Q4 2022 PNC Financial Services Group Inc Earnings Call
Okay.
Oh, well good morning, welcome to today's conference call for the PNC Financial services group.
We're just waiting on this call are Pnc's, chairman, President and CEO , Bill them check 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 are all available on our corporate website PNC dot com under Investor Relations. These statements speak only as of January 18th 2023, 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 a 2022 is successful year for our company and our strong performance during the year reflects the power of our main Street Bank model and our coast to coast franchise for the full year, we reported $6 1 billion in net income or $13 85 per share.
Inside of that we grew loans and generated record revenue during a rapidly rising rate environment. While at the same time, we controlled expenses, resulting in substantial positive operating leverage for the full year 2022.
Turning to our results for the fourth quarter, we generated one 5 billion of net income or $3.47 per share growth in both net interest income and fee income contributed to a 4% increase in revenue.
Our expenses were up 6% this quarter, primarily due to increased compensation from elevated business activity, particularly in our advisory businesses, Rob is going to provide more detail on our fourth quarter expenses as well as our outlook in a few minutes.
Average loans grew 3% during the quarter driven by growth in both commercial and consumer for the full year average loans were up 15% and we continue to grow our loan book in a disciplined manner.
As we look ahead, we are operating our company with the expectation for a shallow recession in 'twenty twenty-three. Accordingly. This outlook drove an increase in our loan loss provision in the quarter and a modest build in reserves under the Cecil methodology importantly, as the credit environment continues to trend towards normalized levels. Our overall credit quality metrics remained solid.
I'd add that with charge offs, having been so low it's not surprising to see volatility quarter to quarter and we saw this in the fourth quarter with an outsized loss on one commercial credit pushing us outside of our expected range.
We continue to manage our liquidity levels to support growth our deposits remained relatively stable and we've increased our wholesale borrowings to bolster liquidity.
During the quarter, we returned $1 2 billion of capital to shareholders through share repurchases and dividends, bringing our total annual capital returned to $6 billion, our progress within the B B V. A influence markets continues to exceed our expectations and we see powerful growth opportunities across our lines of business in these new markets. We continue.
To generate new customer relationships and we've been thrilled with the quality of bankers, we have been able to hire.
In summary, it was a solid fourth quarter as we further built on our post acquisition momentum delivered for our customers and communities across the country generated strong financial results for our shareholders and put ourselves in a position of strength as we move into 2023 as always I want to thank our employees for everything they do.
To make our success possible and with that I'll turn it over to Rob to provide more details Rob.
Thanks, Bill and good morning, everyone. Our balance sheet is on slide three and is presented on an average basis.
Loans for the fourth quarter were $322 billion, an increase of $9 billion or 3% linked quarter.
Investment Securities grew $6 billion or 4%.
Cash balances at the Federal reserve totaled $30 billion and declined one $5 billion during the quarter.
And our average deposit balances were down 1% while period end deposits remained essentially stable.
Average borrowed funds increased $15 billion as we proactively bolstered our liquidity with federal home loan bank borrowings late in the third quarter.
And these are reflected in our fourth quarter average balances.
On a spot basis, we increased our total borrowed funds by approximately $4 billion compared to September 30th.
The period end increase was driven by $2 billion of F. H L B borrowings and $3 billion of senior debt, partially offset by lower subordinated debt.
At year end, our tangible book value was $72 12 per common share an increase of 3% linked quarter.
And we remain well capitalized with an estimated CET one ratio of nine 1% as of December 31 2022.
We continue to be well positioned with capital flexibility during the quarter, we returned $1.2 billion of capital to shareholders through approximately $600 million of common dividends and $600 million of share repurchases were $3 8 million shares.
Slide four shows our loans and more detail compared to the same period, a year ago average loans have increased 11% over $33 billion, reflecting increased loan demand as well as our ability to capitalize on opportunities and our expanded coast to coast franchise.
During the fourth quarter, we delivered solid loan growth loan balances averaged $322 billion, an increase of $9 billion or 3% compared to the third quarter, reflecting growth in both commercial and consumer loans on a spot basis loans grew $11 billion or 3% commercial loans grew more than $9 billion at period.
And driven by strong broad based with new production in both our corporate banking and asset based lending businesses importantly utilization rates within our C&I portfolio remained stable linked quarter.
Consumer loans increased $1 billion compared to September 30th driven by higher residential mortgage home equity and credit card balances, partially offset by lower auto loans.
And loan yields of 4.75% increased 77 basis points compared to the third quarter driven by higher interest rates.
Slide five covers our deposits in more detail.
Throughout 2022 deposit balances have declined modestly amidst the competitive pricing environment in inflationary pressures.
Fourth quarter deposits averaged $435 billion and were generally stable linked quarter.
Given the rising interest rate environment, we continue to see a shift in deposits from noninterest bearing into interest bearing and as a result at December 31st our deposit portfolio mix was 71% interest bearing and 29% noninterest bearing overall our rate paid on interest bearing deposits increased to 1.07% during the.
Our fourth quarter and as of December 31st our cumulative beta was 31%.
Slide six details our securities portfolio on an average basis, our fourth quarter securities of $143 billion grew $6 billion or 4%.
The increase was largely driven by elevated purchase activity late in the third quarter, which included $3 billion of forward starting securities that settled in the fourth quarter.
On a spot basis securities were $139 billion and increased $3 billion or 2% linked quarter.
The yield on our securities portfolio increased 26 basis point to 2.36%.
Driven by higher reinvestment yields as well as lower premium amortization.
And during the quarter, new purchase yield exceeded 4.75%.
At the end of the fourth quarter, our accumulated other comprehensive income improved to $10.2 billion, reflecting the accretion of unrealized losses on securities and swaps.
Importantly, we continue to estimate that approximately 5% of Aoc I will accrete back per quarter going forward without taking into account the impact of rate changes.
Turning to the income statement on slide seven as you can see fourth quarter 2022 reported net income was $1.5 billion were $3 47 per share.
Revenue was up $214 million or 4% compared with the third quarter expenses.
Expenses increased $194 million or 6%.
Provision was $408 million in the fourth quarter, reflecting the impact of a weaker economic outlook as well as continued loan growth, which resulted in a $172 million reserve build.
And our effective tax rate was 17, 7%.
Turning to slide eight we highlight our revenue trends.
And 2022 total revenue was a record $21.1 billion and grew 10% or $2 billion compared to 2021.
Within that net interest income increased 22% due to both higher interest rates and strong loan growth.
Noninterest income declined 5% as lower market sensitive fees more than offset strong card and cash management growth.
Looking more closely at the fourth quarter total revenue was $5 $8 billion, an increase of 4% or $214 million linked quarter.
Net interest income of $3.7 billion was up $209 million or 6%.
The benefit of higher yields on interest, earning assets and increased loan balances was partially offset by higher funding costs.
And as a result, net interest margin increased 10 basis points to 292%.
Fee income was $1.8 billion and increased $75 million or 4% linked quarter.
Looking at the detail asset management brokerage fees decreased $12 million or 3%, reflecting the impact of lower average equity markets.
Capital markets and advisory revenue grew $37 million or 12% driven by higher merger and acquisition advisory fees, partially offset by lower loan syndication activity.
Lending and deposit services increased $9 million or 3%, primarily due to higher loan commitment fees, reflecting our strong new loan production.
Residential and commercial mortgage revenue increased $41 million driven by higher our MSR valuation adjustments, partially offset by lower commercial mortgage banking activities.
Other noninterest income declined $70 million linked quarter, reflecting a negative fourth quarter visa fair value adjustment compared to a positive valuation adjustment in the third quarter, resulting in a change of $54 million.
Turning to slide nine our fourth quarter expenses were up $194 million or 6% linked quarter.
The growth was largely in personnel costs, which increased $138 million, reflecting higher variable compensation related to increased business activity.
Fourth quarter personnel costs also included market impacts on long term incentive compensation plans as well as seasonally higher medical benefits.
The remaining balance of the increase in expenses linked quarter included higher marketing spend as well as impairments on various assets and investments.
The majority of these impairments will lower our expenses going forward and are included in our expense guidance.
As you know we had a 2022 goal of $300 million in cost savings through our continuous improvement program and we exceeded that goal.
Looking forward to 2020, three we will be increasing our annual CIP goal to $400 million. This program funds a significant portion of our ongoing business and technology investments.
Our credit metrics are presented on slide 10.
Nonperforming loans at $2 billion decreased $83 million or 4% compared to September 30th and continue to represent less than 1% of total loans.
Total delinquencies of $1.5 billion declined $136 million or 8% linked quarter.
Net charge offs for loans and leases were $224 million, an increase of $105 million linked quarter.
Given in part by one large commercial loan credit.
Our annualized net charge offs to average loans was 28 basis points in the fourth quarter.
Provision for the fourth quarter was $408 million compared to $241 million in the third quarter.
The increase reflected the impact of a weaker economic outlook as well as continued loan growth.
During the fourth quarter, our allowance for credit losses increased to $172 million and our reserves now total $5 $4 billion were 1.7% of total loans.
In summary, PNC reported a strong fourth quarter and full year 2022.
In regard to our view of the overall economy, we're now expecting a mild recession in 2023, resulting in a 1% decline in real GDP.
Our rate path assumption includes a 25 basis point increase in fed funds in both February and March following that we expect the fed to pause rate actions until December 2023, when we expect a 25 basis point cut.
Looking ahead, our outlook for full year 2023, compared to 2022 results is as follows.
We expect spot loan growth of 2% to 4%, which equates to average loan growth of 6% to 8%.
Total revenue growth to be fixed to 8% inside of that our expectation is for net interest income to be up in the range of 11% to 13% and noninterest income to be stable to up 1%.
Expenses to be up between two and 4%.
And we expect our effective tax rate to be approximately 18% base.
Based on this guidance, we expect will generate solid positive operating leverage in 2023.
Looking at first quarter of 2023 compared to fourth quarter of 2022, we expect spot loans to be stable, which equates to average loan growth of 1% to 2%.
Net interest income to be down 1% to 2%, reflecting two fewer days in the quarter.
Fee income to be down, 3% to 5% due to seasonally lower first quarter client activity.
Other noninterest income to be between 202 hundred $50 million, excluding net securities and visa activity.
We expect total noninterest expense to be down 2% to 4% and we expect first quarter net charge offs to be approximately $200 million.
And with that Bill and I are ready to take your questions.
Thank you.
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And our first question is from the line of John <unk> with Evercore.
Please go ahead.
Good morning.
Morning, John on the on that in a minute.
Interest income side wanted to see if you can give us a little more thought around the deposit cost potentially maybe if you can give us your updated thoughts on where the cumulative beta I know you're not.
Not 30, just over 30% now 31, where that could trend to what's your updated expectation. There and then also maybe on the noninterest bearing mix I know its 29% of total deposits now how do you expect that trending over the course of the next year. Thanks.
Sure why don't I want to take the second one first in terms of.
The mix.
Consistent with our expectations in a rising rate environment, we expect the mix to go more into interest bearing and we're seeing that but it's yeah.
It's right on track no big surprise there.
We're right now at 29% noninterest bearing.
I imagine that over the course of 'twenty three will go down a bit.
Our previous low in previous cycles. It was around 25%. So I think that's a good way to sort of think about it.
In terms of the beta is Youre right are we finished the year right.
Right on top of where we expected as you know betas lagged.
<unk> historical increases for most of the 'twenty two for us and for the industry.
And you know going forward.
We expect maybe that lag that's sort of compress a bit and we'll start tracking to historical rises, but nothing particularly unusual.
And of course, we don't control that that'll be an outcome.
Hey, John if you're if you're trying to dig into.
Good items that I had made a comment at Goldman that we thought our NII might track.
Two an annualized fourth quarter and then our guide we look a little light to that all of that pressure, it's not coming from funding that's coming from the spread on loans.
So where we've been surprised I've been surprised is we just havent seen.
Spreads widen and corporate credit.
So I guess, what I would say to you is.
So there is this disconnect and something's got to give either corporate spreads are going to widen or our current scenario that we have forecasted for Cecil is wrong.
So so right now we basically guide.
I guess kind of where spreads are.
We get some widening and we put in a.
Mild recession and seasonal so we have a little bit of disconnect in the numbers.
But they are what they are.
And that gets of course to our guidance for the full year in terms of NII. So the upside would be add to bill's point that loan spreads would widen as they should.
If we get into the economy that everybody is prepared for yeah.
So that widening would provide upside to that 11 months or so.
So none of that none of the change in kind of thought on NII is driven by any change in our assumption on <unk>.
It is our deposit growth, we had pretty healthy deposits. This quarter. We think we can continue that it's all on this.
We have an ability, particularly the new markets.
To grab a whole bunch of new clients make new loans that are good credit loans kind of invest into this as we've done in our new markets for years.
Invest in the client growth. The problem is the return right now struggles because we haven't seen spreads.
GAAP the way we've seen in the public markets. The way, we might expect given the economy, where we're kind of forecasting.
Got it okay. Thanks, Bill and then separately on the credit side could you give us a little more color on the on the 100 million dollar increase in charge offs. What was the size of the commercial credit what was the industry or you see any other developments in related to that credit or other areas of your portfolio of work.
We're flagging just given the lumpiness and the size of that of that one issue. Thanks.
Let me jump in here right now that one credit's been staring us in the face for a while we've been working on it its a credit that both BBVA and PNC. We're in so it shows up as outsized we had big reserves against it.
Yes, as you've seen in our non performers in our delinquencies there Scott.
Don This is kind of.
Yeah, I don't know what you call, there's something go through a snake, but we've been staring at it and we.
We charged it off and that's showing the elevation this quarter, but I wouldn't read into that.
Yes, no no no underlying trend or anything problematic.
That category.
What was that industry.
Telecommunications.
Okay alright, thank you.
Sure.
Our next question is from the line of John Mcdonald with Autonomous Research. Please go ahead.
Hi, Good morning, Rob wanted to just follow up on the NII question, Sir John there.
Can you just remind us where you are on kind of interest rate positioning.
Building and small rate hike in the beginning of the year, maybe cut later how to rate hikes from here kind of impact you and just a reminder of where you are in the swap book and how that's influencing NII today and how it rolls off would be helpful.
Well sure let me I'll try to cover some of that and then we can follow that up I mean definitely we're positioned to benefit from the two rate hikes that we expect 25 basis points. Each in February and March we do have a 25 basis point cut in December but that won't play largely and twenty-three performance.
So we're positioned well against that and we will grow our NII.
Were pointing to.
<unk> 10, and 13% in terms of that range year over year, Yeah, I will say when we jumped into this right away.
Forecasting for a full year in terms of guidance is always difficult. This.
This year in particular, it's more difficult than most you've heard that sentiment from some of our peers that have already reported really difficult because of all the uncertainties that we all know about so yeah. We put out what we think we can achieve.
That's a bill and I talked a little bit about maybe some upside to that.
In terms of loan spreads but.
Everything that we know now with all the uncertainties.
We're positioned.
No big change in terms of our you know our rate management are in terms of the swaps, we've disclosed at around $40 billion or so but of course that's all.
Part of how we manage the balance between our fixed and variable.
The simplest way to.
Think about that John is we through the course of the year.
The D var want or the sensitivity we have for our long positions is if anything decreased.
So think about that in terms of both the securities book and the swap book, So we remain largely asset sensitive.
Happy with that position.
You know overtime changes with a mix of swaps and.
Securities the swaps themselves.
It's kind of irrelevant to look at them separately, but they're very short and they roll off in big ball.
Couple of years, two and a half.
Okay, Thanks, and Rob maybe as a follow up could you unpack a little bit of the outlook for the fee revenues that you gave for 2023, just some of the headwinds and tailwind that are leading to that outcome on the on the noninterest income, yes, sure yes sure John So.
Just in terms of the categories, where are you now where we expect to see growth.
Capital markets, we do expect a mid single digit growth, which is good and consistent.
With our expectations.
Our steady Eddie card and cash management Ah yeah, it will probably be up high single digits.
And then those two will be offset by continuing headwinds in our asset management given the equity markets.
As well as lower mortgage production. So you put all that together.
And that's how we get into our stable to up 1% for the full year.
Got it thank you sure.
Our next question is from the line of Gerald Cassidy with RBC. Please go ahead.
Thank you, Rob Hi, Bill Hi, good morning Gerald.
Gerald.
Also known as <unk>.
I've been called worse Rob.
[laughter] Bill coming back to your thoughts on you know the spreads you guys just referenced from the commercial loan book relative to the seasonal outlook I'm glad you framed it that way because I think many of US are in that camp that you. Just you just described but in terms of the spreads is there any capacity.
Issues mean, even there's too much lindy capacity, which has kept the spreads maybe lower than normal.
I'm not sure what's going on to be honest with you I mean, there is on the smaller end and.
And certain retail categories, which really isn't our focus there is theres just irrational competition in certain asset categories, and the and the larger corporate space.
You know, where we have this opportunity to grow clients, particularly in the new market then ultimately cross sell there just hasn't been.
Any sort of gas to what you've seen in the public markets. There hasn't been any real change spreads aren't going down, but there hasn't been any change at all with respect to kind of the outlook in this economy and until.
And if you know theres real defaults and charge offs are probably won't be so one of these things is going to give I, just don't know, which one it is.
Very good no I noticed in your table 10 in the supplement the inflows of non performance had been pretty steady. So there's really no excuse me real evident ship.
Thank you for that and then as a follow up can you just remind us your outlook for returning capital to shareholders in the upcoming year with dividends and share repurchases.
Yeah, Hey, alright, and just to finish up on that on the credit spot to your point that in our supplement.
Do nonperformance, but also you take a look at our Npa's on our delinquencies, which are down so the leading indicators are still very strong.
Agreed on yes on the on the share repurchases.
A couple of things one is we are going to continue our share repurchase program into 'twenty three.
Secondly, it will be at a reduced rate relative to what we did in 2022.
And likely to be less than what we did in the fourth quarter of 'twenty, two which was $600 million.
A couple of things about that one is a wide wide lower one is given all the uncertainties that we're seeing obviously, we need to be smart and tactical in terms of our capital deployment as the year plays out.
But secondly, and just logically.
Rate of repurchases flows when your capital ratios.
To go from 10% to 9%. So we still have a lot of capital flexibility, but by definition as we get closer to those operating guidelines, we slow the pace of repurchases.
All that said.
There's flexibility as you know so with the stress capital buffer.
We're allowed a lot of flexibility around it and we plan to use that flexibility as circumstances.
Present themselves.
Great. Thank you.
Our next question is from the line of Bill <unk> with Wolfe Research. Please go ahead.
Thank you good morning, Bill and Rob I'm following up on your swaps commentary could you speak broadly to how youre thinking about downside protection in this environment any color you can give on where you you would expect your NIM to settle if the fed ultimately pushes the economy and to see a mild recession cuts rates and fed funds normalizes.
Say somewhere in the 2.5% to 3% level that would be great.
I have to I have to write all that down in terms of your assumptions there.
Yeah.
I would say in terms of NIM.
Because obviously, we get that question a lot.
It's obviously an outcome. So we don't guide to it we don't necessarily manage to it.
I think when you when you just take a step back you can see that we finished the quarter and finished the year at $2 90 to $2 92.
That's up from all of 'twenty, one where we lived at 2.27, so that 65 basis point jumpers. So that's occurred.
We don't expect those kinds of swings going forward. So going forward, we're now probably more like five or six basis points swings off of these levels are and that's sort of the way that I think about it.
Got it.
Or at least theres been some concern that we could see the mix of time deposits and noninterest bearing deposits return not just to pre COVID-19 levels, but perhaps back to even pre G. F. C levels. In this environment can can you speak to that risk both broadly at the industry level and more specifically as it relates to P&C.
Yes.
Look we're in a bit of an unknown environment.
We have the fed going through Q T. We have the fed absorbing deposits through their reverse repo facility.
We have it.
In our case the ability to grow loans. So so you could see a scenario where deposits gets scarce.
We've priced some of that that's in our forward guide in terms of our best look on that you could draw.
Upside and downside to that kind of Rob's point. This this coming year and the years after that.
Are harder to forecast.
Model than some of the stability, we had pre COVID-19. So we're doing our best and you've seen our best expectations.
I think that's right in regard to that the mix between noninterest bearing and interest bearing so far.
The shift that has occurred.
Perfect like consistent with what we've seen historically.
And with our expectations.
That's helpful Bill and Rob. Thank you if I may squeeze in one last one I wanted to dig in a little bit into your expectation for a weaker economic outlook and mild recession and sort of square that with your reserve rate, having been basically unchanged sequentially. So that suggests that most of the reserve build was really growth driven.
Maybe if the economic outlook does grow more challenging consistent with that mild recession scenario would it be reasonable to expect that your reserve rate could actually hold.
[noise] near current levels or would it still likely drift a little bit higher from here and any thoughts around that would help.
So a lot of moving pieces here, but start with the basic notion that we are fully reserved for the book that we hold today against a forecast that we just we more heavily weighted the recessionary forecast than we had in the third quarter.
And then remember the charge offs that we took this quarter.
But really the Lumpier ones, we mentioned one those were in a large way already reserved.
So our build.
It is actually more than you think.
The ratio ends up the same but we have kind of less we have lower non performers inside of that total book as a percentage maybe think of it that way.
In terms of coming to that $1 seven and then I'd also.
Just to remind you of our wherever we sit today at one seven.
[laughter].
Both.
First Stacy sold to now or what we have now relative to others against the composition of our loan book we've been at this in a fairly.
We think correctly, but nonetheless conservative.
Hum process approach approaches a seasonal.
Super helpful. Thank you for taking my questions.
Our next question is from the line of Betsy <unk> with Morgan Stanley . Please go ahead.
Hey, good morning.
Good morning.
I wanted to talk a little bit about the expense side and I know you mentioned that you know there was a part of the expenses. This quarter that was associated with you know revenue generating activities like capital markets and so you know that is a net positive to be pop. So let's leave those expenses aside I wanted to dig in more to the expense.
Says that.
Did not come with commensurate revenues and understand what.
You know what what the drivers were behind those increasing and then talk a little bit about your outlook for 2023 off of what is now higher based on what people had been expecting coming into today.
I'm not sure I can start there.
In regard to the fourth quarter expenses that the biggest driver of the increase was personnel expense and to your point inside of that are the.
The variable comp associated with the higher business activity.
And to that we did have some medical expenses that that we expect seasonally but they came in a little bit higher than what we would've expected.
Outside of that.
Oh.
See it then allows sure.
Thank you basically burn through your deductible is yes, the deductibles and they like the company takes over after that.
That happens that happens seasonally this season, it was a little bit higher than what we expected.
Outside of that are you know when you look at the marketing spend that sort of timing in terms of how that falls in the year, but the impairments that we took on our various investments in assets, which is part of your question.
There wasn't anything singular that would stand out. It was yes. There was we wrote off everything we had to do with crypto well that was part of it.
Part of it so maybe bill wants to answer these questions.
But I would say there wasn't anything similar with a handful of items that are that.
We took down in technology and that shows up in our equipment expense.
And occupancy where there were some facilities that we right size for our space needs going forward.
That kind of thing so on the margin.
Okay, Yes, sure and then on the margin.
I'm, sorry, just going into adults. It does give me another question, but I'd say on the margin going into 'twenty three those impairments reduced some of our expense rate so that sort of help so our guide is 2% to 4%.
And all of 'twenty three that's how that all stays connected but she is kind of frustrating because none of that stuff in our expense line in the fourth quarter.
Has anything to do with how we spend money I mean, the comp with new business as great everything else was kind of.
We flushed a couple tech projects that didn't work out we right sized occupancy marketing when it went up a little bit and then we get hit this quarter on charge offs, which are you know.
<unk>.
I'm not going to call them artificially high they are what they are but they're kind of lumpy as a function of something that we've been staring at for a while that finally hits the books.
And we're largely reserved.
Yeah.
Okay. So as I think about the guide into next year for total expenses up two to four.
That is really related more towards to your revenues of six to eight and crypto thing whatever it is a it's a one time, one and done yes, that's right yes.
Yeah, that's right and that's why I said in my opening comments, we point to strong positive operating leverage.
In 'twenty three.
Okay Alright.
Alright, and then separately I know, we talked a little bit earlier about the capital and the fact that you know your C. T. One it's been migrating down as you've been doing some nice lending et cetera, just wanted to understand the R. W. A density it looks like it's gone up a bit.
And I just wanted to understand is that just loan growth or is there something else going on there or is there. Some you know changes in how you think about our W. E factories.
And then I'm just wondering you know like how what is the low on C. T. One that you're willing to you know drive too as we think about you know demand for borrowing is still pretty very bought.
Well so a couple of things on that I would say in terms of the <unk> increase hits entirely loan driven so yeah. We've had a lot of loan growth in <unk> and 'twenty two a lot in the fourth quarter with that 3% growth in average loans. So that's that's the.
The key driver of the <unk> increase.
Our CET ratios at nine 1%, we've talked about an operating guideline of between eight and a half of nine so we're still above our operating guidelines and.
That's a good place debate.
Okay, So eight and a half allow really that's how we should read it yes.
Yes.
Okay alright, thank you.
Sure.
Our next question is from the line of Ken <unk> with Jefferies.
Please go ahead.
Thanks. Good morning, I was wondering if you guys could talk about the there's still potential for the T. Lac rose to come down to the category Threes and how you would be thinking about either getting ahead of that are starting to issue or do you just have to wait for the final notice end and then consider that.
Asian period.
I mean, a lot of people talking about this not a lot happening around it were to happen. It by the way, we disagree with it but let's walk down the path and say somehow down the road people suggests that this should happen and there'd be a phase in period.
Practically as we look at the growth opportunity in our company new clients loan growth against.
You know what is likely to be a constrained ability to grow total deposits, but youre going to see our wholesale borrowings and an increase in in the course of our wholesale borrowings increased in the ordinary course of business, we're going to fulfill all or parts of the T. Lack of requirement all of that is in the numbers, we're talking to you about.
It will take more than next year, but in the way, we think about how we kind of normalize as we move towards more normalized mix yes.
In its simplest way to think about that maybe is R. R.
Wholesale debt.
Historically ran I don't know in the mid <unk> mid teens, I was going to say and we're running at 5%. So if we normalize well that's with home loan in there as well.
Normalized our borrowings through time.
It's likely we're going to get fulfilled that requirement.
Without purposely trying to do it.
Just because that's the way, we and other people will be funding.
<unk>.
Yeah, I'll just add to that.
We stayed on our path if.
It's not particularly problematic, but theres a lot to be played out we still don't think it's necessary and.
And there's also.
A reasonable chance it would be some tailoring to it.
Which would be reduced.
Case, yes.
And as a follow on to that to your point about wholesale borrowings.
Funding loan growth incrementally can you just talk about how youre thinking about the securities portfolio. I know you saw some growth this quarter I know you're getting good front book back book on it the percentage of earning assets is still around 28%. So how would you expect that to go vis vis the use of wholesale borrowings to continuing to support that growth as well. Thank you.
You know look.
You wouldn't purposefully borrow wholesale and then invest in a security to hold in your Securities book, However, inside of all of the requirements. So that we manage ourselves too. We also have liquidity requirements LCR.
They need to hold high quality liquid assets. So you know that.
The Securities book will likely fade in terms of total percentage over time simply because of loan growth that we see in some of the roll down.
That Securities book is part of what we have in terms of cash and liquidity.
Satisfy LCR I'm sorry, it's so it's you know we're not going to we're not going to say, hey, lets borrow some money to buy more treasuries right that isn't going to happen.
But practically we use that book to hedge the value of our deposits will continue to do that we'll continue to do that inside of the lens of LCR and other liquidity stresses that we run.
Got it okay. Thank you Bob.
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Our next question is from the line of Mike Mayo with Wells Fargo Securities.
Please go ahead.
Hi.
Mike.
Well I guess in the category of no. Good deed goes unpunished I mean, you did have positive operating leverage last year of 300 basis points, you're guiding for positive operating leverage this year between I guess 206 hundred basis points. Your charge offs were below 30 basis points every quarter youre buying back some shares yeah.
Yes.
Your guidance from one month ago.
Off and your results fell one eight below consensus now don't stop giving your guidance or anything like that and you know.
We're all subject to the uncertainties out there, but just a little bit more about what's changed in the past month. So.
I guess unemployment youre and rate assumption, you're saying, it's over 5%, maybe where that's going to and I guess that drove some of the seasonal driven reserve part of the reserves.
NII and navy or decision to lean into the securities purchases maybe cause you think this is a a relative top line yields. Thanks.
Yeah. So.
Yes.
Complicating it.
One thing changed from a month ago.
And one thing only and that was.
Basically.
The spread we thought we'd earn on new business right. We know Mike that we can go out and grow loans.
Our ability to gain clients.
Cross sell those clients, we've never been more bullish on that the process of doing that.
It is not earning what we would otherwise expect in the moment because spreads have not widened and of course should take our full life of the loan reserve when you're booked out loan. That's the only thing that's really changed the expenses this quarter are noise.
The guide for next year as it is is <unk>.
Tempered simply by that.
Question of whether spreads going to are going to rise on loans, maybe they will or our Cecil analysis will be wrong. We have it we never guide on what our provision is going to be we talk about charge offs. The charge off this quarter. We felt was a bit anomalous. So nothing has really changed other than the sweat factor of Hey can I actually are in what I thought I was going to earn on new law.
Own production that's it.
So you're saying you're too conservative either on <unk> reserves or your NII guide for the year and.
But given you a number on my seasonal reserves right. So, but you know we put in we worsened our economic forecast in the simple soundbite is either spreads are going to widen or our economic forecast is wrong I think that's a fair statement.
If theres an inconsistent right.
You gave a deep and violate the CEO it doesn't turn out maybe you could come to the economists because this is such a detailed outlook in.
In your release that what do you expect the economy and interest rates and everything else. So you gave a lot of detail.
Yes.
You asked me a question on the Securities book, its just you know.
We basically stayed pretty much in the same position all year, we get to re price. The book and you see the income coming out of the Securities book growing nicely, we have an invested into it it's a tough market to invest into it.
If you are.
So in effect the deposit funded institution right. If you want to go out and buy something today against our marginal cost of money are basically carrying flat to negative today on the theory that the fed's going to cut to walk down the road and you got to believe that the fed is going to go back into.
You know twos on fed funds, which I just fundamentally don't believe so I think kind of the Marcus just on investable at the moment and I think that's going to be figured out through the course of the year, So theres upside.
You know my view on that plays out.
And the way we'd run our securities book, but at the moment there's no.
Choosing to to to go long in this environment I think is a mistake.
One more clarification.
You are reserved for your existing book of business, assuming an unemployment rate of what level I know its above five five.
Five one.
Got it alright.
Alright, Thank you Sir.
Our next question is from the line of Ebrahim, Pune Waller with Bank of America. Please go ahead.
Hey, good morning.
Good morning.
On the NII guide so I think we've spoken extensively about the spreads once you get to how much of the inversion in the yield co was affected and impacting DNI outlook and tied to that like with the 10 year is sub $3 40. This morning.
Like do you just not investing right now and wait for things to shake out or how do you think about balance sheet management in a world where maybe the tenures headed to 2% is not 12% next thanks.
So.
That impacts the NII guide a bit only in terms of what our reinvestment yield is and will be when we you know when the existing security book Rolls down right. So you've seen the book yield on that.
Rice from wherever it or what is it now to 60, something Oh, yes. The total book Yeah Yeah.
It continues to increase as we you know.
As things roll off we're reinvesting with high fours five handles on securities.
You know look at the 10 year goes to 3%.
If you yeah. If you look at the five year and five years, the implication of where long term rates really have to head for that to be true.
I just don't buy.
I don't think we're going to be an environment, where the fed as you know bounce in short term funds around 1%, which I just don't think it's going to happen I think we're going to you know.
I think we will get inflation under control, but I think it's going to be a struggle to get it under three long term and I think front Rachael Ray Scott will stay high your they.
They might cut and likely will cut from some 5% level.
But this assumption that they're going to cut and therefore rates are going to go back to two or one I just think is absurd.
And so therefore it to me the back end of that curve is an investable.
Youre right it could rally to there.
No.
Good for the people who own it this as long as it's not me.
Yeah, No that's fair and again I'm not saying it makes sense, but is the world we live in and I guess tied to that I'm not sure. If you gave explicit guidance and just some of those terms of deposit growth outlook.
Still a lot of room, when we look at the loan to deposit ratio does it give us a thought around how you're thinking about getting additional sort of rate sensitive deposits run off.
Having a smaller balance sheet, creating more excess capital.
Okay.
Look there's obviously we could.
In the near term increase earnings by being less competitive with deposit so let deposits run off we have the liquidity to do that.
We could increase our loan to deposit ratio the challenge for the course of doing that youre damaging your long term franchise. So if you're losing deposits that are not.
Core relationship deposits, maybe that makes sense, but if you're losing customers in the process of that run off that's a mistake.
And that's the.
That's the law.
Logic, we use in figuring out how we price deposits and how we grow or maintain deposits.
That's fair and if I may one last question Bill.
In terms of.
Just the macro uncertainty.
How do you assess like.
The difference between credit normalization, and whether or not we're getting into some version of a recession like can you conclusively think about that over the next few months, we are not going to know that until the advent into the depths of the downturn a few quarters from now.
We've given you our best guess.
Yeah, I mean look it's there's a lot of unknowns here.
You know technically we could see ourselves heading into a full employment quote recession, because you'll have still GDP for a couple of quarters, but but you know unemployment.
Ticking up to.
You know high levels and I don't even know how to think about that environment in terms of what charge offs might be.
That's probably not really low charge off environment.
Well, that's just to your point in terms of what I said at the beginning it's really difficult for the full year, particularly this year, we've put together what we think we can do.
Okay.
Thanks for taking my questions.
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Minder, if you'd like to register a question. Please press the one followed by the four.
Our next question is from the line of Matt O'connor with Deutsche Bank. Please go ahead.
Morning, Okay, Matt if you could just circle back on some of the lumpy costs I guess just in aggregate like how much were the empowerment and then I think there was also you had called out some lumpiness.
From a long term incentive plan, which I think impacts both fees and comp, but if you could just kind of flush out the aggregate lumpy costs that would be helpful. Thank you.
Yeah without we don't have specific numbers, you can see them and you can see them as they break down in terms of our impairments within the occupancy line in the equipment line.
The long term lease chest.
I was just the effect of a benefit in the third quarter and then it swung against us in the fourth quarter, so not big numbers, but just the delta between the two quarters drove the increase.
Okay, and then separately.
I heard you earlier kind of reiterated.
Reiterated the 8.5% to 9% target over time, and just any thoughts on the regional banks kind of just below your size it seems like they're all.
Kind of building capital close to 10% and I don't know if it you know.
Pressure behind the scenes from rating agencies or regulators or just conservatism for wherever you are in the cycle, but.
Any thoughts on a company your size, you know being able to run nine when the ones. Obviously that the banks that are bigger are running higher but it's just been interesting to note that the ones below U 200 billion asset all of a sudden you're building closer to 10.
You want to answer it.
Well the only thing the only the only thoughts that I have just reacting as you know because the guidelines are typically drawn at for all banks in terms of the stress capital buffer so how they stress.
You got to look at that and then.
It's the relative capital levels of distress levels as opposed to the absolute levels, but.
That's just my reaction.
Okay, well I guess the point is like do you feel comfortable.
With whatever kind of behind the scenes stuff is going on with the rating agencies regulators.
The 9% and maybe drifting down a little bit over time, but the 9% you feel real comfortable with in the current environment.
Yes, yes.
Okay. Thank you.
Our next question is from the line of Vivek <unk> with Jpmorgan. Please go ahead.
Hi, just a couple of quick ones.
Any color on criticized assets how did it how the how those did in the quarter.
Yes relatively flat.
That's not a big not a big change at all.
Okay.
And Bill just not to beat a dead horse to death, but a whole set of <unk>.
Question on NII and swaps and protection given that you would think of it as.
Swaps in lung.
Securities.
Synonymous slate in terms of expressing your view on rates.
I would expect that you're going to hold off therefore.
Even on the swap side in terms of adding protection yet.
<unk>.
You'll see there are signs of a lot more.
Potential for rate cuts.
Yes.
<unk>.
It's strange to me that if you're a bit of a fixed income guy that this notion of protection I mean at what a lot of banks are doing is they'll put on forward starting swaps.
No not have to eat negative carry in the course of doing that and ill hope sometime by the time those come due that that there is a negative carry because there'll be a cut.
So you effectively I mean everything is priced at the forward curve when they do that trade. It. It makes no sense to me. It's the same as choosing to invest at the moment and where the yield curve is.
That's quote my downside protection you know I can buy we can sell or we can use options and sell the way upside and by some downside protection as a practical matter, we're not wildly out of bounds in terms of what we are.
We're asset sensitive we're not wildly asset sensitive.
And it just doesn't feel like the moment when you're supposed to be long.
Particularly if you have a view that rates in the go forward, a decade or not gonna look like rates.
During the 2012 to 2020 here.
Right.
So that's where we sit.
Yeah.
Alright. Thanks.
And there are no further questions on the line at this time I'll turn the presentation back to Bryan Gill for any closing remarks.
Well. Thank you all for joining the call today, if you have any other follow ups. Please reach out to the IR team will be happy to help you out.
Thanks, everybody. Thank you.
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