Q1 2023 PNC Financial Services Group Earnings Call
Well, good morning and welcome to today's conference call for the P&C Financial Services Group.
participating on this call are PNC's Chairman, President and CEO Bill Dzemchak, and Rob Riley, Executive Vice President and CFO .
Today's presentation contains forelooking 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. Many thanks for watching and see you next time.
These are all available on our corporate website, pnc.com, under Invest Relations.
These statements speak only as of April 14, 2023, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill. Thank you, Brian , and good morning, everybody. As you can see on the slide, our quarterly results were strong, and we reported $1.7 billion in net income, or $3.98 per share.
Inside of this, we grew deposits and loans, increased our capital and liquidity positions, generated positive operating leverage, and maintained strong credit quality.
For the past month, we've seen market volatility across the broader industry. And while we take this situation seriously and are closely monitoring the environment, it's important to note that these events have taken place within a few banks with very unique business models.
Inside of our company, we really haven't seen any meaningful impacts from the events of the past month. Our balance sheet remains strong and stable, and we're operating the company in the same way we were at the beginning of March. Ultimately, over time, we expect the dynamics playing out in the banking system today to contribute to changes in the competitive landscape.
And while it's still early innings, we believe that PNC will be a beneficiary from this process.
That said, in the near term, we're not immune to the competitive environment and the deposit dynamics that will ultimately impact our NII in the near term, and Rob's going to cover that in more detail in a second. We remain focused on growing relationships across our lines of business, and we continue to execute on key priorities, including the expansion in the BBBA legacy market.
mind for our investors in the last couple of weeks. And of course following that we'll be able to discuss your specific questions in the Q&A segment.
Finally, I'd like to thank our 61,000 employees for helping deliver a strong quarter and everything they do to support our customers. Now with that, I'll turn it over to Rob.
Thanks, Bill, and good morning, everyone.
Our balance sheet is on slide four and is presented on an average basis.
Loans for the first quarter were $326 billion, an increase of $3.6 billion, or 1% length of the first quarter.
Investment securities were relatively stable at $143 billion.
Cash balances at the Federal Reserve averaged $34 billion and increased $4 billion during the quarter.
Deposits of $436 billion grew on both a spot and average basis linked quarter.
Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity, as well as senior note issuances in January of this year.
At quarter end, our tangible book value was $76.90 per common share, an increase of 7% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31, 2023.
During the quarter, we returned $1 billion of capital to shareholders, which included $600 million of common dividends and approximately $370 million of share repurchases, or 2.4 million shares.
Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. And of course we'll continue to monitor this and may adjust share repurchase activity as appropriate.
Slide 5 shows our loans and deposits in more detail.
During the first quarter, loan balances averaged $326 billion, an increase of $4 billion, or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022.
Deposits averaged $436 billion in the first quarter, increasing $1.3 billion.
We continue to see a mixed shift from noninterest bearing to interest bearing, and I will cover that in more detail in a few minutes.
Our rate paid on interest-bearing deposits increased to 1.66% during the first quarter from 1.07% in the fourth quarter of 2022.
And as of March 31st, our cumulative deposit beta was 35%.
Turning to the income statement on slide 6, as you can see, first quarter 2023 reported net income was $1.7 billion, or $3.98 per share.
Total revenues of $5.6 billion decreased $160 million compared to the fourth quarter of 2022.
Net interest income decreased $99 million, or 3%, primarily driven by two fewer days in the quarter and higher funding costs.
partially offset by higher yields on interest earning assets.
Our net interest margin of 2.84% declined 8 basis points.
reflecting the increased funding costs I just mentioned.
Non-interest income also declined 3% or $61 million as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity as well as seasonally lower consumer transaction volumes.
First quarter expenses declined $153 million or 4% linked quarter even after accounting for the increase to the FDIC's deposit assessment rate which equated to $25 million. Provision was $235 million in the first quarter and included the impact of updated economic assumptions.
as well as changes in portfolio composition and quality.
And our effective tax rate was 17.2%.
Turning to slide 7, we highlight our revenue and expense trends.
As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago.
And as we previously stated, we have a goal to reduce costs by $400 million in 2023 through our Continuous Improvement Program, and we're confident we will achieve our full year target.
And as you know, this program funds a significant portion of our ongoing business and technology investments.
Our credit metrics are presented on slide 8.
Non-performing loans remain stable at $2 billion and continue to represent less than 1% of total loans.
Total delinquencies of $1.3 billion declined $164 million.
or 11% linked quarter.
Notably, the delinquency rate of 41 basis points is our lowest level in over a decade.
Net charge-offs were $195 million, a decrease of $29 million linked quarter.
Our annualized net charge-offs average loans ratio was 24 basis points in the first quarter.
And our allowance for credit losses totaled $5.4 billion, or 1.7% of total loans on March 31.
essentially stable with year-end 2022.
Before I provide an update on our forward guidance, as Bill mentioned, we want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to.
deposits, securities and swaps, capital and liquidity, and the impact of potential regulatory changes.
And finally, office exposure within our commercial real estate portfolio.
In our view, we believe we are well positioned across all these key areas of focus.
Turning to slide 10.
Our $437 billion dollar deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio.
At the end of the first quarter, our deposits were 53% consumer and 47% commercial.
Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured.
The portfolio is very granular with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast-to-coast franchise.
Our $207 billion of commercial deposits are 20% insured.
But importantly, approximately 95% of the total balances are held in operating and relationship accounts.
These include deposits held as compensating balances to pay for Treasury management fees.
escrow deposits at Midland Loan Services.
and loan services and broader relationship accounts.
all of which tend to provide more stability than deposit-only accounts.
Importantly, we have approximately 1.4 million commercial deposit accounts, representing a diverse set of industries and geographies.
Turning to slide 11, we highlight our mix of non-interest bearing and interest bearing deposits.
Our consumer deposits non-interest bearing mix has been stable, remaining at 10% compared to the same period a year ago. The commercial side is where we expected to see a continued shift from non-interest bearing into interest bearing deposits as rates have risen, and that has played out, albeit at a somewhat faster pace than we had expected.
The commercial non-interest bearing portion of total deposits was 45% as of March 31st.
down from 58% a year ago. Importantly, commercial non-interest bearing deposits include the compensating balances and mid-loan escrow deposits I mentioned previously.
which provide support to this mix through time.
On a consolidated basis, our level of noninterest bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year ago.
PNC has historically operated with a higher percentage of non-interest bearing deposits relative to the banking industry.
due in part to the strength of our treasury management business.
granular deposit base.
As a result, we expect our non-interest bearing portion of deposits to continue to exceed industry averages.
and approach the mid 20% range by year-end 2023.
In addition to our mix shift, we have seen a faster increase in our deposit costs this year as the Federal Reserve has continued to raise short-term interest rates.
Slide 12 shows our recent trends and our current expectations for deposit betas through the end of 2023.
The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid, and ultimately has added incremental pricing pressure sooner than we previously expected.
We expect the Federal Reserve to raise the benchmark rate by 25 basis points in May.
This, coupled with heightened competition for deposits, has accelerated our expectations for the level and pace of beta increase.
And we now expect to reach a terminal beta of 42% by year end.
Slide 13 details our investment securities and SWOT portfolios. Our securities balance averaged $143 billion in the first quarter and we're a relatively stable linked quarter.
The yield on our securities portfolio increased 13 basis points to 2.49% as we continue to replace runoff at higher reinvestment rates.
Yield on new purchases during the quarter exceeded 4.75%.
Our portfolio is high quality and positioned with a short duration of 4.3 years, meaningfully shorter than many of our peers. Approximately two-thirds of our securities are recorded as held to maturity and one-third is available for sale.
Average security balances represent approximately 28% of interest earning assets. Our received fixed swaps pointed to the commercial loan book remain largely stable at $42 billion notional value and 2.25 year duration.
At the end of the first quarter, our accumulated other comprehensive loss improved by $1.1 billion, or 10%, to $9.1 billion.
driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pulled apart.
Slide 14 highlights the pace of expected security and swap maturities, as well as the related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll off.
This will drive increases in our securities and commercial loan yields, as well as meaningful tangible book value improvement as we expect approximately 40% AOCI accretion by the end of the year 2024.
Slide 15 highlights our strong liquidity position.
Our strong liquidity coverage ratios continue to improve in the first quarter and exceed the regulatory requirements throughout the quarter.
Our cash balances at the Federal Reserve totaled $34 billion, and we maintain substantial unused borrowing capacity and flexibility through other funding sources.
PNC has a robust liquidity management process.
which includes a required statutory daily liquidity coverage ratio assessment, as well as a monthly net stable funding ratio calculation.
In addition, we perform monthly internal liquidity stress testing that covers a range of time horizons as well as systemic and idiosyncratic stress scenarios.
Our mix of borrowed funds to total liabilities has historically averaged approximately 17%.
and reached an unprecedented low level of 6% in 2021.
On March 31st, our mix was 12% and we expect to move closer to the historical average over time.
In light of the current environment, we anticipate that we will be subject to a total loss absorbing capacity requirement in some form and at some point with a reasonable phase-in period.
Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plans under existing TLAC requirements.
Slide 16 shows our solid capital position with an estimated CET1 ratio of 9.2% at quarter end.
As a Category 3 institution, we don't include AOCI in our CET1 ratio.
but understand why there is focus on this ratio with the inclusion of AOCI. As of March 31st, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level.
taking into account our current stress capital buffer.
However, we also believe it's important to take a look at the balance sheet positioning of a bank from a market value of equity perspective, similar to our understanding of Basel IRR BB rules.
Market value of equity doesn't truly get reflected on the balance sheet today due to generally accepted accounting principles.
which results in a skewed approach of valuing certain items primarily on the asset side.
While AOCI takes into account the current valuation of the securities and certain portions of our swap portfolios, it does not account for the valuation of the deposit book.
which can be a meaningful offset in a rising interest rate environment. In fact, looking at P&C's change in market value of equity over the past year, the increase in the market value of our deposits in a rapidly rising interest rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities and fixed-rate loans. Total market value of equity increased substantially in the rising rate environment.
further, our duration of equity is now essentially zero and well positioned in the current environment.
Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances, and deposit lies.
We also recognized early on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived.
Recall our Fed balances peaked in the first quarter of 2021, around 86 billion dollars. As a result, we modeled an economic value associated with those deposits at a fraction of the value of core deposits.
Turning to slide 17, I wanted to spend a few minutes talking about our commercial real estate portfolio.
While credit quality is strong across the majority of our CRE book, Office is the segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates.
So, we thought it would be worthwhile to highlight our exposure and our position with this portfolio.
At the end of the first quarter, we had $8.9 billion, or 2.7% of our total loans in our office portfolio.
Turning to slide 18, you can see the composition of this portfolio, which is well diversified across geography, tenant type, and property classification. Reserves against these loans, which we have built over several quarters, now total 7.1%, a level that we believe adequately covers expected losses.
In regard to our underwriting approach,
We adhere to conservative standards, focus on attractive markets, and work with experienced, well-capitalized sponsors.
The office portfolio was originated with an approximate loan to value of 55 to 60 percent, and the significant majority of those properties are defined as Class A.
We have a highly experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy.
We don't solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress testing property performance to set realistic expectations.
To appropriately sensitize our portfolio, we've significantly discounted net operating income levels and property values across the entire office book.
Additionally, tenant retention, build-out costs, and concession levels are all updated to accurately reflect market conditions.
Credit quality in our office portfolio remains strong today, with only 0.2% of loans delinquent, 3.5% non-performing, and a net charge-off rate of 47 basis points over the last 12 months.
Along those lines, we continue to see solid performance within the single tenant, medical, and government loans, which represent 40% of our total office portfolio.
These have occupancy levels above 90% and watchlist levels of 3% or less.
Where we do see increasing stress and a rising level of criticized assets is in our multi-tenant loans which represents 58% of our office portfolio.
Multi-tenant loans are currently running in the mid-70% occupancy range, watchlist levels are greater than 30%, and 60% of the portfolio is scheduled to mature by the end of 2024.
In the near term, this is our primary concern area as it relates to expected losses, and by extension comprises the largest portion of our office reserves.
Multi-tenant reserves on a standalone basis are 9.4%.
Obviously, we will continue to monitor and review our assumptions to ensure they reflect real-time market conditions. For each of the key areas of focus I just discussed, we believe we are well positioned.
Slide 19 summarizes our balance sheet strengths during this volatile time.
Our deposits are up, our capital and liquidity positions are strong, and our overall credit quality is solid.
In summary, PNC reported a strong first quarter 2023.
In regard to our view of the overall economy, we are expecting a recession starting in the second half of 2023.
resulting in a 1% decline in real GDP.
A rate path assumption includes a 25 basis point increase in the Fed funds rate in May.
Following that, we expect the Fed to pause rate actions until early 2024, 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 1 to 3%, which equates to average loan growth of 5 to 7%.
Total revenue growth to be up 4 to 5 percent.
Inside of that, our expectation is for net interest income to be up 6-8%.
At this point, visibility remains challenging and our full year NII guidance assumes the continuation of the recent intensity on deposit pricing, which is being driven by recent events. We expect non-interest income to be stable, expenses to be up 2-3%, and we expect our effective tax rate to be approximately 18%.
Based on this guidance, we expect we will generate positive operating leverage in 2023.
Looking at the second quarter of 2023 compared to the first quarter of 2023, we expect average loans to be stable, net interest income to be down 2-4%.
Fee income to be stable to down 1%. Other non-interest income to be between $200 and $250 million, excluding net securities and visa activity.
Taking all the component pieces, we expect total revenue to decline approximately 3%.
We expect total non-interest expense to be up 1-2%.
and we expect second quarter net charge-offs to be between $200 million and $250 million. Further, given our strong credit metrics, our credit quality is trending better than our expectations.
And with that, Bill and I are ready to take your questions.
Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-2 prompt technology request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment please for the first question.
Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a through-tune prompt technology request. If your question has been answered and you would like to withdraw your registration, please press 1-3. One moment please for the first question.
Our first question comes from the line of Betsy Krasik with Morgan Stanley . Please go ahead.
from the line of Betsy Krasik with Morgan Stanley . Please go ahead. Hi, good morning.
Hey, good morning Betsy. First off, I just want to say your slide deck is phenomenal. I just, you answered so many of the questions that I had coming into this. I felt like you were reading my mind ahead of this call. Could have been, could have been, yeah. Thank you. The team did a nice job putting that together. Thank you for recognizing.
that. No, it was great. You guys did a great job. I have two questions. One is on the beta, the deposit beta. When you know you're talking about the 42%, obviously that is aligned with you know the outlook that you just expressed for interest rate movements.
I guess I wanted to just understand how you're thinking about the flex between deposit beta and deposit growth. Because part of me says, hey, I could have expected even more deposit growth than you gave me QQ. And is there a rate paid element to that that maybe you're holding back on and that's a little bit more of a
the volatility in the market deposits still overall leaving the system. You know, particularly in the government money funds and then this shrinkage of the total on the back. QT.
You know our rate paid, you know if you look year on year, I think our total deposits are down 3% or something which is less than most anybody would compare to and we have purposefully been protecting the franchise.
in the course of doing that, I recognize some other people don't do that and that's, you know, we'll see how that plays out through time. But I, you know, we kind of feel we outperformed on deposits, so I'm a little bit puzzled by your question. Yeah. Yeah, no, QQ definitely and I would expect…
And then just separately, as a fallout of what has happened with SISB, Signature, et cetera, do you feel like there's any need at all to reassess the duration of the commercial operating account deposit liability life? Is that something that... Okay, very good casts today.
having seen what happened at Civ B, you would want to take a closer look at, or do you feel like it's just such a different animal given what you outlined on slide 10 with the granularity you've got. Thanks.
Well, first of all, we look at that all the time. And as Rob put into his comments, a large portion of the deposit growth that we saw through COVID, you know, so stimulus and the growth in the Fed's balance sheet, we just assumed had a life of a day, a zero.
We look at that all the time. And as Rob put into his comments, a large portion of the deposit growth that we saw through COVID, so stimulus and the growth in the Fed's balance sheet, we just assumed had a life of a day, a zero.
You know, because we're in an abnormal period of time that the core operating deposits that we have, you know, particularly as you go in the middle market are are basically the monies, you know, the working capital monies that the companies use to run their companies. We truncate and always have truncated the.
modeled lives of those deposits well below what the practical experience would show us. Yes, so it's conservative. And deposits are spread out over diverse industries and diverse geographies.
accounts you know you almost can't compare what happened at
you know, Silicon Valley and Signature to any other bank I have ever seen in terms of the concentration of the deposit accounts. And the nature of the clients. Just the nature of them. I mean a lot of that money was capital raised money that was sitting there.
Right. Okay, that's super. Thank you so much. Appreciate it. Our next question from the line of Mike Mea with Wells Fargo Securities. Please go ahead.
Hi, I guess this question goes in the category of no good deed goes unpunished. Your operating leverage in the first quarter of a year was over 10%. You got it for positive operating leverage this year of 1-3%. Your cycle to date beta, I estimate that being below 40%. All that looks really good.
But on the other hand, you did, I guess, lower your...
guidance for how much positive Ockney leverage this year. You mentioned NII, you mentioned the intensity on deposit pricing.
So, can you help talk about the trade-offs of pursuing growth with more deposits versus maybe scaling back if that deposit pricing is really that much more intense or do you see that not being so at some point?
I think part of the issue that we face here is you have an interest rate forward curve that is suggesting cuts out there. So if you believe that betas would be less. We kind of think the Fed is going to hold through the year and cut next year. Personally I think they might hold longer than that.
So everybody's NII guide is going to be all over the place depending on what they actually think the Fed is doing as we go into this, you know, the back end of this year. Separately, you know, we have seen just this heightened awareness of interest rates and what you do with deposits on the back of the banks that failed. You've seen the growth in the government money funds on the back of the Fed's reverse repo facility.
which is a real thing. As long as they allow that to keep growing, you know, they're at the market deposits, but they're basically getting drained from the banking system, you know, and making liquidity more expensive. So that's, you know, we took all that into account and said, look,
If the rates are higher for longer, if the Fed keeps draining deposits through its reverse repo facility, the smaller banks really need to pay up at super high rates to fund their balance sheets, it's going to be painful for us and that's what we put in our guide. That may or may not happen. Coming soon.
And I would just add we've got to focus on our core franchise and our clients. So on the commercial side, it's really the effect of
commercial clients choosing to switch to interest-bearing from non-interest-bearing. Yeah. And their relationships fully intact. And then on the consumer side, as Bill just mentioned, the interest-bearing deposits and the pressure around rates paid there.
One other point you guys have made is that either NIL be better or you might get to release some of your credit reserves. Have you seen any improvement in that loan pricing commensurate with some of therun time really been in touch, especially the cash ecosystem of things that areht, we're marketing, paying rug
you know the standards and the capital markets, you know, you're pricing for risk a lot more in the lending market you have not been pricing for risk and you brought that up before. Are you seeing that at all or still not yet? You know, our new production is a little bit better than it was but you know in fairness at the moment credit looks much better than we are.
you would expect credit spreads to widen here simply because the cost of funds for all banks has gone up. I haven't seen that play out yet, but it continues to be at least my expectation that it will.
credit spreads to widen here simply because the cost of funds for all banks has gone up. I haven't seen that play out yet, but it continues to be at least my expectation that it will. All right. Thank you.
Our next question comes from the line after our Cassidy with RBC. Please go ahead.
Hi guys, how are you? Hey, morning, Barack. Bill, can you give us, you guys pointed out about, Rob, the expectations on TLOC and your prepared remarks, but can you guys give us some color on what changes may come as a result of the COVID-19 pandemic?
signature and silicon value bank failures the regulators look like they're going to reassess the situation We'll get the post-mortem on May 1st of course But what do you guys think may happen in terms of additional requirements for regional banks like yours? And I know to you like you're already planning on that but outside of T lack
I don't know what it is they might do. There's a lot of talk around should they eliminate the available for sale.
I don't know what it is they might do. There's a lot of talk around should they eliminate the available for sale.
opt-in or opt-out for AOCI for banks our size. And they may well do that. Part of me though, the reason we put economic value of equity in our presentation is as soon as you start isolating specific fixed rate.
assets and ignore others. So, you know, what do you do with fixed rate hold on mortgages? What do you do with held the, you know, it's all the same stuff. It's an accounting entry.
And so I would hope that they would have a more holistic look as they do in Europe on measuring balance sheet risk to interest rates. I don't know where that's going to end up and whatever it is they do is going to take a period of time.
You know, TLAC, I think, is a certainty at this point. It's a function of how much it'll be and whether it's varied as a function of size and complexity of bank. But there's some tailoring, right? Yeah. No, and Bill and Rob. Yeah. Go ahead, Rob. Go ahead. Those are the two prominent subjects, TLAC and AOCI inclusion.
But by the way, the issue, it's just, it's worth mentioning, you know.
Basic interest rate risk management and the test around liquidity that banks go through.
I mean we do this, we run this stuff every single day with all sorts of different scenarios. And the regulators require us to. And we get measured on it, do even more than that on it. And I don't even know who was looking at these other banks.
every single day with all sorts of different scenarios. And the regulators require us to. And we get measured on it. Do even more than that. And up on it. And I don't even know who was looking at these other banks. It's.
So to come in and say we ought to do more, we are already doing it is I guess my point. Very clear. And I am glad you guys put the whole balance sheet, the equity evaluation because that message has to get out. And I am glad you guys did that. So thank you. Go ahead Ed.
Moving on to commercial and industrial loans, you guys have seen really good growth over the past year. Can you give us a little more color on? Do you see a, you know, re intermediation coming into the banking system because the capital markets are still disrupted? Or is it just you guys have, you know, had success with BBVA and that's working for you? What can you?
be above what you would expect in a long-term trend and then over time we cross-sell into those new relationships. So I almost think of it as, you know, it's kind of advertising dollars, you otherwise participate in a deal on the hope that you're going to get TM revenue and other things.
What we'll see going forward is the cross-celling to the new relationships we've established.
The ability to continue to grow loans at that pace should we choose to is probably still there. Do you get paid for it today the way you did when rates were much lower? That's a tougher question.
Now that the whole reintermediation in the banks from capital markets, I've heard some of that buzz. By the way, I've heard the buzz the other way. You know, all else equal, I suspect the long-term trend will be less in the banking system and more out of the banking system.
in over a long, long period of time, notwithstanding what happens in the near future.
long, long period of time, notwithstanding what happens in the near future.
Very helpful, thank you. And to reiterate what Betsy said, great deck, thank you very much. Thanks, Fred. Next question from the line of John Kari with Evercore, please go ahead.
Good morning.
Good morning.
And I agree on the slide deck, very, very helpful detail. Thanks for giving it. On the deposit front, just a couple additional detail. The beta expectation, the terminal beta, 42% looks a little bit more conservative than the group and probably appropriately so. So it's good to see it.
Again, it's an expectation. We'll see how it plays out ultimately. You're on the right track. If you take a look at our total deposits of $437 billion and you take commercial and the high net worth, the consumer portion, which is high net worth, which is around $230 billion, the number of depositbottom prices and the increase in the pockets be the lowest in nature. Of course a certain amount of Dakota wealth was excessive there, but we're seeing over
it's an expectation. We'll see how it plays out ultimately, but you're on the right track. So if you take a look at our total deposits of $437 billion and you take commercial and the high net worth, the consumer portion, which is high net worth, which is around $230 billion, those paid as a boot, they're already at terminal. It's done.
So, you know, that leaves roughly 200 billion or so in consumer deposits. As I mentioned in my comments, 10% of those are non-interest-bearing, which are transactional accounts that we don't expect to change. So, you know, you're at 170 billion, the minority of our total deposits of interest-bearing consumer deposits that are sort of in play and that we expect to pay higher rates on. So, that's how we get to, you know, maybe a more conservative number than what you're seeing on peers that don't have the same mix.
Also, on the deposit front, if I could also get a little more detail on the amount of inflows that you may have seen during the March time period around the failures, can you maybe quantify the amount and if you expect any outflow of any of those inflows that you saw?
So we did see in mid-March. We saw some inflows during that week at the height of the disruption. But a lot of that settled out, so we don't expect to see that be a factor for us positively or negatively.
as we move into the second quarter. The only thing I'd say, we actually opened in March twice the number of accounts, you know, in our CNI franchise that we would otherwise open in a month. So, you know, away from the deposits that came in, we actually got a bunch of clients. Yeah. You know, the deposits all
stay and get mixed, some will go, but we grew our account portfolio pretty substantially in one month. Okay, great. If I could put one more in there. Just on the office front, do you happen to have perhaps...
you know, the refreshed LTVs that you're starting to see in that portfolio? That's a good question and I haven't seen them, but it's worth, I don't know we put in the deck or not, but you know, we underwrite to what 55 to 60? 55 to 60. And all of that stuff is stale.
down and then you have to put in the rehab costs.
you know, to release it. And then you just count it at lower rates. We've done all that building by building and then taken reserves against it. And I guess the final point I'd make, if you think about Rob's number, it was at 9.6%. We have against the multitask.
Effectively, you're saying, all right, I can have 20% of Class A office default and lose 50 cents on the dollar on a portfolio that was originally underwritten at 60%.
That's a pretty severe outcome. Yeah, and I would add to that, John , and Bill mentioned it, you know, we have a relatively small portfolio, so we're able to go asset by asset rather than just broad strokes across, you know, a general portfolio.
We, you know, look, we, you know, we know how to do this, right? But we've been in the business for a long time. We have all the resources and have seen the activity of Midland. You know, we know all the borrowers we're with and, you know, we think we've laid it out pretty clearly. We, you know, we're going to have charge-offs.
but that's why we built the reserves. That's where they're coming from and we built the reserves. Got it. Very helpful. Thank you. Next question from the line of Bill Kartasche with Wolf Research. Please go ahead. Okay.
Good morning Bill and Rob. I wanted to follow up on the deposit beta commentary. Rob, you mentioned that mid 20% non-interest bearing deposit mix that's implicit I believe in your 42% terminal beta assumption. It looks like that would get you back to pre-COVID levels on slide 11 I think. How are you thinking about the risk that that non-interest bearing mix will continue to fall you know not just a pre-COVID level.
accounts that we have that we just were mentioning we know really well and we know the nature of their activities. So it's really knowledge of our operating book that gives us that indication.
Understood. And then separately following up on your commentary around potential regulatory uncertainty in light of bars, your recent Senate testimony.
So hoping you could address broadly how you're all thinking about the levers at your disposal to the extent that the regulatory environment grows more challenging. Certainly your seems like you're well positioned, but you know in terms of levers whether it's RWA growth, buyback, dividend, if you could just frame you know how you think about those to the extent that it does get more challenging.
broadly how you're all thinking about the the levers at your disposal to the extent that the regulatory environment grows more challenging certainly your seems like you're well positioned but but you know in terms of levers whether it's RWA growth, buyback, dividend if you could just frame you know how you think about those to the extent that it does get more challenging.
I am not sure. If you put ASCI in, we are already kind of over the threshold. All else equal, I think we are well positioned and fine. As Rob mentioned, we are at least at the moment being conservative on our thoughts on share repurchase, but most of that is to kind of wait out the current environment, get through earnings and see where we are. I don't see any issue coming out of regulation that we won't be able to handle.
due course. And they would largely be in the obvious areas of capital and liquidity where we're strong.
They would largely be in the obvious areas of capital and liquidity where we're strong. Next question, please.
Next question from the line of Scott Seifers with Piper Sandler. Please go ahead. Morning everyone. Thank you for taking the question. So you reduced the full year 23 loan growth expectation a bit. I was wondering if you could comment for a second on how much of that is the full year 23 loan growth expectation?
is sort of lower either existing or anticipated demand? And how much is you guys just sort of being more conservative about where you'd hope to kind of direct your capital liquidity?
It's a great question. It's probably 50-50. So demand has softened a little bit and then you know the marginal cost of syncing new clients has gone up so we're a little more picky than we were.
question, it's probably 50-50. So demand has softened a little bit. And then the marginal cost of sinking new clients has gone up, so we're a little more picky than we were. It's probably 50.
And that spread issue that we talked about that we you know, we think that we should be paid more for the risk
Okay perfect thank you and then I was hoping you could extend just a bit on that commercial account opening comment you made a couple questions ago. Maybe as you sort of think of how the sort of the world might look going forward for commercial customers do you think they'll just maybe diversify their relationships to protect themselves a little you know it
How will an operational account work? Will people just keep less in their operational accounts and sprinkle it elsewhere? Any thoughts on how things might evolve?
account work? Will people just keep less in their operational accounts and sprinkle it elsewhere? Any thoughts on how things might evolve?
You know, I am not sure. We have not seen anything with our legacy clients in terms of behavior. Now they have, we have seen money go into sweep accounts, you know, government funds from corporates and individuals largely is a function of rate.
I don't know that it has anything to do with diversification. Now, as you go for smaller banks, I suppose that could become an issue depending on how much visibility there is into that particular bank's balance sheet, but we just haven't seen any of that. Yeah.
I don't know that it has anything to do with diversification. Now as you go, you know, for smaller banks, I suppose that that could become an issue, you know, depending on how much visibility there is into, you know, that particular bank's balance sheet. But we just haven't seen any of that. Yeah. Okay. Thank you.
All right, perfect. Thank you very much. Yes. Next question from the line of Ken Austin with Jefferies. Please go ahead. Thanks. Good morning, everyone. Hey, guys, I just want to dig on the guidance a little bit. The second quarter guidance is clear for the revenue step down, and kind of that implies in the full year guide that second half revenue is pretty equal to first half revenue. I'm just wondering if you could kind of maybe give us some.
NII versus fees, and are you expecting any, you know, just better stability or increase as you go through the year, perhaps, in fees versus what might happen in NII? Thanks. Okay, I think you're asking in terms of the full year. So you know, we've given you the new guidance around our NII, and we've been through that. As far as fees go, you know, we're calling it to be stable.
year over year and there's some moving parts in there. Some of the fee categories are doing a little better than we expected. Some are doing a little bit worse, but all together it's still stable. Okay, and within that, can I just ask you a question? Your higher saloon business has just been a great one over the years.
Yeah, so Harris Williams, you're accurate in terms of that's our biggest driver of our capital markets advisory businesses and they had a slower than usual quarter in the first quarter, obviously reflecting a lot of disruption and the pipelines are still pretty good. We're not expecting a big rebound in the second quarter but potentially in the second half.
But to your point, a lot of that depends on the psychology at the time and the ability and the support for both buyers and sellers to do deals.
Okay, hey Rob, one more quick one. I know your footnote on your beta slide says that you don't include time deposits in your beta calcs. Are we generally to assume that this the beta on time deposits is is obviously very high just given what we know the earlier point that Phil made about about the industry funding costs?
Yeah, that's right. And again, that's a conventional measure, so that's not our own personal PNC measure. That's how the industry calculates it.
That's right, and again, that's a conventional measure, so that's not our own personal PNC measure. That's how the industry calculates it. Okay, understood. Thank you.
So that's not our own personal PNC measure. That's how the industry calculates it. Okay, understood. Thank you. University of New York A&M School of Law
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Thank you. Quick question if I may on the commercial real estate follow-up one on criticized loans on slide 18. It said 20% twice as much as the rest of your commercial real estate book. So I would just like to understand what was this number before and how you would expect this number to evolve from here. Thank you.
I'm sorry, I didn't follow all of that. Yeah, yeah, sorry. On slide 18, you mentioned that our office loan ratio is 20%. I'd just like to know what was this number before for produce quarters and how would you expect this number to evolve from here?
So the 2.7%, it's been pretty steady.
It's been a small percentage of our total commercial real estate hasn't changed nor do we expect it certainly not to go up
Next question from the line of Alan Davis.
Matt West Markets, please go ahead. Hi, thank you very much. Alan Davis here from Matt West Markets. Just a very quick question and echo what everybody said, the disclosure information here is fantastic. With all the market noise that went on after SVB, and I totally get the difference, and I totally agree with what you're saying about.
the accounting standards and so on. Nevertheless there's a lot of keen interest in the unrealized losses on the hold to maturity portfolio.
Are you able to provide any color or guidance there? I don't think all of that would be an AOCI. Is there anything that you can help guide me with in that regard?
The add-on held to maturity, so inside of AOCI today is one number and then we have another smaller loss in held to maturity which we disclosed. Three and a half billion. Yeah, I did. I apologize. I did not see that.
Fantastic. Sorry, didn't mean to waste your time. Thank you.
Sorry, I didn't mean to waste your time. Thank you. No problem. No waste. Okay. All right. We have no further questions on the phone line.
Okay, well, thank you for joining our call and your interest in P&C. And if you have any other additional questions or need follow-up, please feel free to reach out to the IR team. Thank you. Bye. Thanks, everybody. Thank you so much.
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