beyond or even if we get to a place where we think.

Rates have probably gone where they need to go buy the size I think they'll go we could we could increase that but that's not contemplated in the forecast that we have right now.

Because on my right and thinking your target range of securities to earning assets like 25% to 30% is that fair.

So that's right.

Okay.

And then remember remember remember inside of that mix right, that's a big portfolio of securities.

The big difference in the yields come in out of buying short dated treasuries, which has been kind of a recent trade versus going further out the curve and going back towards mortgages. Once you. Once you assume the extension risk is taken out massive difference in yields. So it's some of it's notional of security some of it's what's you're actually buying an <unk>.

Are those will be driven by the speed.

And an outlook for for rates over time.

Right. So what I'm hearing is baseline and the expectation, but upside as we approach kind of rates, reflecting your view of full extension risk on it or on the on the R&D side I don't know if my if my individual views right, there's a lot of upside.

But the forecast that we've given you on what's kind of in our plan as is.

Steady state follow the follow the forwards and legging overtime.

But in terms of the yields on the yields on the securities portfolio can change a lot.

Right right right right I got it Okay, and then separately just thinking a little bit longer term fell on me.

On the investments that you're doing could you just give us a little bit of color as to what are you looking for in the bolt on acquisitions to enhance your digitization, what what pieces of your digitization or you're looking to improve.

And also is there a need for reinvestment in branches and the new geographies, where maybe you would've had a slightly different skew to the branch mix just trying to understand a little more detail there. Thanks.

Two very different questions.

We as you've seen we've done a number of small things tempus, probably being the most interesting one where we bring in certain payment capabilities that lead to other opportunities.

We see more and more of those by the way we're not unique in that.

Banks are playing in this space, they're not terribly expensive, but oftentimes you get.

Modules of technology that can be sort of bought into and then scaled across your broader platform.

I, just think youre going to see more of that as we continue to compete.

The digital space for both the consumer and corporate.

On the branch side, we have plans to further.

So we always do kind of build out selectively in the markets, where we're underpenetrated, but at the same time, you'll see US continue our practice of of consolidating the debt there.

Or markets. So so no no real.

Change there and all of that's in the numbers, we've given you.

Okay. Thank you.

Yeah.

Thank you and we now have a question from the line of Kevin Cassidy with RBC. Please go ahead with your question.

Hi, Ron Hi, Bill.

Good morning, John Good morning.

Can you guys give us a little color im trying to figure out what we're going to be talking about in the fourth quarter earnings call for 2022 in January of 'twenty, three and I think credit might be subject receives more attention than can you share with us your underwriting standards, how you compare them today to let's say right at the start of the pen.

And then compare them to 2019, how they look compared to today.

So you got a separate something our credit box per se right. So the type of clients, we lend to the leverage they can have all the things you would otherwise measure we we really don't change that over time.

Having said that of course, even inside of that box companies are doing.

Better or they are doing.

Trending more poorly I think we're going to go into a period of time here as we go towards the end of the year, where all else equal there will be pressure on credit not because we changed our underwriting standards, but because of the upgrade downgrade ratio.

What will change.

Rob and I were talking before the call. If you actually look at our reserve ratio, particularly when you adjust it for credit cards.

I can't think of a period of time, where you're kind of going into it.

Rising rate environment, which is going to help us long growth, which is going to help us.

And Ilene.

Healthy reserves when you compare where we are versus just call it that versus the rest of the industry in terms of raw percentages against balance and then you know our our our book through through legacy performance.

So in <unk>, resulting from the unique dynamics of the pandemic. So it's a it's an unusual setup yeah, yeah, but.

Yeah.

Very good and then as a follow up.

You have some decent loan growth Rob that you pointed to for 2022.

Within the commercial.

Growth area C&I, not real estate, but C&I right can you share with us or give us some more color are they coming from the newer markets that you guys have entered over the last five or six years or are you seeing early traction with the BBVA customers, maybe if you could dissect where someone that might come from in 2022.

What was it.

The new money out right. So the the new clients and new money that we are committing whether it's drawn or not.

Has accelerated for the last bunch of months and a lot of that is related to the newer markets, we're in including some big wins coming out of the BBVA markets.

Utilization.

Part right. So the moneys out now if somebody borrowing more under what Lloyd is broad based and if you just think about how many clients we have it.

You know, it's it's kind of distributed across everything.

The other thing that I'd add to that Gerard is that the pipelines in our commercial book are strong and in the new markets, they're up percentage wise significantly.

Very good thank you.

Thank you.

We now have a question from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi.

Hi, Phil you, let off saying that BBVA has exceeded expectations.

But I didn't I don't think I heard any changes to your expense savings.

Or synergies or anything like that so even if you can't quantify it can you talk about what's going better or worse than expected.

I will look better than expected on initial dearth of deal terms as Laurie.

Yeah as largely the economy.

Right the assumptions where we.

Mark credit and looked at credit.

Turned out to be.

All that conservative.

But that's what we saw at that point.

Uh huh.

Other than expected if I look at it I think the teams that we've been able to deploy in the market. Some of the talent that BBVA has some of the talent we were able to hire.

The amount of call volume that we're having in the new markets.

With new products at old clients, and with new products and people with new clients all sort of.

Wildly outpacing what we were able to do with RBC.

Yeah.

In our newer markets in the past and then just just wins.

Showing up with clients.

Early on.

So that's kind of all on the business momentum side continues to give us comfort on our ability to build out the markets. The credit is a lot better than we thought.

You know the the <unk>.

Expense guide.

You know we go out there, we said, we would take $900 million not including <unk>.

Investment and we stick to that but to Rob's point and you guys know this of us through time.

Does it mean that we're going to stop looking at once we hit our expense guide.

I would just leave it there.

Where are you, leaving it so I guess, what really my question. So why not increase your expense savings target or quantify that is that because you're reinvesting it or you're just being conservative or youre just waiting longer.

The easiest way to answer that as you know when I was talking about continuous improvement a little while ago.

We kind of know their stuff there.

True.

Some metrics and some thought process today, but until we can.

You know put an action plan together quantify it know how we're going to measure it I can't I'm not just going to throw an expense guide in there that probably is embedded but I'm not sure and I. Just think this is rob the mic I just think it's premature. So we worked hard in 2021 to get that $900 million in savings and of that $1 billion seven run rate.

So we got to get going and this is getting going part.

And then I know part of your ear in all top 30 U S markets now and.

I know you want to expand and so you did guide for you said.

Solid positive operating leverage for the years like get that on the other hand isn't it getting a lot more expensive to hire people to help with that expansion into new markets.

It is but we've largely hired them all.

Right.

We hit you need to understand when we closed.

And then converted we had basically the team's built out and all of these markets. So they're in our run rate.

I mean, I think it's D J.

I mean cause.

These are a lot of our pits and stuff right.

Yeah, a lot of people.

But it is the extension of your question is are we going to see way too we expect to see wage pressure in 2022, we do.

And that is built into our expense guidance.

Okay fair enough alright, thank you.

Sure. Thank you.

As a reminder to register for a question press the one followed by the four.

Up next we have a question from the line of Bill Karachi with Wolfe Research. Please proceed with your question.

Thanks, Good morning, Bill and Rob.

Following up on your deposit beta commentary.

How are you thinking about the risks that balance sheet run off.

Yeah.

The potential impact it could have in this cycle versus the last one given that its expected to.

Play a bigger role versus when we exited the last cycle.

That's a great question and that's obviously going to impact it.

Yeah.

You know in the extreme if they if they shrink their balance sheet dramatically. It obviously would impact betas and make them higher the offset to that though is you got to remember with loan growth you actually create deposits.

So if loan growth does pick up as early as the fed is dropping their balance sheet, which doesn't which isn't unlikely.

That loan growth actually generates deposits you'd be thinking about just the leverage on the capital you hold for a loan in the money everywhere else.

So I'm not sure I reiterated my way through exactly how that's going to play out other than it feels like the combination of those two things should leave us extremely liquid deposit wise you know for the next several years.

Which is our base expectation well you've got to keep an eye on it yeah.

Yes, yes.

Makes sense.

I guess.

I guess continuing on that thought process Bill do you feel pnc's, perhaps a little bit less exposed than some of the larger banks that are primary dealers and more directly involved in the creation of of those deposits under the QE process.

I don't think the system works that way.

The fed shrinks its balance sheet.

You will likely see corporate cash.

I don't know that you can think through it that way I think get transmitted through the banking system and I think it hits everybody largely the same as a function of their corporate and consumer mix.

But corporates behave like corporates and consumers behave like consumers.

Got it and then lastly, I think you touched on this but just to put a finer point on it.

Pipelines are strong loan growth trends that you are describing persist.

Yeah, I guess, maybe if you could just comment on your willingness to you or the extent to which that influences your willingness to take your securities portfolio as high as 30%.

I guess.

Your liquidity is sufficient to be able to do both fund that stronger loan growth antibody or Ohio or yeah. It was a wonder.

How does that interaction.

We have plenty of liquidity to do both.

Yep.

Got it thank you for taking my questions.

Thank you. Thank you.

And we now have a question from the line of Ken Ruskin with Jefferies. Please go ahead.

Hey, Thanks. Good morning, guys just wanted to follow up Rob I think you had mentioned when you broke down the revenue guidance that you're looking at mid <unk> in the mid single digits and obviously that also includes the BBVA stub ridiculously great year for corporate services, especially I'm just wondering underneath the surface what do you see as being the underlying growth driver.

<unk> outside of the BBVA rollover.

Yes, I would just say if you're taking a look at the full year, Ken just going through the categories asset management, we would expect to continue to increase in.

And that mid single digit range.

Sumer are higher than that in part due to the addition of the BBVA franchise, but you hit it on corporate services, we had such elevated levels in 2021, our expectations for 2022 or down a bit.

Residential mortgage maybe up a little bit and then service charges on deposits down.

As we get the full year effect of reduced overdraft fees that.

We expect from low cash mode. So you put all that together, that's how you get to mid single digits.

Okay got it and then and then.

Same thing in terms of just how youre thinking about that other category is it still within the kind of zone Youre thinking about for the first quarter is that how you think about it for the full year.

Yep.

Okay, one little clean up just on securities yields Rob last quarter, you had that negative impact from the BBVA with portfolio Mark and then this quarter. It was flattish even I would think with the absence of that so can you kind of just working through what was the impact in the fourth quarter. If any and are you still are you at the point, where youre seeing better reinvestment yields.

Yes, we're starting to I think the investment yield is whats the story on the premium amortization issue at the third quarter, which was elevated.

It went down in the fourth quarter, but it's still elevated over what I would consider normal levels so that.

That worked against us a little bit as well.

Okay understood alright, thanks, Rob.

Sure.

Thank you.

And we now have a question from the line of John Mcdonald with Autonomous Research. Please go ahead Sir.

Hey, guys.

One more on the expenses it is pretty impressive for the expense guide for 'twenty, two if I look at it.

Relative to kind of a fourth quarter annualized and implies a quarterly run rate is about 5% lower Rob. So I guess, just kind of unpacking that is the fourth quarter. This year, a little high because of such strong capital markets revenues and then.

How are you eating inflation and still getting cost to be 5% lower year over year. When other banks are having a lot of inflationary pressures that'd be helpful.

Yeah, No you hit it it's definitely on the on the wage side in the fourth quarter.

And it just goes back as we go into 2022 goes back to what we were saying earlier in terms of how we laid out the year, we have the cost saves.

Locked in for the BBVA side, we have investments.

On the non BBVA side that are largely offset by our continuous improvement numbers. So that's that's how we put it altogether and that's yeah. That's the plan.

Okay, and just because I know all of our employees are listening.

This plan assumes that we are paying people competitively in a competitive market.

The market for talented people.

We just we just need to find the dollars elsewhere to be able to do that right.

Okay got it and then one industry type question for you guys that you have a lot of reserves relative to peers mix adjusted on every basis.

But we've never seen like seasonal working in a loan growth environment. So just kind of your guys' thoughts.

As loan growth starts to pick up for the industry could we start to see some growth math, where you need to add provisions and add to reserves just for growth or is the 5% growth like contemplated in your reserves today or as loan growth picks up do you have.

Growth driven provisioning.

Yes, I can answer that one John .

That complex and in some instances I don't know if we know because we haven't run peaceful through an environment like that but academically and baking.

We will get to the point, where we will need to grow reserves in concert with bigger balance sheets bigger loan balances.

We're still in this place where we're running high in terms of percentage terms. So you know there's going to be some offsetting that offsetting factors here is my guess and 2022.

Yes.

Okay fair enough. Thanks.

Alright, thank you.

I'll now turn the conference back to Mr. <unk> for your concluding remarks, thank you Sir.

Alright, no no concluding remarks I know you guys are busy. Thank you for dialing in we've got a lot of calls today.

Look forward to talking to you in the first quarter.

Thank you. Thank you. Thank you.

That does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect. Your lines. Thank you once again.

Take care everyone.

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Well good morning, and 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.

These statements speak only as of January 18th 2022, and PNC undertakes no obligation to update them.

Now I'd like to turn the call over to Bill Thanks, Brian and good morning, everybody as you've seen we had a strong fourth quarter and full year for 2021, we successfully completed the conversion of BBVA USA early in the fourth quarter and had been running hard as one bank. Since then the transaction continues to meet or exceed our.

Yield projections and Rob will give you some of those details I'm, especially pleased by our ability to announce close and convert a transaction of this size inside of 11 months challenges notwithstanding we have the talent and technology and the strategy to accomplish this and to combine our organizations in a way that will provide growth opportunities for years.

As to come the acquisition positions us with a coast to coast presence and along with our continued organic growth strategies, including our recent expansion into Las Vegas, We now have a presence in all of the top 30 U S markets. We're excited about the opportunity. This presents and we are confident in our ability to generate growth by executing on.

Our main street relationship based model.

Said, we recognize that we have a lot of work to do in building out the new and expansion markets, which will be our primary focus in 2022, BBVA, obviously impacted our results for the full year and Rob will walk you through the details excluding BBVA, we generated record revenue highlighted by strong noninterest income with broad based contributions across our <unk>.

<unk> consumer businesses, we also maintained outstanding credit quality and a very strong capital position, while we continue to opportunistically deploy some of our excess cash into higher yielding securities throughout the year, we remain well positioned with substantial excess liquidity to capitalize on a rising interest rate environment, our reported results for the fourth quarter <unk>.

<unk> the impact of almost $440 million of BBVA integration costs. Excluding these we generated nearly $1 6 billion of net income and solid returns importantly, excluding the impact of the PPP loan forgiveness, we saw decent underlying loan growth trends and some uptick in utilization rates.

Which is very encouraging as Rob will discuss in more detail critical to our long term success has been the quality and stability of our talent and we pride ourselves of being an employer of choice given the recent dynamics of the substantially increased competition for talent in part due to the great resignation, we experienced greater wage pressure during the fourth quarter and I expect that to.

To persist into the coming year naturally we will look to offset these increases with our continuous improvement efforts, which include driving further automation and rethinking core processes.

Continue to invest in technology to enhance our capabilities in an increasingly digital world customers are looking to their financial providers to offer innovative tools that help them manage their money in ways that are faster smarter and more convenient.

Whether that be expanded use cases, Brazil, where transaction volumes are up 50% or low cash flow for example by providing account transparency and control of low cash mode has substantially reduced customer overdraft fees and related complaints.

Close by thanking our employees for their hard work and steadfast commitment to our customers and communities because of our employees. We had a remarkable year and are well positioned to serve all of our stakeholders in 2022 and beyond and with that I'll turn it over to Rob for a closer look at our results and then we'll take your questions. Thanks.

Thanks, Bill and good morning, everyone. Our balance sheet is on slide five and is presented on an average basis.

Overall year over year balance sheet growth was primarily driven by the acquisition of BBVA USA.

Loans grew 18% investment securities increased 49% and deposits grew 26%.

Looking at the linked quarter changes.

Loans for the fourth quarter were 289 billion, a decline of $2 4 billion or 1%.

Excluding $4 $7 billion of PPP forgiveness activity loans grew $2 3 billion or 1% and I'll cover the drivers in more detail over the next few slides.

Investment Securities increased $7 billion or 6% as we maintained higher purchasing activity throughout much of the quarter.

Accordingly cash balances at the federal reserve declined by $5 billion.

On the liability side.

The balances declined $1 6 billion.

As higher commercial and consumer deposits were offset by runoff deposits related to the strategic repricing of certain BBVA USA portfolios during the third quarter.

And that negatively impacted fourth quarter average balances.

However, on a spot basis total deposits as of December 31 increased $8 billion or 2%, reflecting the continued strong liquidity positions of our customers.

During the quarter, we returned approximately $1 $1 billion of capital to shareholders via common dividends of $500 million and share repurchases of $600 million.

Excluding the impact of PPP commercial loans grew by $2 $2 billion or 1%.

And by growth in corporate banking and asset based lending during the fourth quarter. We continued to see a slow and steady increase in utilization rates within our corporate and institutional banking business and along with that expanded pipelines.

Taken together these factors are driving our expectations for higher loan growth in 2022.

Consumer loans increased modestly linked quarter as higher residential real estate balances for mostly offset by lower home equity and auto loan.

Finally, as I mentioned PPP loans continued to decline due to forgiveness activity.

And as of December 31, $3 4 billion of PPP loans remained on our balance sheet.

Average deposits of 453 billion declined by $1 $6 billion linked quarter for the reasons I previously mentioned.

Overall, our rate paid on interest bearing deposits remained stable at four basis points.

Slide seven details to change in our average securities and Federal reserve balances.

As rates increased at the end of the third quarter and throughout the fourth quarter. We continued to Opportunistically add securities to our portfolio, primarily U S. Treasuries as a result securities balances averaged $128 billion in the fourth quarter, an increase of $7 2 billion or 6% compared to the.

Third quarter, 2021, and now represent 26% of interest earning assets.

We continue to have substantial excess liquidity with fed cash balances, averaging $75 billion during the fourth quarter, which we believe positions us well for a rising rate environment.

As you can see on slide eight fourth quarter 2021 reported EPS was $2 86, which included pretax integration costs of $438 million.

Excluding integration costs adjusted EPS was $3 68.

As expected during the fourth quarter, we incurred essentially half of our total anticipated deal integration costs, which reduced revenue by $47 million and increased expenses by $391 million.

Since the announcement of the acquisition.

We have now incurred approximately 95% of the totaled $980 million expected integration costs, including a $120 million of write offs for capitalized items, excluding the impact of integration costs linked quarter revenue was down $31 million or 1% expenses increased $48 million.

Or 1% and pre tax pre provision earnings declined $79 million or 4%.

The fourth quarter provision recapture was $327 million, reflecting continued improvements in the economic environment.

Net income excluding pretax integration costs of $438 million was $1 6 billion in the fourth quarter.

Now, let's discuss the key drivers of this performance in more detail.

Turning to slide nine these charts illustrate our diversified business mix total.

Total revenue for the fourth quarter of $5 $1 billion decreased $70 million linked quarter, reflecting lower noninterest income.

Net interest income of $2 9 billion was up slightly primarily a result of higher securities balance.

Net interest margin was stable at two 7%.

As I mentioned, the integration costs reduced noninterest income by $47 million, which.

Which included $19 million of lease exit costs.

$17 million of Treasury management fee waivers and $11 million of overdraft wafers.

Fourth quarter fee income, excluding integration costs was $1 $9 billion and.

<unk> $39 million or 2% linked quarter.

Looking at the detail asset management fees increased $3 million or 1% primarily related to higher average equity markets.

Consumer services grew $12 million or 2% due to higher brokerage and credit card revenue corporate service fees increased $14 million or 2%, reflecting higher loan syndications activity as well as continued elevated corporate advisory activity.

<unk> mortgage noninterest income declined $46 million, driven by lower our MSR valuation adjustments and loan sales revenue.

Service charges on deposits decreased $22 million, primarily a result of converting BBVA USA customers to pnc's product in overdraft pricing structure.

Turning to slide 10, our fourth quarter expenses were up by $204 million or 6% linked quarter. The growth was primarily driven by $156 million increase in integration expense.

We added 2021 goal of $300 million in cost savings through our continuous improvement program and we successfully completed actions to achieve that goal looking forward to 2022, our annual CIP goal will once again be $300 million.

Our credit metrics are presented on slide 11.

Nonperforming loans of $2 $5 billion decreased $48 million or 2% compared to September 30, and.

<unk> continue to represent less than 1% of total loans.

Total delinquencies of $2 billion on December 31 increased $516 million or 35%. Obviously this was a large increase where.

Annualized net charge offs to average loans continues to be low and in the fourth quarter was 17 basis points and during the fourth quarter, our allowance for credit losses declined $471 million, reflecting continued improvements in the economic environment at quarter end, our reserves were $5 $5 billion, representing one nine.

2% of loans.

In summary, PNC reported a strong fourth quarter, which concluded a successful 2021, and we're well positioned for 2022 as we continue to realize the potential of our coast to coast franchise.

Beginning in May followed by additional increases in June September and December looking ahead, our full year guidance for 2022 includes the impact of 12 months of BBVA USA results compared to only seven months in 2021 taken that into account our outlook for full year 2022 compared to 2021 rig.

<unk> is as follows we.

We expect average loan growth of approximately 10% and 5% on a spot basis, we expect total revenue growth to be 8% to 10% we expect.

Expenses, excluding integration expense to be up 4% to 6%.

And to be clear here. This includes five additional months of BBVA USA operating expenses, which equates to a full year increase of approximately $500 million.

And we expect our effective tax rate to be approximately 18% based.

Based on this guidance, we expect will generate solid positive operating leverage in 2022.

Looking ahead at the first quarter of 2022 compared to the recent fourth quarter 2021 results.

We expect average loan balances, excluding PPP to be up approximately 1% to 2%.

We expect NII to be down approximately 1% to 2%, reflecting two fewer days in the quarter and a decline of approximately $75 million in PPP related interest income.

But.

Taking our guidance for all components of revenue into consideration, we expect total revenue to decline approximately 3% to 5%.

We expect total noninterest expense, excluding integration costs to be down approximately 4% to 6% and.

And during the quarter, we expect to incur $30 million of integration expense.

Finally, we expect first quarter net charge offs to be between 101 hundred $50 million.

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

Thank you well now begin the question and answer session. If you would like to register for a question press. The one followed by the four on your Touchtone phone here with three pumps with knowledge in the class.

If your question has been answered and you'd like to withdraw your registration press. The one followed by the <unk>.

As a reminder, this conference is being recorded.

Thank you.

Our first question comes from the line of Dave <unk> with Baird. Please proceed with your question.

Hey, guys. Good morning, I had a question about capital.

And capital allocation you, obviously finished the year at <unk>.

Tend to CET, one which is ahead of kind of your initial targets when you announced.

You kind of answered your own question because we're consistent.

All else equal in this environment.

First focus on the potential of loan growth and using it as a good way.

Our bias strong bias towards dividend.

But we will still be in the market to repurchase shares and I think.

You will.

Probably see us accelerate some of the things we're doing on the smaller side in terms of.

Product activity bolt ons into <unk>, and so forth none of that by the way that those acquisitions won't add up too much but.

But an important part of.

Just added core capabilities as we go into a digitized world.

Okay. Thanks for that and then a question on your guidance in particular NII I know you mentioned you have got four hikes.

So our economists expect four hikes I actually think it's going to be more aggressive than that but of an outlier.

Currently one vote.

Our our forecast is at.

At this point pretty much on the forward curve at this point.

I think the plan Rob I don't know if you can talk to the plan.

We're going to gradually add duration throughout the year.

There wasn't any magic to it than we do.

Didnt really build in in Rob's guidance.

Some assumption that we would go at it even more aggressively.

If rates reacted and the range that we had that 25% to 30% range that is still the range thats in our guidance.

Okay. Thanks, Ross I appreciate it.

Sure.

Thank you and next we now have a question from the line of John Kerry with Evercore. Please proceed with your question.

Okay.

Good morning, guys.

Hey, good morning, John .

On the <unk>.

<unk> guide for the full year equal to 10%.

I just wanted to see if you could help unpack that a little bit in terms of how you view the NII trajectory for the year.

Type of growth, we think is reasonable versus the.

The trajectory on the fee income side of things given some of the dynamics you flagged. Thanks.

Yes sure John .

So full revenue full year revenue up 8% to 10%.

Break down those components net interest income up low teens.

And that does that does factor in the rate increases that we spoke about in the comments opening comments.

And then on the fees mid single digits.

Year over year so.

Those two together gets you to the 8% to 10%.

Got it alright. Thanks, that's helpful and then on the on the loan growth front.

Just given the 10% end of period loan growth expectation certainly implies an acceleration that you indicated that youre seeing.

Cumulus a little more color on the growth trends that you think is achievable on the commercial side versus consumer and maybe well.

What are you expecting to be the biggest drivers of that acceleration as you look at the loan book.

Yes sure so.

So for the full year guide, it's 10% average, but probably a better indicators the spot just because of the acquisition dynamics on the average number so spot up from period end, 5%.

And we see a continuation of what we started to see in the fourth quarter, which was some expanded utilization in the commercial book.

Picking up through 2022, and then a little bit less on the consumer side.

Tumor customers are still pretty flush with cash.

Loan demand there certainly in the first half of 2022, we expect to be softer than the commercial side.

Got it that helps thanks, yes, I meant to say.

Average on the growth.

You have the color. Thanks you.

You bet.

Thank you.

And now we have a question from the line of Eric and Eric.

Ian <unk> with UBS. Please proceed with your question.

Hi, good morning.

Good morning Erika.

Wanted to follow up on the questions on what's embedded in the NII Guide Robbie answered the question on.

What you are assuming for liquidity deployment, but what are you assuming in your NII guide about the trajectory of deposit beta.

And what do you think will actually happen.

Well in terms of our guidance, Eric what we what we apply in terms of beta is what we've seen in past cycles.

Which generally speaking will be a lag on the front end so yes.

My expectation and what we built into the guidance is that we will see some beta increase but not not until the end of 2022, and it'll probably be more of a factor in 'twenty three.

Just because of the levels of liquidity and deposits that we have.

Got it okay. So if I'm comparing it to your previous deposit beta.

In terms of let's say in 15 to 16 to 17 actually the first 100 basis point your guidance assumes a slower ramp than that.

That's exactly right.

Got it and the second follow up question is for Bill.

One of your peers, Jamie had obviously given.

Our guidance for higher expenses.

2022, pointing to accelerated investment spend as we think about this 4% to 6%.

Obviously some of this is the BBVA baseline, but did you frontloaded some of the investment spend in 2022 in other words as your investors to start thinking about P&C profitability.

More.

Normalized rising rate environment is 4% to 6%.

Brokerage guide post for future for future growth and expenses going past 'twenty two.

No.

To unpack the guide for next year.

I think the.

PNC legacy expenses are up.

Maybe a percent the non BBVA USA, yes, yes, all right yeah.

So.

<unk>.

$900 million of cost saves that was netted number against investments, we're going to make to build out those markets. So inside of everything youre seeing there actually has a lot of investment already built into it.

And of course, our continuous improvement of $300 million offsets.

And that's something that we've been doing for a number of years.

Got it and I also think we've had it's worth noting we've had some debate internally.

The continuous improvement number and cannot be larger because I think we all see opportunities in the operating environment.

Once we kind of lock it down and kept track of it shows up in continuous improvement.

That won't stop us from going after exactly.

Got it thank you.

Thank you and we now have a question from the line of Betsy <unk> with Morgan Stanley . Please go ahead.

Hi, good morning.

Hey, Betsy.

Okay. So two questions one just on how we are thinking about the reinvestment in the securities portfolio as we think about the NII guide as well, maybe you could give us a little sense of the.

The.

Okay.

We will.

Leg in throughout the course, but remember what's in our guide on Securities doesn't Dent our liquidity profile. So what we have in our guide here is kind of steady deployment working towards.

The 25% to 30% will add balances it doesn't even that the potential of what we could do with liquidity with the fed cash balances yeah yeah.

Yeah.

It's kind of a it's a.

Base line budget boring the rates did this we did the following.

If there is.

If rates go beyond or even if we get to a place where we think.

Our rates are probably gone where they need to go buy the size I think they'll go we could we could increase that but that's not contemplated in the forecast that we have right now.

Because I am I right in thinking your target range of securities to earning assets like 25% to 30% is that fair.

So that's right.

Okay.

And then remember.

Remember remember inside of that mix right. That's a big portfolio of securities. The big difference in the yield coming out of buying short dated treasuries, which has been kind of a recent trade versus going further out the curve and going back towards mortgages. Once you. Once you assume the extension risk is taken out massive.

<unk> and yields so some of it's notional of security some of its whats youre actually buying in both of those will be driven by the speed.

<unk>.

And an outlook for for rates over time.

Right. So what I'm hearing is baseline and the expectation, but upside as we approach kind of rates, reflecting your view of full extension risk in winter.

The R&D side I don't know if my individual views right, there's a lot of upside.

But the forecast that we've given you on what's kind of in our plan as is.

Steady state followed the follow the forwards and legging overtime.

Alright particular terms of the year.

On the yields on the securities portfolio can change a lot.

Right right right right I got it Okay, and then separately just thinking a little bit longer term fell on me.

Maybe you would've had a slightly different skew to the branch mix just trying to understand a little more detail there. Thanks.

Two very different questions.

As you've seen we've done a number of small things tempus, probably being the most interesting one where we bring in certain payment capabilities that lead to other opportunities.

We see more and more of those by the way we are not unique at that.

Lot of banks are playing in this space, they're not terribly expensive, but oftentimes you get.

<unk>.

Modules of technology that can be sort of bought into and then scaled across your broader platform that I, just think youre going to see more of that as we continue to compete.

At the digital space for both the consumer and.

Corporate.

On the branch side, we have plans to further.

So we always do kind of build out selectively in the markets, where we're underpenetrated, but at the same time, you'll see us continue our practice of Consol.

Consolidated.

Thicker markets. So so no no real.

Change there and all of that's in the numbers, we've given you.

Okay. Thank you.

Yeah.

Thank you and we now have a question from the line of Kevin Cassidy with RBC. Please go ahead with your question.

Hi, Ron Hi, Bill.

Good morning, John Good morning.

Can you guys give us a little color im trying to figure out what we're going to be talking about in the fourth quarter earnings call for 2022 in January of 'twenty, three and I think credit might be a subject receives more attention than can you share with us your underwriting standards, how you compare them today to let's say right at the start of the <unk>.

<unk> and then compare them to 2019, how do they look compared to today.

So you got a separate something our credit box per se right. So.

Type of clients, we lend to the leverage they can have all the things you would otherwise measure we we really don't change that over time.

Having said that of course, even inside of that box companies are doing.

Better or they are doing.

And in more poorly I think we're going to go into a period of time here as we go towards the end of the year, where all else equal there will be pressure on credit not because we changed our underwriting standards, but because of the upgrade downgrade ratio.

What will change.

Rob and I were talking before the call. If you actually look at our reserve ratio, particularly when you adjust it for credit cards.

<unk>.

I can't think of a period of time, where you're kind of going into.

Rising rate environment, which is going to help us long growth, which is going to help us.

And feeling.

Healthy reserves when you compare where we are versus just call it that versus the rest of the industry in terms of raw percentages against the balance.

And you know our our our book through through legacy performance.

And resulting from the unique dynamics of the pandemic. So it's.

Unusual setup, yeah, yeah, but.

Very good and then as a follow up.

You have some decent loan growth Rob that you pointed to for 2022.

In the commercial.

And that might come from in 2022.

What is it.

The new money out right, so the new clients.

New money that we are committing whether it's drawn or not.

Has accelerated for the last bunch of months and a lot of that is related to the newer markets, we're in including some big wins coming out of the BBVA markets.

Utilization.

Part right. So the moneys out now if somebody borrowing more under what line is broad based and if you just think about how many clients we have it.

It's kind of distributed across everything.

The other thing that I'd add to that Gerard is that the pipeline and our commercial book are strong and in the new markets are up percentage wise significantly.

Very good thank you.

Thank you.

We now have a question from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Hi.

So Phil you, let off saying that BBVA has exceeded expectations.

But I didn't I don't think I heard any changes to expense savings.

Or synergies or anything like that so even if you can't quantify it can you talk about what's going better or worse than expected.

I will look better than expected on initial dearth of deal terms as Laurie.

Yeah as largely the economy.

Alright, the assumptions where we.

Mark credit looked at credit.

Turned out to be.

Idly conservative.

But.

What we saw at that point.

The.

Better than expected if I look at it I think the teams that we've been able to deploy in the market. Some of the talent that BBVA had some of the talent we were able to hire.

The amount of call volume that we're having in the new markets.

With new products at all clients and with new products and people with new clients all sort of.

Wildly outpacing what we were able to do with RBC.

<unk>.

Yeah.

In our newer markets in the past and then just just wins.

Showing up with clients.

So that's kind of all on the business momentum side continues to give us comfort on our ability to build out the markets. The credit is a lot better than we thought.

The expense guide.

We'd go out there.

We would take $900 million, including <unk>.

Investment and we stick to that but to Rob's point and you guys know this of us through time.

Does it mean that we're going to stop looking at once we hit our expense guide.

I would just leave it there.

Where are you are leaving it so I guess, what really my question. So why not increase your expense savings target or quantify that is that because you're reinvesting it or youre, just being conservative or youre just waiting longer.

I think the easiest way to answer that is we don't know what I was talking about continuous improvement a little while ago.

We kind of other stuff there.

True.

Some metrics and some thought process today, but until we can.

You know put an action plan together quantify it know how are we going to measure it I can't I'm not just going to throw an expense guide in there that probably is embedded but I'm not sure and I. Just think this is Rob Mike I just think it's premature. So we worked hard in 2021 to get that $900 million in savings into that $1 billion seven run rate.

So we got to get going and this is getting going part.

And then I know part of your you are in all top 30 U S markets now and.

I know you want to expand and so you did guide for you said.

Solid positive operating leverage for the years like get that on the other hand isn't it getting a lot more expensive to hire people to help with that expansion into new markets.

It is but we've largely hired them all.

Okay.

We hit you need to understand when we closed.

And then converted we had basically the teams build out and all of these markets. So they're in our run rate.

I mean, I think if you take a higher I mean because.

These are a lot of markets and stuff right.

Yeah, a lot of people.

But hey, if the extension of your question is are we going to see wait to we expect to see wage pressure in 2022, we do.

And that is built into our expense guidance.

Okay fair enough alright, thank you.

Sure. Thank you.

As a reminder to register for a question press the one followed by the four.

Up next we have a question from the line of Bill Karachi with Wolfe Research. Please proceed with your question.

Thanks, Good morning, Bill and Rob.

Following up on your deposit beta commentary.

How are you thinking about the risks that balance sheet runoff.

Yes.

The potential impact it could have in this cycle versus the last one given that its expected to.

Play a bigger role versus when we exited the last sort of cycle.

It's a great question and that's obviously going to impact it.

Yeah.

In the extreme if they if they shrink their balance sheet dramatically. It obviously would impact betas and make them higher the offset to that though is you got to remember with loan growth you actually create deposits.

Alright, so if loan growth does pick up as early as the fed is dropping their balance sheet, which doesn't which isn't unlikely.

That loan growth actually generates deposits you'd be thinking about just the leverage on the capital you hold for a loan in the money everywhere else.

So I'm not sure I reiterated my way through exactly how thats going to play out other than it feels like the combination of those two things should leave us extremely liquid.

Deposit wise for the next several years.

Which is our base expectation well you've got to keep an eye on it yeah.

Yes.

Makes sense.

I guess.

<unk>.

It's under the QE process.

I don't think the system works that way.

The fed shrinks its balance sheet.

You will likely see corporate cash.

I don't know that you can think through it that way I think it transmits through the banking system and I think it hits everybody largely the same as a function of their corporate and consumer mix.

But corporates behave like corporates and consumers behave like consumers.

Got it.

Lastly, I think you touched on this but just to put a finer point on it.

The pipelines are strong loan growth trends that you are describing persist.

Yes, I guess, maybe if you could just comment on your willingness to you or the extent to which that influences your willingness to take your securities portfolio as high as 30%.

I guess do you think your liquidity is sufficient to be able to do both.

That's stronger loan growth as well as higher ore, whereas I wonder how.

How does that interaction.

We have plenty of liquidity to do both.

Yes.

Got it thank you for taking my questions.

Thank you. Thank you.

And we now have a question from the line of Ken <unk> with Jefferies. Please go ahead.

Hey, Thanks. Good morning, guys just wanted to follow up Rob I think you had mentioned when you broke down the revenue guidance that you're looking at mid <unk> fees in the mid single digits and obviously that also includes the BBVA stub yesterday ridiculously great year for corporate services, especially I'm just wondering underneath the surface what do you see as being the underlying growth driver.

<unk> outside of the BBVA rollover.

Yes, I would just say if you're taking a look at the full year, Ken just going through the categories asset management, we would expect to continue to increase in that mid single digit range.

Sumer.

Higher than that in part due to the addition of the BBVA franchise, but you hit it on corporate services, we had such elevated levels in 2021, our expectations for 2022 or down a bit.

Sure.

Residential mortgage maybe up a little bit and then service charges on deposits down.

As we get the full year effect of reduced overdraft fees.

We expect from low cash mode. So you put all that together, that's how you get to mid single digits.

Okay got it and then and then.

That is yes.

Okay, one little clean up just on securities yields Rob last quarter, you had that negative impact from the BBVA portfolio, Mark and then this quarter it was flattish even with.

With the absence of that so can you kind of just work us through what was the impact in the fourth quarter. If any and are you still are you at the point, where youre seeing better reinvestment yields.

Yes, we are starting to I think the investment yields is what's the story on the premium amortization issue at the third quarter, which was elevated.

It went down in the fourth quarter, but it's still elevated over what I would consider normal levels. So.

That worked against us a little bit as well.

Okay understood alright, thanks, Rob.

Sure.

Thank you.

And we now have a question from the line of John Mcdonald with Autonomous Research. Please go ahead Sir.

Hey, guys.

One more on the expenses it is pretty impressive for the expense guide for 'twenty, two if I look at it.

Relative to kind of a fourth quarter annualized and implies a quarterly run rate is about 5% lower Rob. So I guess, just kind of unpacking that is the fourth quarter of this year, a little high because of such strong capital markets revenues and then.

How are you eating inflation and still getting cost to be 5% lower year over year. When other banks are having a lot of inflationary pressures that would be helpful.

Yes, no you hit it it's definitely on the on the wage side in the fourth quarter.

And it just goes back as we go into 2022 goes back to what we were saying earlier in terms of how we laid out the year, we have the cost saves.

Locked in for the BBVA side, we have investments.

On the non BBVA side that are largely offset by our continuous improvement numbers. So that's that's how we put it all together in that.

That's the plan.

Okay, and just because I know all of our employees are listening.

This plan assumes that we are paying people competitively in a competitive market.

The market for talented people.

We just we just need to find the dollars elsewhere to be able to do that right.

Okay got it and then one industry type question for you guys that you have a lot of reserves relative to peers mix adjusted on every basis.

But we've never seen like seasonal working in a loan growth environment. So just kind of your guys' thoughts.

Growth driven provisioning.

Yes, I can answer that one John .

That complex and in some instances I don't know if we know because we haven't run seasonal through an environment like that but academically speaking, yes, we will get to the point, where we will need to grow reserves in concert with bigger balance sheets bigger loan balances.

We're still in this place where we're running high in terms of percentage terms, so theres going to be some offsetting that offsetting factors here is my guess and 2022.

Yes.

Okay fair enough. Thanks.

Alright, thank you.

I'll now turn the conference back to Mr. <unk> for your concluding remarks, thank you Sir.

Alright, no concluding remarks, I know you guys are busy. Thank you for dialing in we've got a lot of cost today.

Look forward to talking to you in the first quarter.

Thank you. Thanks. Thank you.

That does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect. Your lines. Thank you once again.

Thank you everyone.

Q4 2021 PNC Financial Services Group Inc Earnings Call

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