Q2 2022 PNC Financial Services Group Inc Earnings Call

Speaker 2: three two

Speaker 2: one

Speaker 3: Good morning and welcome to today's conference call for the PNC Financial Services Group.

Speaker 3: Participating on this call are PNC's Chairman, President and CEO Bill Domchak, and Rob Riley, Executive Vice President and CFO .

Speaker 3: 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.com, under Invest Relations.

Speaker 3: These statements speak only as of July 15, 2022, and P&C undertakes no obligation to update them.

Speaker 4: 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 second quarter highlighted by 9% revenue growth and solid positive operating leverage resulting in PPN our growth of 23% we maintain strong credit quality and fees rebounded from the first quarter driven primarily by capital markets activity Including Harris Williams and continued growth in card and cash management The strong loan growth and rising rates helped us to increase both net interest income and that it

Speaker 4: capital to shareholders during the quarter through share repurchases and dividends.

Speaker 4: Looking forward, there is uncertainty in the environment we're operating in, including the impact of higher rates, supply chain disruptions, and inflation. But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, continued focus on expense management, and differentiated strategies for organic growth will continue to provide the foundation for our success.

Speaker 4: And our focus is on executing the things we can control and not getting distracted by what is beyond our control. Along those lines, we delivered well on our strategic priorities in the quarter, including the build-out of our new BBVA and expansion markets, modernizing our retail banking technology platform, bolstering our asset management offering, and building differentiated and responsible capabilities for our retail and commercial customers in the payment space.

Speaker 4: As I've talked about recently at conferences, our performance in the BBVA markets has exceeded our own expectations.

Speaker 4: On slide three, you can see that the strong growth we've generated in these markets are across customer segments.

Speaker 4: corporate banking we've seen sales increase 40% length quarter and maintained a 50% non-credit mix of sales since conversion.

Speaker 4: We've seen similar growth within commercial banking where sales in the BBVA USA markets are up 32% link quarter and non-credit sales to total sales have been approximately 55% since conversion.

Speaker 4: In retail banking, we've experienced a notable increase in sales for both small businesses and consumers of 16% and 22% respectively.

Speaker 4: And we continue to invest in AMG and a big part of that is building a strong customer-focused team that can deliver our brand across our footprint. We have built good momentum in our recruiting efforts over the past few quarters, hiring advisors across all areas of the business to help deliver for our clients.

Speaker 4: I'll close by thanking our employees for their hard work and dedication to our customers and communities. Moving forward, we believe that we're well positioned to continue to grow shareholder value. 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 very much.

Speaker 5: Well, thanks Bill and good morning everyone. Our balance sheet is on slide four and it's presented on an average basis.

Speaker 5: During the quarter, loan balance is averaged $305 billion, an increase of $14 billion or 5%. An increase of $14 billion or 5%.

Speaker 5: Investment securities grew approximately $1 billion or 1%.

Speaker 5: And our average cash balances at the Federal Reserve declined $23 billion.

Speaker 5: Deposit balances averaged $447 billion, a decline of $7 billion or 2%.

Speaker 5: Our tangible book value was $74.39 per common share as of June 30th, a 7% decline linked quarter entirely AOCI driven as a function of higher rates.

Speaker 5: And as of June 30, 2022, our CET1 ratio was estimated to be 9.6%.

Speaker 5: Given our strong capital ratios, we continue to be well positioned with significant capital flexibility.

Speaker 5: During the quarter, we returned $1.4 billion of capital to shareholders through $627 million of common dividends and $737 million of share repurchases for 4.3 million shares.

Speaker 5: Our recent CCAR results underscore the strength of our balance sheet and support our commitment to returning capital to our shareholders.

Speaker 5: As you know, our stress capital buffer for the fourth quarter period beginning in October 2022 is now 2.9%, and our applicable ratios are comfortably in excess of the regulatory minimums.

Speaker 5: Earlier this year, our Board of Directors authorized a new repurchase framework, which allows for up to 100 million common shares, of which approximately 59% were still available for repurchase as of June 30.

Speaker 5: This allows for the continuation of our recent average share repurchase levels in dollars, as well as the flexibility to increase those levels should conditions warrant.

Speaker 5: Slide 5 shows our loans in more detail.

Speaker 5: During the second quarter, we delivered solid loan growth across our expanded franchise.

Speaker 5: particularly when compared to 2021 growth rates.

Speaker 5: 2021, as you know, was characterized by low utilization levels, PPP loan forgiveness, and in PNC's case, a repositioning of certain acquisition-related portfolios.

Speaker 5: Loan balances averaged $305 billion, an increase of $14 billion, or 5%, compared to the first quarter, reflecting growth in both commercial and consumer loans.

Speaker 5: Commercial loans, excluding PPP, grew $13 billion, driven by higher new production as well as utilization.

Speaker 5: Included in this growth was approximately $5 billion related to high quality, short-term loans that are expected to mature during the second half of the year. Notably, in our CNIB segment, the utilization rate increased more than 120 basis points, and our overall commitments were 5% higher compared to the first quarter.

Speaker 5: PPP loan balances declined $1.2 billion and at the end of the quarter were less than a billion dollars.

Speaker 5: Consumer loans increased $2 billion as higher mortgage and home equity balances were partially offset by lower auto loans.

Speaker 5: And loan yields increased 10 basis points compared to the first quarter, driven by higher interest rates.

Speaker 5: Slide six highlights the composition of our deposit portfolio, as well as the average balance changes linked quarter. Slide six highlights the composition of our deposit portfolio, as well as the average balance changes linked quarter.

Speaker 5: We have a strong core deposit base, which is two-thirds interest bearing and one-third non-interest bearing.

Speaker 5: Within interest-bearing, 70% are consumer, and within non-interest-bearing, 50% are commercial compensating balances and represent stable operating deposits. At the end of the second quarter, our loan-to-deposit ratio was 71%, which remains well below our pre-pandemic historic average.

Speaker 5: On the right, you can see linked quarter change in deposits in more detail. Deposits averaged $447 billion in the second quarter, a decline of nearly $7 billion or 2% linked quarter.

Speaker 5: Commercial deposits declined $8 billion, or 4%, primarily in non-interest-bearing deposits, due to movement to higher-yielding investments and seasonality. Average consumer deposits increased seasonally by $2 billion, or 1%.

Speaker 5: Overall, our rate paid on interest bearing deposits increased 8 basis points linked quarter to 12 basis points.

Speaker 5: Deposit betas have lagged early in the rate rising cycle, but we expect our deposit betas to accelerate in the third quarter and throughout the remainder of the year given our increased rate forecast.

Speaker 5: As a result, we now expect our betas to approach 30 percent by year-end, compared to our previous expectation of 22 percent.

Speaker 5: Slide 7 details our securities portfolio.

Speaker 5: On an average basis, our securities grew $800 million or 1% during the quarter, representing a slower pace of reinvestment in light of the rapidly rising interest rate environments. In light of the rapidly rising interest rate environments.

Speaker 5: The yield on our securities portfolio increased 25 basis points to 1.89%, driven by higher reinvestment yields as well as lower premium amortization.

Speaker 5: On a spot basis, our securities remained relatively stable during the second quarter as net purchases were largely offset by net unrealized losses on the portfolio.

Speaker 5: As Bill mentioned, in total, we now have 60% of our securities and held to maturity as of June 30th, which will help mitigate future AOCI impacts from rising interest rates.

Speaker 5: Net pretax unrealized losses on the securities portfolio totaled $8.3 billion at the end of the second quarter.

Speaker 5: This includes $5.4 billion related to securities transferred to held to maturity, which will accrete back over the remaining lives of those securities.

Speaker 5: Turning to the income statement on slide 8.

Speaker 5: As you can see, second quarter 2022 reported net income was $1.5 billion, or $3.39 per share, which included pre-tax integration costs of $14 million.

Speaker 5: excluding integration costs, adjusted EPS with $3.42.

Speaker 5: Revenue is up $424 million or 9% compared with the first quarter.

Speaker 5: Expenses increased $72 million or 2%, resulting in 7% positive operating leverage linked quarter.

Speaker 5: Provision was $36 million and our effective tax rate was 18.5%.

Speaker 5: Now let's discuss the key drivers of this performance in more detail.

Speaker 5: Slide nine details our revenue trends.

Speaker 5: Total revenue for the second quarter of $5.1 billion increased 9% or $424 million linked quarter.

Speaker 5: Net interest income of $3.1 billion was up $247 million, or 9%.

Speaker 5: The benefit of higher yields on interest earning assets and increased loan balances was partially offset by higher funding costs.

Speaker 5: As a result, the net interest margin increased 22 basis points to 2.5%.

Speaker 5: Second quarter fee income was $1.9 billion, an increase of $211 million, or 13% linked quarter.

Speaker 5: Looking at the detail of each category, asset management and brokerage fees decreased 12 million dollars or 3% reflecting lower average equity markets.

Speaker 5: Capital market related fees rebounded as expected and increased $157 million or 62% driven by higher M&A advisory fees.

Speaker 5: Card and cash management revenue grew $51 million, or 8%, driven by higher consumer spending activity and increased treasury management product revenue.

Speaker 5: Lending and deposit services increased $13 million or 5%, reflecting seasonally higher activity and included lower integration related sea waivers.

Speaker 5: Residential and commercial mortgage non-interest income was essentially stable linked quarter. Higher revenue from commercial mortgage banking activities offset lower residential mortgage loan sales revenue.

Speaker 5: Finally, other non-interest income declined $34 million and included a $16 million Visa negative fair value adjustment related to litigation escrow funding and derivative valuation changes.

Speaker 6: Turning to slide 10.

Speaker 5: Our second quarter expenses were up by $72 million or 2% link quarter, driven by increased business activity, merit increases, and higher marketing spend.

Speaker 5: These increases were partially offset by seasonally lower occupancy expense and lower other expense.

Speaker 5: We remain deliberate around our expense management, and as we've previously stated, we have a goal to reduce costs by $300 million in 2022 through our continuous improvement program, and we're confident we'll achieve our full year target.

Speaker 5: As you know, this program funds a significant portion of our ongoing business and technology investment.

Speaker 5: Our credit metrics are presented on slide 11.

Speaker 5: Overall, we saw broad improvements across all categories. Non-performing loans of $2 billion decreased $252 million, or 11%, compared to March 31st.

Speaker 5: and continue to represent less than 1% of total loans.

Speaker 5: Total delinquencies were $1.5 billion on June 30th, a $188 million decline-linked quarter reflecting lower consumer and commercial loan delinquencies, which included the resolution of acquisition-related administrative and operational delays. Net charge-offs for loans and leases were $83 million, a decrease of $54 million linked quarter driven by lower consumer net charge-offs primarily within the auto portfolio. For more information, visit www.fema.gov

Speaker 5: Our annualized net charge off the average loans continues to be historically low at 11 basis points.

Speaker 5: And during the second quarter, our allowance for credit losses remained essentially stable, and our reserves now total $5.1 billion, or 1.7% of total loans.

Speaker 5: In summary, PNC reported a solid second quarter and we're well positioned for the second half of 2022 as we continue to realize the potential of our coast to coast franchise.

Speaker 5: In regard to our view of the overall economy, we expect the pace of economic growth to slow over the remainder of 2022, resulting in 2% average annual real GDP growth.

Speaker 5: We also expect the Fed to raise rates by an additional cumulative 175 basis points through the remainder of this year to a range of 3.25% to 3.5% by year end.

Speaker 5: Looking at the third quarter of 2022 compared to the second quarter of 2022.

Speaker 5: We expect average loan balances to be up 1 to 2 percent.

Speaker 5: We expect net interest income to be up 10 to 12 percent.

Speaker 5: We expect non-interest income to be down 3-5%.

Speaker 5: which results in total revenue increasing 4 to 6 percent.

Speaker 5: We expect total non-interest expense to be stable to up 1%.

Speaker 5: And we expect third quarter net charge offs to be between $125 million and $175 million.

Speaker 5: Considering our reported operating results for the first half of 2022, third quarter expectations, and current economic forecasts for the full year 2022 compared to the full year 2021,

Speaker 5: We expect average loan growth of approximately 13% by an 8% loan growth on a spot basis.

Speaker 5: We expect total revenue growth to be 9 to 11 percent.

Speaker 5: Our revenue outlook for the full year is unchanged from the guidance we provided in April . However, relative to our expectations at that time, we now expect more net interest income from higher rates offset by somewhat lower fees.

Speaker 5: We expect expenses, excluding integration expense, to be up 4-6%.

Speaker 5: And we now expect our effective tax rate to be approximately 19%.

Speaker 5: With that, Phil and I are ready to take your questions.

Speaker 7: Thank you. At this time, if you would like to ask a question, please press the number 1 followed by the 4 on your telephone keypad.

Speaker 7: Please hold while we compile the Q&A roster.

Speaker 7: And our first question comes to the line of Gerard Cassidy with RBC. Please proceed.

Speaker 8: Good morning guys, how are you?

Speaker 5: Hey, good morning, Gerard.

Speaker 8: Rob, can you elaborate a little further on the deposit beta change? Is it purely just the rate of change in interest rates going up so fast, or is there a deposit mix that's also influencing your new outlook for the beta?

Speaker 5: Oh yeah, hey good morning Jard. Yeah probably both but a little bit more the former. You know we're just at that point now where we're seeing rates rising to the point where the betas are becoming active. They were not that active on the consumer side, a little bit on the commercial side in the first quarter and that's picked up a bit. More on the commercial side as we expected and in our case you know it's our non-operating deposits. That explains the decline.

Speaker 5: there in the second quarter. So, you know, betas are beginning to move. We expected that and we're ready for it. Very good.

Speaker 8: Credit quality obviously was quite strong for you folks, similar to the prior quarter.

Speaker 8: Bill, I don't know, I know there's a lot of uncertainty out there with what's going on in the world, but it just seems that for your company at least, you are so well positioned from a credit quality standpoint. And are we just going to go off a cliff or something at the end of the year with some sort of big recession that has frightened everybody about credit quality for banks in general? And any elaboration on your outlook on credit and the outlook for the economy? Thank you.

Speaker 4: Yeah, look, I don't think there's any cliff involved. You know, I do think that the trouble ahead lies, you know, somewhere in the middle of next year, you know, not any time in the next six months. But what you're seeing inside of our credit book, you got to remember that during this period of time, we continue to kind of run off a higher risk book from BBVA and our loan growth is largely in higher quality names.

Speaker 4: You know, the overall quality of our book actually improves quarter on quarter. You know, eventually that has to stop. And eventually I think the Fed has to slow, you know, the economy to a pace to get inflation under control. And I think that's going to be harder to do than the market currently assumes, and I think it's going to take longer than the market currently assumes.

Speaker 4: And when that happens, we're going to see credit costs go up, you know, at least back to what we would call normalized levels. But I don't think.

Speaker 4: You know, I don't see any particular bubbles inside of the banking system as it relates to credit. I think you're just going to see a slow grind with credit losses increasing over time as we get into this slowdown.

Speaker 5: And some normalization. I'm sorry, what was that Rob? I'm sorry. I was saying, and Bill mentioned it, just some normalization which is inevitable.

Speaker 8: Yes, no, agreed. Thank you guys.

Speaker 7: Sure. And our next question comes from Bill Karkashy with Wolf Research. Please proceed.

Speaker 9: Thanks. Good morning Bill and Rob. There was a time where you talked about increasing the mix of your securities given all the liquidity in the system, but as the Fed engages in QT and with the strong loan growth that you're seeing, could we see you go the other way and perhaps redeploy some of your securities portfolio paydowns to fund more of your growth such that you actually remix more, a larger mix of your earning assets towards loans?

Speaker 4: I think over time that is probably likely if we continue to see long growth the way we do. But you shouldn't mix security balances with the way we think about...

Speaker 4: fixed rate exposure hedging our deposits. Securities are one way we do that. Swaps are another way, and then of course our fixed rate assets themselves. And then inside of that, the duration of the securities we buy. So, long story short, the balance has probably declined.

Speaker 4: But we are sitting in a period of time right now where we are very asset sensitive. You will notice our balances basically stayed flat through the course of the quarter as we kind of purposely watch and let things roll off here given our view on what we think longer term rates are going to ultimately do. So balances could go down.

Speaker 5: just as a matter of sort of algebra in the balance sheet, but our ability to invest in rising rates is still there in a large way. Yeah, that's right. Well, the context, Bill, as you know, the context of your question is historically, pre sort of the rapid increase in liquidity over the last couple of years, we did run about 20% of our securities to our earning assets.

Speaker 5: we raised that because of all the liquidity in the system. So we're still pretty high on a historical basis, but as Bill Demtz just said, that's not likely to change anytime soon.

Speaker 9: That's very helpful. Thank you. And separately, as the Fed proceeds through the hiking cycle at some point, I think as you've both alluded to in your comments, that's going to presumably slow the pace of growth. But you're taking your loan growth guidance higher for the years. Maybe could you speak to how much of that improved outlook is idiosyncratic? Because it certainly does sound like you're expecting a deceleration at some point at the macro level.

Speaker 4: A lot of it just comes from our ability to win new business. Utilization rates have largely approached where we were, I think Rob, pre-pandemic at this point. So there's a little bit of room there. But you know, these new markets are...

Speaker 4: just our ability to win new business. And by the way, new business that is 50% fee-based is pretty strong, and we feel confident we'll be able to continue to do that, independent of what happens in the economy.

Speaker 5: Yeah, and I would just add to that, in terms of the loan growth outlook for the 12 months, we're up a bit, mostly because of the outperformance in the first half relative to our expectations. So that's sort of truing up, so to speak.

Speaker 9: Got it. If I could squeeze in one last one.

Speaker 9: You know, I think it's interesting, Bill, to think about your commentary around the normalization of credit as the Fed proceeds through its hiking cycle and, you know, sort of we think about the long and variable lags between monetary policy and when that ultimately starts to show up in credit. And then we sort of juxtapose that with what's happening with reserve rates, which it's notable that for most of your peers, they've...

Speaker 4: dynamics of CECL, but you know you should assume, you know we assume that all else equal credit quality is going to deteriorate at some pace. You know from here through the next two years I just don't think it's going to be all that dramatic.

Speaker 4: And it almost has to be a true statement given the charge-off levels we've been seeing.

Speaker 4: to be a true statement given the charge off levels we've been seeing. Right.

Speaker 5: And I would add to that.

Speaker 5: You know our reserve levels are above our day one see so even adjusted for the BBVA acquisition. We're appropriately reserved

Speaker 5: now and feel good about it.

Speaker 9: Very helpful. Thank you for taking my questions.

Speaker 7: And our next question comes to the line of Ken Usden with Jefferies. Please proceed.

Speaker 10: Hey guys, just wanted to just ask to dissect a little bit. Rob, you mentioned that your outlook for NII is a little bit better, your outlook for fees a little softer. The NII one I think we get, just wondering if you can help us understand now.

Speaker 10: What kind of curve you're building in and is it more just that uptick of rates that offsets that new 30% beta outcome?

Speaker 5: Yeah, that's right. Good morning, Ken. Yeah, that's it. That's exactly right. So, you know, higher rate environment, NII, and the balances that we've generated contribute to the improved NII look. And then you sort of referenced it in terms of the fees, mostly in terms of our full year expectations compared to what we thought at the beginning of the year and last quarter, some softer on AMG and mortgage.

Speaker 5: as you would expect with the equity markets performing like they are for AMG and interest rates on the mortgage side. So it's sort of the trade-off of the higher rates.

Speaker 10: Got it right. I'm sorry I missed your three and a quarter, three and a half comment from earlier, so thank you. On the fee side, you had a really good bounce back as you expected, especially in that capital market. What's changed there in terms of what you're seeing as far as the outlook on the fee side?

Speaker 5: So on the fee side again for the full year, most of the change relative to our full year expectations is within AMG and mortgage. and capital markets.

Speaker 5: You'll recall we had a soft first quarter relative to our expectations. We did see the bounce back in the second quarter, so we're back in position with our full-year expectations. You know, in the second half obviously remains to be seen.

Speaker 10: Okay, and if I could just sneak one more in, you know, you mentioned, Bill, you mentioned all the different ways that you can, you know, get exposure to variable rates and such. I'm just wondering, how are you guys thinking about just swaps portfolio, you had done some ads in terms of protecting and, you know, managing the near term upside versus the potential of what happens down the road, you know, based on Fed Funds futures curve expectations in your general view of the economy? Thanks, guys. Thanks, Bill.

Speaker 4: We don't think about the swaps book separate from our basic investing and fixed rate exposure. Where we sit across a securities book and swaps and everything we do fixed rate, we're looking at a curve now where I kind of think the year end rates in my own mind are probably largely right, but I think the assumption that the Fed is going to start easing in the spring of next year is absurd. I think the Fed is going to start easing in the spring of next year.

Speaker 4: You know, which means we're holding off at this point because we think there's still value to be had in the longer end of the curve as people come to the realization that inflation isn't as easy to tame as people might assume, and separately, that the Fed isn't going to immediately cut simply because the economy slows if inflation is still running hot.

Speaker 4: So we're going to sit pat, but it's not we don't think swaps

Speaker 4: are one thing and bonds are another. We just we look at our interest rate exposure, we're very asset sensitive, we have an opportunity to deploy in multiple places. We're just not doing it. We basically let everything run down thus far this year.

Speaker 7: Understood. Okay, thank you. And our next question comes line of Erica Najarian with UBS. Please proceed.

Speaker 11: Hi. Good morning. I'm sure this is the question that's been asked, but I just wanted to clarify. The loan growth expectation rose. You know, the performance has been spectacular. The revenues didn't move even though we had the higher loan growth and the higher rate outlook, and that's because of the higher beta assumed and also lower fees, Rob?

Speaker 5: Well, in part. I think the earlier question, and you might have missed it, Erica, was the improved outlook for the full year loan growth. The answer was most of that was a true up to our outperformance in the first half. So we grew loans faster than we thought we would in the first six months, which is great. So we drew up that full year expectation. So all of that is built in to the full year guidance.

Speaker 4: Part of the impact that we're seeing in NII and NIM is actually on our loan yields where the quality of our book, it improves fairly substantially. We put a lot of very high-grade stuff on and spreads have actually come in quarter on quarter. So when we look at the out forecast on NII together with loan growth, which will be pretty healthy, we have in there, embedded in there, this notion.

Speaker 4: that spreads are tighter than they were is we basically improve the quality of the book. That's another component. That's right.

Speaker 11: Got it. And just as a follow-up question, you know, how should we think about, you know, deposit growth from here? Bill, I think you've been the one that has been vocal about the notion that if loan growth is positive, deposit growth should be positive. How should we weigh that relative to, you know, probably your your willful desire to work out the non-operating deposits out of your balance sheet and, you know, in QT?

Speaker 4: Well, it's a good question and the answer to that remains to be seen a little bit. We've clearly seen the larger corporates move liquidity out of the banking system into the.....

Speaker 4: you know, in the money markets, government money markets. And I think, you know, as we go forward, the combination of QT from the Fed and what they do with their repo facility is going to drive some of the yields available in those funds, which in turn is going to drive how much of that sits on banks' balance sheets or not. Outside of those deposits, it's more about a rate-paid game. And I think deposits kind of, you know, inside of the retail space in the smaller bin market –

Speaker 4: commercial space, I think deposits actually grow simply because of the loan volume. But the mix shift that we've seen in commercial from a little bit less non-interest bearing into interest bearing, that game's going to play out. So thus far if you look at the total liquidity in the system, it really hasn't moved. And of course the Fed hasn't really started their QT program yet.

Speaker 4: You know, what we've seen is a movement of liquidity from banks into money funds.

Speaker 4: as money fund yields started to grow.

Speaker 4: So this is going to take a while to play out.

Speaker 5: Yeah, and our expectations, Eric, are generally stable, but as Bill pointed, the mix could be different. And then an open question on the non-operational deposits, which we'll either do or not do. Yeah. A big part of what we've seen go thus far are kind of deposits that we don't really care about. They were, you know, we kind of call them surge deposits internally, which were non-core clients, you know, parking liquidity that now have kind of gone into fund.

Speaker 5: and importantly are by definition low margin. That's it.

Speaker 11: Got it. And my last question, you know, Bill, you said earlier you don't really see any bubbles within the banking system. I think a lot of investors are more concerned about what's outside of the banking system. And interestingly, I'm sure you know the statistic very well, you know, corporate lending in terms of the bank share of it has declined to 16%. I guess my question to you is, you know, do you see an opportunity as rates rise and you know, the economy slows down?

Speaker 11: you know, is some of that market share available back to banks in terms of what's happened in the private market, you know, or was that never credit that you wanted to do anyway? And don't you have a unit within PNC that does third-party recoveries, you know, in terms of, you know, if you have, you know, corporate defaults, you could be a third-party recoveror, if that's the term? …

Speaker 4: First, I want to see the audit on only 16% of corporate credit being inside of banks, but I'm sure there's some way you can get there. Maybe the other way. Yeah, no, it's credit outside of the banking system melts. We play in that in two ways. One is, if it's in the real estate space, we do that inside of our special servicing arm in Midland. Two is we are very good at working corporate credits and we wouldn't be afraid of buying portfolios of troubled assets.

Speaker 4: to be approached by multiple B lenders.

Speaker 4: to basically run their books as they look at what's coming their way.

Speaker 4: Thus far we haven't agreed to do any of that and were we to do it, I think it would be quite lucrative.

Speaker 5: And we've done that in the past.

Speaker 11: Got it. All right. Thank you.

Speaker 7: And our next question comes from Mike Mayo with Wells Fargo Securities. Please proceed.

Speaker 12: Hi, can you hear me?

Speaker 5: Good morning. Okay, great.

Speaker 13: I guess all these questions get down to Nim.

Speaker 13: So are you forecasting deposits to run off for the year because you've mentioned Betas are starting to move and I I missed the updated guidance because you're you're guiding for good and I I grow so

Speaker 5: How much deposit runoff are you assuming there are deposit growth? I can jump on that and we covered some of that Mike. Generally speaking, and we recognize the fluidity for the second half, we're calling for stable deposits. Some mix change between non-interest bearing and interest bearing. Also an open question in terms of non-operational deposits and you know what betas are required for that and whether we choose to keep those or not. So that that all remains to be seen but...

Speaker 5: The outlook is stable and MIM we do expect to expand.

Speaker 13: And you talked about tighter low-nield spreads just because you're going up in quality.

Speaker 13: Are you getting rewarded for this more uncertain outlook? I mean capital markets, some assets are pricing in near recession levels, but I feel like the lending markets are not doing the same.

Speaker 13: And are you getting more spread for the added...

Speaker 13: Are you getting more spread for the added chance of a recession?

Speaker 4: It depends on the lending sector. So we are, for example, an asset based...

Speaker 4: you know, straight spreads on high-rated stuff has kind of stabilized. A lot of what we're seeing is just a mix shift in the quality of our book, not...

Speaker 4: change in the market in terms of spread. Where I think the market continues to be irrational is on the consumer side.

Speaker 4: You know so so auto lending seems you know in our view to be a little bit of a bubble You know and some of the some of the things we're still seeing being done on the consumer side But on that on the corporate side and the real estate side

Speaker 4: You know, the shift is moving back towards the banks in terms of our ability to negotiate and get spread and get covenants and get structure. Just not a dramatic shift the way you've seen in some of the headline stuff and capital markets related issues.

Speaker 13: So you're getting some of that. Bill, can you put this in context? This looks like the past is commercial loan growth in 14 years. We haven't had a cycle like this in quite some time. and

Speaker 13: I guess I'm repeating what I think what you said in the past. It's inventory, it's greater utilization, it's capital expenditures, it's working capital, some business from capital markets back to the banks.

Speaker 13: Did I miss anything there?

Speaker 4: No. Thank you for reminding me. That's what happened, right? We've had inventory built in capex and a little volume back to the banks and boom you get big loan growth.

Speaker 5: Yeah, and particularly on the utilization, which has grown. So that's coming off of their inventory, Bill, which, you know.

Speaker 13: The one I didn't mention that some other banks have mentioned, you did not. So I don't want to leave the witness here. But in terms of gaining share from non-banks, because you're seeing some non-bank entities not on as solid footing as they were in the past. Are you gaining share from them? Do you expect to gain share from them? Are there opportunities to do so? Are you shifting resources? Because I get it. You're the National Main Street Bank. You're in 30 MSA's.

Speaker 13: You have a lot on your plate to try to gain share in all those markets. Meanwhile, you have some verticals where you might be able to gain share. What are you doing to try to capitalize on that?

Speaker 4: Yeah, Mike, that most of those players play in a risk bucket that we don't like to play in.

Speaker 4: Right, so the exception to that is in our asset-based lending book where borrowers who might have been able to do a cash flow loan with a BDC at one point are now going to come back to the banks and do it asset-based.

Speaker 4: But you know in the consumer side the guys who are out there playing subprime consumer or or You know even in the leverage lending side cash flow unsecured work We just don't have a big book of business business there nor do we want one

Speaker 13: Okay, and last one, just on Cecil, you didn't, I mean, you beat on credit, your credit is great, you've always been high quality, you proved it through the global financial crisis, you get it.

Speaker 4: But with all this talk about a recession out there, doesn't that give you cover to go ahead and increase reserves? Like I get it you're above day one CSOL, but why not just take more reserves out of conservatism? It's it's you know, we have a model and we run by a model so we're not we're not a label We're not allowed to just that's right. We you know as much as I'd like to sometimes put my thumb on the scale we're not we don't we don't do that we don't do that, you know, see sold the model driven approach and

Speaker 5: As you pointed out, Mike, we're above our day one. We're appropriately reserved in a relative to our book. Okay, thank you.

Speaker 7: And our next question comes from John Pincare with Evercore ISI.

Speaker 14: Morning guys.

Speaker 5: Morning, John .

Speaker 14: On the back to the commercial loan growth topic, I'm sorry if I missed the detail on it, but I know you mentioned the 5 billion in high quality short term loans that were brought on that you expect to mature in the second half. Can you give a little bit of color on on that? On those balances and what drove it and and maybe a little bit in terms of outlook, could you see additional flows in that type of lending as well? Thanks.

Speaker 4: We'd like to see additional flows in that type of lending. It's kind of, you know, that was client, a handful of clients, but client specific.

Speaker 4: timing issues that we were able to serve client needs.

Speaker 4: you know, there are big balances and they're going to run on. And we like to do that. Yeah. If it happens again, that's great, but you know, these were specific ones we called out both because of their size and also because there are lower spreads than the rest of the book and you know, that had some impact on the loan yield this quarter.

Speaker 14: Okay, and then also related to that, in what areas do you expect that you could see some moderation in commercial loan demand as we do get some slowing in economic activity if the Fed succeeds here with the tightening?

Speaker 4: Eventually what you're going to see, we've seen utilizations go up as people have built inventories. Now that will reverse itself as we get into a slowdown and people struggle to move inventories. It will peak and then it will grind to a halt.

Speaker 4: But you know, I think that's going to end up being the driver. We'll continue to go work and gain share. And ultimately, you know, against the money we put out, we look at what happens to utilizations, the utilizations will start to drop through a slowdown.

Speaker 4: You know peek early into it and then and then slow down and say they try to free up working capital

Speaker 14: Okay, got it. Thanks, Bill. And then back to the Lomos reserve front, I hear you again in terms of the adequacy of your reserves. In your scenarios, did your economic scenarios that you run that support CSOL, did they get worse at all versus last quarter? Or did they like how did that change? And then separately, did you have any reallocations within the reserve that were noteworthy, like coming from commercial going into consumer? Can you maybe talk about that? So just trying to

large underwritings we just spoke about, improving the mix. So, pretty much unchanged.

Got it. Okay. Thanks, Ron.

Well, no, so, I'll clarify that. In terms of the dollar amounts and the stable, but inside of that, you know, obviously our scenarios build in some worsening concepts, but there's QFRs as part of that process that offset that, so.

End of the day, stable. Got it. Okay.

Thanks, Rob.

Okay.

Our next question comes from Abraham with Bank of America. Please proceed. pm

Hey, good morning.

Good morning, I guess just one follow up, Rob. In terms of everything about the outlook for deposit betas and margins, if the Fed stops at the end of the year, are you talked about the deposit beta and deposit growth expectations in the back half? But give us a sense of the acid sensitivity profile of the balance sheet in a world where the Fed stops hiking, the two 10 remains inverted for six to 12 months, and as Bill alluded to, he may not get cuts as quickly.

In that backdrop, do you still expect the margin to drift higher or do we start seeing some liability sensitivity where deposits are re-pricing higher but you're not seeing the benefit on the asteroid?

Yeah, yeah.

Well, you know, we don't give explicit NIM outlooks, but I would say your question is when does NIM peak? We see NIMs continuing to expand and peaking in 23. So with everything that you described, we still see upside in NIM.

Got it. So safe to assume that even in a backdrop where the Fed stops hiking, the NIMS should still at least drift higher a bit for a few more quarters. So, point noted.

Yeah, possibly and again we're in in sort of that context we're talking about 23 then to 2023 20 Yeah, and I didn't mean to pin pin you down or ask for 23 guidance I'm just trying to consider everything if we go into this Period where we've not been where the code remains a flat to inverted for a while what that does to the name and it's not unique to you, but Yeah, you have to you know the number of pieces that are moving inside of that You know even if let's assume they get out there, and they just freeze and you have a small

everything that was purchased with the 1.5% handles rolls off.

Yeah, that's right. That's why we're still some part, some ways from the peak.

That's fair, appreciate the perspective. And on the lending side, just still wanted to follow up on two things. One, do you have a sense of where customers are in terms of rebuilding inventories? That's been a big driver of growth for the last two to three quarters, but compared to pre-pandemic, are customer inventories back to those levels? How would you frame that? And secondly, would love to hear your thoughts about just outlook for the commercial real estate market in this backdrop, especially if we get a recession. You've been cautious in the past, so we'd love to hear your thoughts.

We think we're really well-reserved but absent that kind of slow burn the rest of it

continues to kind of do okay to improve. And I think that holds even at least in the, you know, in the slow down that's in the back of my mind. Again, I don't, you know, I just don't see some big spike into a really ugly recession.

So, you know, we have our eye on real estate, we have exposure into the office space that we're reserved against. It's kind of doing what we expected. And beyond that, we're not particularly worried about it. Yeah, and your point, we're well reserved. And multi-family, which is the biggest component of that, is very strong.

And just one quick one, sorry if I missed it. Did you talk about the pace of buybacks, how we should think about that in the back half of the year?

I did in my opening comments, you know, we're going to continue buying back shares roughly at the average rate of what we've been doing the last couple of quarters.

No, thanks for taking my questions.

Can you take my questions? here. Hello.

Our next question comes from Matt O'Connor with Deutsche Bank. Please proceed.

Good morning. You know, as we think about low-moss reserves and call it a moderate recession, how high or how much ad do you think you have to do? I think for COVID, it was around 2.5 billion X, the day one seasonal impact, but obviously there's been mixed shifts, the BBVA deal, and a lot of factors, but as you guys run your stress test, what would cumulative reserve be for a moderate recession?

No way to answer. Yeah, I was going to say that Bill said there was an earlier impossible question. Yeah, that one might be number two. But Matt, I mean, remember that reserve build in COVID, right? The scenarios we were running, you know, I don't remember off the top of my head, but it was a jack on employment to 15% or higher. GDP to, you know, we're not, this has nothing to do with that. Right, we're going to go into a slowdown and we're going to see an increase in reserves at some point, but...

They're not even going to be related to the thing we saw. You know, when COVID hit the economy down. Yeah, just in terms of size. You almost have to take that whole example set and remove it from the framework of how you think about provisions going forward.

Right, so if you'd like your employee and we've heard from some others that it should be a lot less.

So it seems like you're implying, and we've heard it from some others, that it should be a lot less.

I guess we'll see. No, no, no. I can't imagine, I mean...

You know, only if you're for think about what those forecasts were.

I mean, do you remember, they were unemployment going to 15%. Yeah, I mean it was, you know, I don't think there's anybody out there who thinks we have to crater the economy by that amount to get inflation under control. That was a, you know, look, there could be some world event that causes that, but it's not gonna be a function of the Fed raising rates and slowing the economy to get inflation under control.

Yeah, agreed. I mean, obviously that's what the market's so worried about. And it's just interesting, you know, if you put it relative to capital, even if you did what you did for COVID, it's only 50 basis points of capital.

that couple. Alright, look, you're bringing up, this whole issue is the issue I think that...

You know, investors just have completely wrong about the banking system right now.

you know if you look at the market cap that's been pulled out of the banking system and take your worst case reserve bill in charge of through some cycle it's just wildly wrong yeah we'll have increased losses but relatively you know

Not to that extent. Not to, not to, you know, anything close like what we put in during, during COVID and more importantly. Like what we put in during, during COVID and more importantly.

You know, I think there's a growth opportunity to improve a mild downturn for us. You know, I think there's a growth opportunity

Just given the way we run our business and the business it'll come back into the banking systems and out of the capital markets.

I'm personally confused about all the.

concern that sits out there on banking reserves in the coming recession and the impacts on the profitability of banks. It'll hurt a little bit, but... Well, and to your point, if it's being extrapolated from COVID scenarios... That's just a data point that needs removed.

And then just the flip side you've got a little over 8 billion of losses in OCI Obviously a lot of that comes back over time the part that's related to the bond book You know just give us a rule of thumb like how much of that it creates back each year If rates stay here on the kind of the medium long a term part of the curve?

but that the held a maturity creates back in the penetrative rates at this point that i don't know you guys have we discussed that right now it couple of million i mean you know the way we can think about internally given how much we moved is we ought to have hold a par on the held a maturity book adding to our capital base

that a pace that largely hedges us against further declines in AOCI and the available for sale book. Depending how much of a spike their rates are, rates are versus the roll down. But we feel pretty good about the mix we have at this point and obviously it's not impacting our capital flexibility. And obviously it's not impacting our capital flexibility.

you know, vis-a-vis the way we look at AOCI inside a regulatory capital.

Yeah, I guess what I was asking is like if we just think over the next few years, right, like all that OCI essentially gets reversed back as the bonds mature. Yeah, that's right. You are saddled with eight billion of losses like a lot of banks, you know, having to drag and just wondering, you know, what's a good rule of thumb? Does that eight billion come back kind of maybe one and a half, two billion a year or something like that? Well, I mean, we've got a duration in the book of 4.7 years or something. Well, the short answer is approximately 200 million a quarter, a billion a year.

So that's the number you're looking for, but you know, that's the right neighborhood. Sorry, that's out of the held to maturity. Held to maturity. Yeah, the held to maturity. You have a separate AOCI loss available for sale. Which is dependent on rate, right.

Okay. Thank you. Sure. As a reminder to register for a question, please press the 1 followed by the 4.

And our next question comes line of Betsy Graphic with Morgan Stanley . Please proceed.

Hi, thanks. Just one follow-up on that. On the AFS book, I guess the underlying question is, is the duration roughly the same as the HTM book? I get that, you know, rates will move that mark around, but let's say rates never change. Is it the same duration as HTM?

Yeah, roughly. Yeah, roughly. Yeah, yeah, yeah. Okay. And then just separately, I know there's a lot of questions earlier about deposits, etc. And I'm just wondering, your loan to deposit ratio, I think today is around 70, maybe 71%. And in 4Q19, it was at 83. So there's lots of room there in the LDR. I'm wondering how you think about it. Is, you know, are you happy to go back to 83 in the near term? Or is there, you know, a trajectory or a pace that you're comfortable with?

Look, if it's high quality, we'd love to go back to 83. You know, if it's in our risk box and coupled with, you know, client relationships where we have really strong cross-cell, it'd be a great outcome. Well, and that also relates to the deposit pricing and what we choose to do. Right. So, yeah, you're right. We have room and flexibility there as we go through these increased data and growing one environment. And we're growing one environment.

Right, so part of the question is just trying to get a sense is to the pace of LDR increase. You know, you kind of control with a deposit price on. Right. Right.

You know, you could let a lot more run off.

Yeah, that's my point. That's the flexibility so we can view these deposits in terms of whether we want to make for them. I don't think. Look, our intention here is to keep deposits and grow deposits if we can without having to be aggressive on rates very soon. If we can without having to be aggressive on rates very soon.

And inside of that, we'd like to grow loans. And if we manage to do the two things there and grow loan to deposit 83%, we'll be making a below the money given the Phoenix we get when we grow loans. That's a good position. That'd be a great thing to be able to do when we work in the water down.

Yeah, well, I mean, I guess part of the question is, you don't have to be more competitive on deposit rate right now.

You could wait a few more quarters and then move. Yeah, that's what I said.

a few more quarters and then move. Yeah, that's what I said. OK. All right. Thank you.

Our next question covers my mic. Maya was well before go securities. Please proceed.

Hi, I wanted to follow up just because Bill, you're just, he seems so adamant that the market cap has been taken out of your stock, you know, far exceeds, you know, credit loss hits that you have in a scenario. So, a personal question, you've owned a lot of stock for a long time, you have a lot of skin in the game.

At what point would you put more skin of the game and buy some shared we haven't seen that I think by any bank CEO and if you think this is Dislocation and you think it's so unlikely to have you know some kind of deep recession glow from the Interacresist pandemic sort of situation I have you thought about that I mean would you do that?

You know, I think about it all the time. I don't know what I go into details on my own financial situation. I'm not going to be able to do that. I'm not going to be able to do that. I'm not going to be able to do that. I'm not going to be able to do that.

I see a lot of value there. It's interesting. We've had a bunch of senior execs actually enroll in our employee stock purchase plan, which maybe is a simple way for me to get a few shares here and there. But look, I think there's a lot of value. I don't know that you're going to see me make a giant purchase because as you've said, I own a lot of stock and it's most of my net worth.

It's just a just an extra tone for the top, but I guess you said it on the call. Just one more time on that question. Again, you have this disconnect between the capital markets with some other areas and your own expectations.

So what you were saying before is that the power or the control has gone back to the banks from the borrower in terms of terms and structure, maybe not the same degree of pricing though.

And I'm just, it's that pricing element that

You know it's tough for you or anyone to really know how much you should be pricing these loans if you think we might be going into a recession. So how do you get to that level.

Look, it's, let me price you an ultimately as market driven. I just noticed with Hanah... Thank you.

I would expect for a given credit quality, we're gonna see small backup. Of course pricing is also based on a grid. So as we go into a slower economy and people run another turn of leverage given their performance, we'll see jumps in spreads that's built into the existing contract, because spreads are performance-based and a lot of the loans that we do. So we'll get there. And a more important to us, Mike, is the...

cross-cell that we ultimately get. You know, at the end loan price, as long as we get good structure, price is important, but, you know, pricing along with...

you know the majority of the TM relationship and capital markets business really up the return that you get from that client relationship

Okay, I stronger and then there's a structure component. There's a lot of good companies out there that don't have structures that we would lend into that they could change that.

And then I guess one more just in terms of your 30 MSAs or your newer market or BBVA markets. Do you have any metrics on what market share you have there versus your legacy franchise? That would size the opportunity.

That's small. Big opportunity. Big opportunity. Big opportunity. So big, we don't need to worry about that right now. We just need to do more.

Okay, all right, thanks a lot. There are no further questions.

Nice everybody.

Yes, everybody. Thank you.

Thank you, that does conclude the call for today. We thank you for your participation and I hope you just connect your lines. Have a great day.

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