Q2 2019 Earnings Call
[music]. Please continue to stand by your call will be answered any border. It was received.
The conferencing service can I have your first and last name.
Our same as Michael last name as much television, it's felt and I see H.A.E.L.D.V. I CH.
I'll just confirm so I'm like Mary I see age 80 L. E V like Victor I see age.
Got it.
What is your affiliation.
Era, the company's that's felt a I.E.R.A.
So hey, I era.
Got in place your line drawn on that.
Thank you.
Check and Rob Reilly Executive Vice President and CFO .
Today's presentation contains forward looking information.
Good question Harry statements about this information as well as reconciliations of non-GAAP measures are included in today's earnings release materials as well as our SEC filings and other investor materials.
These materials are all available on our corporate website PNC dotcom under Investor Relations.
These statements speak only as of July 17th 2019, and PNC undertakes no obligation to update them.
Now I'd like to turn the call over to Bill.
Thanks, Brian and good morning, everybody as you've seen this morning, PNC reported net income of a 1 billion four or 288 per diluted common share for the second quarter.
By virtually every measure it was a successful quarter you saw we generated really strong growth in loans and deposits. We grew total revenues, both eni and noninterest income increased.
Managed expenses well generated positive operating leverage and delivered strong returns.
Building on the strong first quarter, we're pleased where where we sit on performance through the first half of this year.
Credit quality remains strong.
We continue to see no cracks really on either the commercial or the consumer side.
Our loan growth this quarter continued to be driven by the commercial side, but we did see growth in consumer as well.
And inside of our strong commercial loan growth, we saw a drop in yields consistent with lower interest rates LIBOR sets basically and some further spread compression.
The effect was particularly impactful on the margin this quarter at the same time, we continue to have great success in cross selling fee based products to these clients and our economic profit on the total relationships continues to be really healthy pipelines are solid going into the third quarter sales on our corporate banking segment in June actually tied a monthly record high and Treasury management and capital markets revenue also set quarterly records.
In terms of market expansion, we continue to generate strong results and see an IP with our new markets and we will take our middle market corporate banking franchise into two additional markets next year next year with moves into both Portland and Seattle.
On the retail side, our national digital expansion effort continue to make good progress this quarter, our high yield savings product continues to be an attractive entry point for new customers in our expansion markets and beyond.
And we've now opened three new branch locations under our solution Center model in Kansas City in Dallas that support our digital offerings and outreach in our expansion markets.
And.
We've been very pleased to see the growth in those branches.
They are growing at nearly five times the pace, we'd expect for de Novo branch in our legacy markets. Looking ahead, we plan to accelerate the pace of new solution center openings over the next 18 months or so in Boston, Dallas, Houston and Nashville.
We continue to return capital to shareholders, even as we maintained a strong capital position.
Im sure Youve seen we recently announced a 21% increase in our quarterly.
Cash dividend on common stock raising the dividend to $1.15 per share on top of a substantial increase in our share repurchase programs and as we look.
As we look at the current environment.
And the remainder of the year ahead, Theres, obviously, some uncertainty in the economy and the outlook for rates.
That of course is beyond our control, but we will continue to invest in our businesses, particularly in customer facing innovation keep improving the customer experience and further expand our product and service offerings to meet our customers' evolving needs.
As always I want to thank our employees for their continued hard work and with that I will turn it over to Rob to take you through our second quarter results in a little more detail.
Thanks Bill.
And good morning, everyone.
As Bill has mentioned, we reported second quarter net income of $1.4 billion or $2.88 per diluted common share.
Our balance sheet is on slide four and is presented on an average basis.
Average total loans grew $6.3 billion or 3% to approximately $235 billion linked quarter loan growth compared to the second quarter of 2018 with $12.2 billion or 5%.
Investment Securities of $83.6 billion increased $1.3 billion or 2%, primarily due to purchases of agency RMBS.
Securities increased $6.1 billion or 8% year over year.
Our cash balances at the fed averaged $13.2 billion for the second quarter down $1.5 billion linked quarter, and seven and a half billion dollars year over year.
Deposits grew $5.7 billion, or 2% linked quarter, and $11.9 billion or 5% year over year.
As of June Thirtyth 2019, our Basel III common equity tier one ratio was estimated to be 9.7% compared with 9.8% as of March 31 2019.
Our tangible book value was $80.76 per common share as of June thirtyth, an increase of 12% compared to a year ago.
Our return on average assets for the second quarter was 1.39% up five basis points from the first quarter and our return on tangible common equity was 14.82% an increase of 69 basis points.
Slide five shows our loans and deposits in more detail.
Average loans grew $6.3 billion or 3% over the first quarter with broad based growth in both commercial and consumer lending.
Commercial lending balances increased $5.4 billion or 3% linked quarter with particularly strong growth in our secured lending portfolio.
On the consumer side balances increased approximately $900 million or 1% linked quarter with growth in residential real estate auto and credit card somewhat offset by runoff in our home equity and education loans.
Compared to the same period, a year ago average loans increased 5% or $12.2 billion.
Average deposits increased approximately $5.7 billion in the second quarter compared with the first quarter, reflecting growth in both commercial and consumer deposit.
The growth was primarily in interest bearing deposits. However, average noninterest bearing deposits posted a small increase as well.
Compared to the same quarter, a year ago average deposits increased by $11.9 billion or 5%.
As you can see on slide five our capital return to shareholders has been substantial over the past several years through a combination of share repurchases and dividends, while maintaining an overall strong capital position.
In the second quarter, we completed the common stock repurchase programs, we announced last year.
And last month, we announced a new plan to repurchase up to $4.3 billion of shares over the next four quarters. This represents a 48% increase over our recently completed share repurchase programs.
Additionally, last week, our board of directors approved a 21% increase in the quarterly dividend to an all time high of $1.15 per share effective with the August dividend.
As you can see on slide six first quarter total revenue was $4.4 billion.
$153 million linked quarter or 4%.
Net interest income was up $23 million or 1% compared with the first quarter.
Noninterest income increased $130 million or 7% linked quarter, reflecting seasonally higher fee income as well as an increase in other noninterest income.
Noninterest expense increased $33 million or 1% compared with the first quarter as expenses continued to be well manage.
Provision for credit losses in the second quarter was $180 million, a $9 million linked quarter decrease.
Our effective tax rate in the second quarter was 16.6% for the full year 2019, we continue to expect the effective tax rate to be approximately 17%.
Now, let's discuss the key drivers of this performance in more detail.
Turning to slide seven net interest income of $2.5 billion was up $23 million or 1% compared with the first quarter.
The increase reflects higher loan balances as well as an additional day in the quarter, partially offset by lower commercial loan yields and higher interest bearing liability balances.
Net interest income grew $85 million or 4% year over year, driven by higher earning asset yields and balances, which were partially offset by higher funding costs and balances.
Net interest margin decreased to 2.91% in the second quarter. The primary driver of this decline was commercial loan yields which were impacted by a decrease in LIBOR rates as well as narrower spreads.
Additionally, deposit rates increased five basis points during the quarter.
Noninterest income increased 7% linked quarter and 2% year over year importantly fee income grew 5% linked quarter with increases across all fee categories. The main drivers of the $71 million linked quarter fee increase word.
Asset management revenue, which includes our equity investment in Blackrock increased $8 million, reflecting higher average equity market.
Consumer services increased $21 million in service charges on deposits increased $3 million due to seasonally higher transaction volumes and customer growth.
Corporate services increased $22 million, driven by higher Treasury management product revenue and loan syndication fees.
And residential mortgage noninterest income income increased $17 million due to higher loan sales revenue and a positive our MSR valuation adjustments, partially offset by lower servicing revenue.
Finally, other noninterest income increased $59 million linked quarter, reflecting higher capital markets related revenue, including a record quarter in our corporate securities business and asset sale in valuation gains.
Second quarter. Other noninterest income included a gain on the sale of the retirement record keeping business, which was announced in the first quarter and was included in our second quarter guidance.
In the third quarter, we expect other noninterest income to be in the range of $250 million to $300 million. Excluding net securities. In these activity. This reflects our expectation for lower asset sale gains compared with the second quarter.
Turning to slide eight second quarter expenses increased 1% for both the linked quarter and year over year comparisons as our expenses remain well controlled.
The largest percentage increase was in our marketing expense, which supports our national retail digital strategy.
Our efficiency ratio improved to 59% in the second quarter compared with 60% for both last quarter and a year ago.
Expense management continues to be a focus for us and we remain disciplined in our overall approach.
As you know we have a goal to realize $300 million in cost savings through our continuous improvement program and we're on track to achieve our full year 2019 target.
Our credit quality metrics are presented on slide nine.
Overall, our credit quality remains strong and we continue to see strength broadly in both our commercial and consumer portfolios.
Provision for credit losses was $180 million and $9 million decrease linked quarter.
Net charge offs increased $6 million to $142 million linked quarter and our annualized net charge off ratio was unchanged at 24 basis points.
Overall, our allowance for loan and lease losses to total loans was 1.15% as of June Thirtyth 2019, virtually unchanged from the previous four quarters.
Nonperforming loans were up 70, $171 million or 4% driven by the commercial portfolio.
Total nonperforming loans to total loans represent 73 basis points, a small increase in the quarter, but down year over year.
Total delinquencies were down $127 million or 9% linked quarter, reflecting a decline in both commercial and consumer delinquencies.
As you know we are approaching the adoption of Cecil the new accounting standard for credit losses, which will go into effect January Onest 2020.
We have done in parallel run since the beginning of this year and based on our expectation of forecasted economic conditions and portfolio balances as of June Thirtyth 2019, we estimate that Cecil could result in an overall allowance increase of 15% to 25% as compared to our current aggregate reserve levels.
The majority of the increase is expected to be driven by the consumer loan portfolio as longer duration assets require more reserves under the Cecil methodology.
Importantly, these are still happening.
So at this point and we will continue to refine them through the balance of 2019.
In summary, PNC posted very good second quarter results, which contributed to an overall strong first half of 2019.
For the balance of this year, we expect continued growth in GDP, albeit at a slower pace over the second half of 2019.
We now expect to 25 basis point cuts in fit in the fed funds rate in 2019, one in July and one in October .
Looking ahead to third quarter 2019, compared to second quarter 2019 reported results, we expect average loans to be up approximately 1%.
We expect total net interest income to be stable.
We expect fee income to be up low single digits. We expect other noninterest income to be between $250 million and $300 million, excluding net securities and visa activity.
We expect expenses to be stable, and we expect provision to be between $150 million and $200 million.
Turning to slide 12, and taking into account our third quarter guidance, we'd also like to take this opportunity to reaffirm our full year outlook.
Our income statement guidance remains intact, and we are increasing our outlook for average loan growth based on the strong performance we have experienced in the first half of the year.
We're now expecting full year average loans to be up approximately 5%.
We expect the net interest income benefit of this incremental loan growth to partially offset the lower than expected rate environment, which will support our ability to achieve our original full year revenue target.
Importantly in the first half of 2019, we generated positive operating leverage and remain well positioned to deliver positive operating leverage for the full year 2019.
And with that Bill and I are ready to take your questions.
Edison could you poll for questions. Please.
Thank you at this time, if you ask a question. Please press the number one followed by the number four on your telephone keypad. Please hold while lumber composite accuen a wash our roster.
Your first question comes from the line of John Pancari with Evercore. Please proceed.
Good morning.
John Good morning, Tom.
On the on your guidance for the full year and it's good to see the revenue outlook unchanged. Despite the.
The rate backdrop so.
Is it.
I'm wondering if you could break out that revenue expectation of.
At the higher end or of the low single digits between what your expectation would be for the full year or for Eni.
Versus fees 'cause it seems like likely that your fee outlook.
As improving here and helping keep that revenue outlook unchanged in the backdrop of the lower rate environment Yep Yep Yep Yep, Hey, John This is Rob.
It will take a look at in terms of our full year guidance, what we originally expected.
We said the upper end of the low single digits, probably at that time, a little more and Eni and a little less.
In in noninterest income.
Fast forward to today.
Counting for the.
Now a rate environment, where we expect declining rates that we'd see the eni back off a little bit then the noninterest income pickup.
Eni is not down as much as it would be.
As I pointed out in my comments because of the higher than expected loan growth, so probably a little bit more to answer your question, probably a little bit more equal contribution both from Eni and noninterest income.
Yes, Scott, what Rob, Yes, clear, though what Rob say NII down a little bit it's relative to our expectation, yes, our of our original expectation Thats right.
Right got it got it Okay, and then as it pertains to Eni.
Can you give us a little bit more granularity on what you how you see the margin trending.
I know previously you look for a couple.
Bips impact, but I was going through the remainder of the year, but curious what your expectation is now the year.
Looking for cuts and then also what will be the Eni or NIM impact of 25 basis point cut each just curious on your rate sensitivity. Thanks.
And we can both jump this was a bit of a weird quarter job because the LIBOR sets kind of got in front of the expectation that the fed is going to cut. So we we had that drop in loan yields.
The.
It wasn't really offset by any any drop in in deposit rates and other things. So I don't know that youre going to see a drop like you saw this quarter interestingly all of what we saw virtually all of it was on the asset side.
As opposed to the liability side of our balance sheet here. So I think going forward and we do have two cuts in the forecast you will still see NIM under pressure, but it shouldn't be at all like that the drop we saw this quarter.
Having said all that.
Theres a million caveats to mix and other things in there that affect debt.
Yes, I think I can add to that just in simple terms side this quarter.
Interest bearing assets were down largely driven down by commercial loan yields.
And on the liability side, we actually went up a basis point because even the borrowings came down the deposit rates were up so going forward with that and the deposit rates are up because of mix shift metric not yet echoes aveda and competitive factors. So going forward, we see the liabilities be more in tandem.
So less compression to Bill's point, and then on the NII itself in terms of the approximate amount relative to the two cuts that we have we approximate that to be about $100 million.
Relative to our yes relative to what it would have been otherwise, we didnt get the capacity to add to that.
Got it.
Okay all right. Thank you.
Sure John .
The next question comes from the line of John Mcdonald with Autonomous Research. Please proceed.
Yes.
The loan growth came in.
A little more color on where things have been.
Thank you.
Where they might.
Hello.
Pittsburgh the legacy.
John you're breaking up a little bit.
You there.
Okay. So the next question will comes back in it.
The next question comes line of Betsy Graseck with Morgan Stanley . Please proceed.
Hi, good morning.
Hi, Betsy.
Hi, I wanted to understand a little bit more about the loan growth that you generated this quarter. I mean, you guys are known for being very conservative and careful and this is really eye popping growth. So just wanted to understand.
What the drivers worse in particular in the CNS side, and what kind of legs. Do you think this has just just want to see if this was really unusual quarter or theres more calm, yes, I cannot pay that it's Rob I can.
Start.
We did have it we had a great quarter in terms of loan growth as you mentioned that largely on the commercial side, although consumer growth was good too.
On the commercial I think it was a bit elevated in the second quarter.
The primary drivers of our loan growth, which.
Which we'd expect to continue maybe not at the same rate that we are in new geographies all of which are doing well.
And then.
In this quarter similar to what we've been saying for the last couple of years really strong growth in our secured lending.
Segment, which has better competitive dynamics.
So those two things happened in the quarter and then on top of that we had strong growth up.
Some high quality commercial just general commercial credit so little bit more in the second quarter than we would expect going forward, which is why we guide to 1% loan growth in the third quarter, but those fundamentals are still in place.
We haven't changed the risk bucket.
Actually the quality of what we've been originating on average has been better higher over the course of the first half of this year than it was last year.
No it's interesting because we see in some of the data a little weakness and the manufacturing transportation area.
Energy and and those are big borrower. So is there any is there other industries, that's really driving the bus for you than those.
It's it's pretty diversified the one thing that's in there is we did see.
Some pickup in utilization this quarter, which helps a little bit, particularly in asset based lending book.
Although I would say that.
It actually came down in June so it's I don't know that that's a strength that necessarily continues but it was broad based its new clients to the new.
I don't remember the set off the top my head route but the new markets are growing at multiples multiples are very high percentage is off a small base, but clearly, adding or adding materially to the balances. So things are just work and they're doing a good job.
So do you feel like that is in part because of your size going into these new markets folks are looking for somebody.
A little bit larger that can take down bigger bites is that part of it and maybe you can speak to the quality of the loans that you are doing is it more.
Cash flow asset based or is it.
Fund buybacks and M&A.
Well remember the asset base business has been national four years.
So we're not actually in housing that when we talk about our new market growth. So most of the new market growth.
Yes, it was coming from our traditional middle market products.
It's not.
Differentiated by risk.
The cross sell ratio in the new markets.
Is accelerating.
Quickly approaching legacy markets. So.
We're just executing well and I don't I don't actually I don't know how else to explain it and taking the same approach as new market that we do in our legacy markets. We know how to compete we don't win them all but we win our fair share.
Yes, okay. Thank you.
No.
And we will try with Mr. John Mcdonald from Autonomous Research. Please proceed with your question. Please.
Okay. This thing on.
Yes, much better.
All right sorry about that guys I'll move onto the next topic.
Got a big authorization on the C car with the buyback I guess bill just kind of wondering about your philosophy. There. Some banks frontload others are more opportunistic how are you going to approach to executing the buyback.
We spread it through time, you know you can't really.
Frontloaded anyway you.
I forget the exact growth and in terms of yeah in terms of our plan going forward is what we've done in the past years, which is pretty much evenly distributed throughout the year, some others have front loaded, but thats part of their submission.
We're opting to otherwise.
Okay, and then Rob you obviously get.
Some benefit based on the tailoring proposal have you guys done any fine tuning of the estimates of how much that could help on the capital front, if the tailoring goes through as proposed.
Yes, yes, John we have.
And again this is proposed.
The the quick answer is about 65 basis points on our Cetone ratio.
That's down a little bit from last time, we were asked that question, mostly because AOCI has changed around.
So 65 basis points is that is a good estimate.
And is that pretty much all Blackrock then as the benefiting might you add the threshold the threshold deduction, but a blackrock has flattened blackrock the biggest piece.
At Bryan's right. The other components MSR entities are down a little bit at Blackrock for the piece.
Okay, and then just on the credit quality, Rob anything to note. There. The npls are up a touch is that just kind of lumpy stuff going on there overall credit looks good just maybe a comment there yes, yes, thats our view John just.
You know a couple of a couple of deals coming off of really really low levels last year. So when you take a look at the percentages of the total loan portfolio, they're virtually unchanged.
We had a couple of deals on the commercial side.
Go to the Npls out one one of which went to the top there that we've disclosed but they are unrelated to and.
You know had instances and circumstances that mitigate what would be no further broader concerns.
Okay got it thanks.
Yep.
Yes.
The next question comes from line of Erika Najarian with Bank of America. Please proceed.
Hi, good morning.
Hi, Eric as we think about deposit strategy in the mid to freight cuts could could you share with us what kind of.
Sensitivity you assume as you think about.
Mitigating the frightening the first few rate cuts.
And are you going to continue to separately thinking about your expansion markets in terms of pricing versus your legacy markets.
Perfect.
Yes, sure Eric I can I can start on that obviously going forward in a declining rate environment that we'll keep an eye in terms of our deposit rates.
And if we do get the cuts that are proposed it's likely that.
Our rates with either subject to competitive pressures stable or go down I think in regard to the national retail digital strategy at near the deposits. Although they have increased nicely percentage wise. There there is still pretty small relative to our total deposits. So we will remain pretty aggressive there in terms of the rates that we pay them.
But of course that will be.
Largely subject to the rate environment and the competitive pressures.
I think.
Practically betas lagged on the way up there. So they don't have as much to we don't have as much to go down.
The national markets interesting, if you post and the top couple rates you gather lots of deposits if you're off that from tier.
It slows down.
And our strategy right now isn't actually to go out and try to grow those deposits aggressively instead, it's to go out and learn exactly the dynamics of how.
Marketing dollars spent give you a return on your investment in the combination of marketing dollars in the physical branch presence effects volume.
So you won't see as a practical matter.
I don't think rate impact, causing anything that you know rate impact, having causing any change in international expansion in the near term because we're still in the stage of kind of figuring out the levers that drive success.
In that effort elsewhere inside of deposits were going to drop of that drop rates ill subject to what the market does.
That's very helpful and as a follow up as you think about it.
Studying those new markets and how you entered those markets is that affirming the decision that we're really in a digitally and.
Initiated moral and therefore, the value of that traditional brick and mortar acquisition for someone like PNC is isn't much lower particularly if it's small in size.
A couple of things that are showing a very clearly to us that the branch builds but we're putting in place are much more successful dramatically.
Up more successful than the than we had assumed in they affect the quality of the customer.
That you actually book online.
So our bias and I have that in my comments is probably to go with more branch bills than we builds and we hit originally assumed in our in our national expansion.
The other thing that's that's very clear is that this online market is growing.
We can measure deposits that leave us to go to competitors as well as the deposits that come to us and it's very clear.
Through time at least in my mind. This is going to take a greater greater in portion of the market and for banking to be profitable as you see mix shift to interest bearing from noninterest bearing in the margin non interest bearing declining in effect for banking and be profitable youre going to continue to see this branch spending.
And our saturated markets, which we've talked about.
As we build out the fin.
So I think this is in motion not just for us, but for the whole industry and I don't think there's anything that's going to slow it down.
Got it I think I was unclear in my last question I heard you loud and clear that the branch experience. It enhances the customer acquisition I meant it more that you know the.
Organic build it seems more valuable than the traditional tuck in depository deal.
Oh, yes ma'am.
Got it thank you.
Go ahead.
Do you were going to add to that or it was just that that math becomes.
It's fairly straight forward when was the small small depository institutions are trading at multiples of book value and that was that was one of the things that we wanted to test with this with this experiment is and it is proving out that way.
Perfect. Thank you.
The next question comes from the line of Scott Siefers with Sandler O'neill and partners. Please proceed.
Morning, guys. Thanks for taking the question.
Rob I guess first just kind of a housekeeping one.
The retirement record keeping business.
Maybe quantify the size of the gain that was in other income.
I guess in a sense it doesn't matter since youve given.
Guide for.
I can I can I can I can help you.
Little bit of a math and you'd be able to do it yourself when you take a look at the AG segment information.
The gain on the sale of the business was it came in two components.
One was a $60 million gain in other noninterest income.
Associated with the transaction was $20 million of expenses.
The primary.
Driver of that was the write off of the software of our own administrative system that was not part of the sale. So so a net 40 million dollar gain.
And again, you can see that pretty you can see that pretty clearly in the AG segment info in terms of elevated revenue and expenses.
Yes, and it was as you pointed out it was part of our part of our second quarter guidance.
Yes, all right. Thank you and then.
Maybe just sort of a broader question.
If the fed indeed does go into this rate cutting mode.
Can you talk a bit about what you think sort of the stimulative impact if any would be on your your customers I guess on the consumer side, it's a little more self evident but as it relates to your commercial customers I mean would it generate any change in demand or Howard how are you or your customers thinking about that dynamic.
I don't know that I have any insight into that.
In theory Thats why they would do it as a practical matter I continue to think we're on Oh, we have really low rates today, so I I struggle to see how another 25 basis points or 50 basis points actually is going to impact.
What is already pretty low cost of funding for people.
But we'll see.
And the psychological aspect to that sometime Dale.
Yes.
Okay.
Perfect. Thank you guys I appreciate it.
Sure.
The next question comes from the line of Gerard Cassidy with RBC. Please proceed.
Good morning, Bill Good morning, Rob.
Hey, good morning.
Bill you talked a couple of times about the success of the solution branches outside your footprint and they are growing much faster than expected, which one are you finding is the reason for that success.
I don't know [laughter].
Thats fair answer okay.
Part of it.
As we design them purposely to be different in terms of the the numbers of employees and types of employees. So.
The employees in those branches.
It's been in a more time than a traditional branch outside of the branch so they're out working.
Events in neighborhoods in centers of influence.
You know more than you would see in a in a traditional branch I think.
You know the advertising that is in play in these markets.
Makes people aware of us and our offer and I still think that particularly for large deposits branches matter.
You know somebody says look it's a great offer but.
I'm willing to drive the 20 minutes to go see somebody face to face rather than do a digitally.
That has no you that's kind of common sense, but I think thats been a has had a stronger impact and I otherwise would have suspected.
And then circling back to the strong seeing high loan growth outside your traditional footprint.
Obviously.
From what you've said you're not.
Selling mill or making the loans and prices at a completely different than your competition or underwriting standards.
The guys on the front line that are making building. These relationships for you folks in the CNS area. What are they telling you why people are coming again I'm, assuming it's not just the loan is it the treasury management products that you have would sure everybody knows are very strong our what's bringing these people to you guys, if it's not pricing or underwriting.
Well first John you have to remember that that were just kind of starting to see the roll on of this new business as we've been in these markets for a couple of years. Our strategy is just to call on people sometimes for several years before we get any business.
We go into a market we figure out who we want to have his customers and then we just focus on them for however, long it takes.
What you're seeing in terms of our results as you know Mike Lyons calls at the wave, but basically kind of this catch up of the investments. We have made as we're starting to see growth come from three years of planting seeds. If you remember all the way back.
When we when we bought RBC, we kind of did the same thing right, we planted seeds and that that effort Kona came alive, two and three years later and that's what you're seeing now so its traditional clients. So I would tell you that makes a big difference.
Our ability to go in and cross sell when you you know more often than not you end up leading with capital with credit.
Is part of your intro to the relationship and as you pursue pursue cross sell we just have more to offer in terms of variety of products for for treasures and cfos to choose from.
We have good products and it's worked for US, yes, Gerard I would add to that that I agree with all that what I would add is that what we found is that receptivity of.
Potential clients in all these geographies to PNC, calling effort has been very high yeah.
Which.
20 years ago with difficult.
But the receptivity is very high and then once the dialogue occurring it's all the points that bill pointed out.
We tend to compete very well with our products and services.
And then just lastly, your federal reserve balances, obviously down year over year quite nicely how low can they go before they just have to be maintained.
Where are you there are really well so I think.
So.
How low can we go thats it thats a good [laughter] I think we're in it's a function of LCR I can go down to zero right wanted to put our stuff to add to it.
Level, one securities right. That's one of the issues you saw this quarter.
Was was we actually change the mix on balance of our securities bit to to a.
Which which.
Otherwise would have allowed us to have either Wes.
Wholesale borrowings indoor dropped the balance more yeah.
I think that's that's all true there I think were essentially at the levels.
That we expect to be at what I would point out though is part of the tailoring proposals as a possible reduction in the LCR levels and if that occurs.
We could go down substantially our math as much as maybe 10 or $20 billion, depending on whether it's 70 or 85% coverage.
Great. Thank you.
Yes.
The next question comes from the line of Matt O'connor with Deutsche Bank. Please proceed.
Good morning.
Hi, Good morning, I know the period end balances can whip around a little bit but I was just wondering if we look at the securities portfolio. The cash you had pretty big increase now that seems like it's being funded with wholesale and just trying to think through like is that as you think about your interest rate positioning or you pre funding some of your securities or is it just some of that period that noise that oversight yeah. There's there's some miss just between the the average in the in the spot at period end, but but you are correct that we did.
Because we added some to a securities we funded that with home loan advances actually and so you see that jump.
That's all inside of our rate.
Management process, we saw value in the largely certain types of MBS this quarter and took advantage of it yes.
Okay, and I guess I think there was a view out there that.
The rate curve is maybe overly ambitious in terms of predicting rate cuts.
And I think folks are still trying to keep some dry powder, but if.
If the rate cards that don't materialize.
Or they say reverse quickly which could happen.
How would you think about managing the balance in some of the security is definitely actions that you've taken here to what seems like reduce assets.
Having a little bit.
You shouldn't confuse the increase in balances.
With an assumption that we simply added duration is maybe the best way I could answer that question.
We.
We.
Saw what we think we're we're.
Irrational prices.
On certain types of securities that the offered a fairly protected return inside of surely we'll buy rate moves.
If rates stay where they are we don't see a you know were in fact follow the forward curve, there's not a whole lot of reason to want to add duration at this point.
Obviously if.
Because like you I don't believe that forward curve.
If that reverses then we'll take a look at it and there's opportunity there.
But nothing radical event.
Okay, Alright yep. Thank you.
The next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed.
Good morning.
Hey, Ken Lamb last last quarter, you guys mentioned that you had some expense leverage expense levers you can pull.
If there was a lot of pressure on rates and if that were to continue.
Are you still seeing some flexibility on the expense side if possible.
In order to continue to generate operating leverage given the current rate environment.
Hey, Kevin This is Rob I'm not sure I'm not sure what the levers that we were talking about before but we as we look on the script, but I'll I'll answer it in a sense that you know we do manage to positive operating leverage we've had a good first half.
Solid up positive operating leverage and we expect that.
To deliver full year positive operating leverage and that's what we manage to so on the expense side I feel good about it in terms of what Weve manage if you just go through the categories. Our personnel expense is up 2%, which is consistent with merit.
That contrasts where we were this time last year, where we were making a lot of investments in personnel and it was much higher.
Occupancy is essentially flat.
Equipment expense is up just a little bit reflecting our technology investments marketing is up that's deliberate.
Discretionary and part of our build out and we expect to continue that into the real savings has been in the all other category, which is our second largest behind personnel, which is down year over year, that's where our CP program shows up the most so I feel good about our expense management.
What we've done so far this year and what we plan to do for the balance.
Okay, and then shifting gears back to some of the longer of comments in consumer loan growth was it was a.
Focus for you.
And has consistently lag the commercial loan growth is there anything there that we can see maybe develop on the on the consumer side.
That will maybe start to emerge and maybe diversify your balance sheet, a little bit more oh between commercial and consumer lending.
But.
I don't think so I mean.
The Bell at the places we are growing are actually growing at reasonable percentages off of.
Smaller balances because we havent been that that larger consumer you know they are being offset by the continued run down of home equity and education student lending.
Which masks some of the underlying growth, but at the end of the day, our consumer loan growth.
Is always in effect I should say always but practically always is going to be slower than see an ice simply because its on on a much smaller base and by the way if you see a dramatic change in that than the ought to start asking questions.
We're growing into it I think an appropriate pace off the base. We're in with the products. We have as we increase penetration with the clients we have.
But I don't know that you'd see a dramatic turn.
I don't think it'd be dramatic, but it is just to add to that card and auto are growing nicely and that's all part of our plan.
Residential mortgages are up and that's a function of just higher client activity, particularly the jumbo space by one day to home equity runoff will stop running off.
[laughter] and then we will get that we'll get the benefit of that but but that's the plan.
I mean longer term do you.
And more broadly do you view, having a more.
Balanced commercial versus consumer lending book.
As ideal or do you feel comfortable with the way. It is right now 73, so yes.
So look optically.
Because we are light on consumer we screen poorly on efficiency ratio and some other things in our in our NIM is lower because our loan yields are lower.
That doesn't have anything to do with true economics, but optically people screen and say were perhaps doing something wrong.
You know the only way to materially change that.
You know would be through some sort of acquisition of some type and we are.
Im just as an aside consumer lenders who for sale.
Come for sale typically have some sort of big problem and word.
The severally interest hit and the people to fix the consumer lending problem I'd, probably answer that differently. If it was the cnine problems. So I don't see that we have.
Either the need economically or the opportunity.
So dramatically change that mix.
Given where we're starting from nor do we want to slow down the high quality commercial growth, which in which we're good at.
All right. Thank you for taking my questions.
The next question comes from the line of Mike Mayo with Wells Fargo Securities. Please proceed.
Hi, I just wanted to follow up more on the solution center expansion and.
I understand your thought process, a little bit more I thought you know going back a few years you were looking at Adam market digital only expansion and you called that an experiment. So should we take from this that now as you expand out of market, you're only doing that with the solution centers and how many solution centers do you think you need and each of these markets to have the critical mass that you that's necessary.
That's a fair question Mike it's.
We always talked about going out digitally fan and building branches in a largely following our CNS expansion.
What's changed is we are going to build more than we had originally assumed so.
In Dallas, if I was thinking five we're now thinking 10 or 15 those are soft numbers.
Having said all that of course national digital is national.
And in markets, where we have no presence and in fact, some of our greatest growth is coming for parts of the country, where we don't have any presence in C NIE or retail and we don't intend to build branches. So it'll be a mix all im suggesting here is that.
Certain markets, where we did you know where we thought we'd build a couple of branches, it's becoming clear that that you can actually get a higher return.
In those markets by building more branches.
And I don't know if that's.
A function of just better brand presence a higher return on your marketing or exactly what's driving it but that's exactly why we're doing test and learn and all these different places.
With different levers to see what gives us the most economic growth.
And I mean, just how do you frame, who you are I mean, when I go to your website. It doesn't say that you're a national retail bank.
So is your intention to be across the country with solution centers. I mean, you highlighted I guess for sales here along with Casey Yes.
Let's.
It's interesting I Didnt know that was on our website I'm going to change that this afternoon.
But what what now.
As like a sense that he says the Midwest this as the southeast in that.
Okay, I think I think traditionally of course, we're following where we have physical footprint as a as a practical matter Mike our ambition is to be a national retail bank.
The form that that takes for us and for everybody continues to evolve my own belief is that over time that will involve having physical presence in all the emmis A's in this country.
Done over whatever period of time as we continue to thin.
Our saturated markets.
You know I don't I don't have a timeline on.
It wasn't that plays out but I have this.
Are we have this belief that fundamentally if you sit in your existing region.
And simply try to protect your region, while you have the large banks coming in so being a b of a and JP Morgan or in Pittsburgh or by simply sit and protect Pittsburgh I will lose because they will take share.
And therefore, we have to go out and compete in markets, where they have share today and we pull share. If you sit near existing return you will atrophy through time.
And so our strategy is to go national.
And when you say physical execute on them.
Sorry can you say a physical physical presence in all in this age you mean like the top 50 top 20 top 100 and yes.
Yet to be determined, but but ill assume it's a top 50.
But all of that is.
You know that isn't next year's plan, yes.
It is and the euro.
The practical outcome of the transformation you are seeing in bank and with more and more is done digitally the bigger banks are getting larger.
The inability to simply defend a regional footprint in my view on a cost efficient basis suggests that you need to reach the whole country and pull share where you can pull share that's what we're going to do overtime.
It'll evolve as we go and that's why we're doing the test and learn we are doing today. So we don't do a massive.
Spend and then have to to reel it back in yeah.
And then last follow up and this is very helpful.
Why not do it isn't a tougher if you don't have the brand name outside of the market I mean, some of the largest banks are already known when they go into market, whereas PNC going into I don't know.
What do you have your Houston.
Dallas, it's not going to be as well known on the retail side and then why not just jump start the whole process and buyback and I know everybody always says we're not going to buy back were not going to buy back and like National City. Your annual report highlights a decade light later that was a success. So why not accelerate this kind of national retail bank ambition with an acquisition.
I don't I'm not exactly sure what that has to do with brand because you. The brand build ultimately comes from from spend in the local market and national markets as well, but you could most definitely accelerate share through an acquisition. It issue and you've heard me talk about this Mike if you buy the small bank you're getting a lot of stuff you really don't want at a multiple of book value.
You know we want the accounts, but we more often than not don't want to have anything to do with the balance sheet and the branches that you get or in the wrong place with the wrong technology with the wrong style and the wrong employees. So there's just not a return on it I wish there was.
If you jump up in scale.
You know look if there was a another national city it yes.
Less than book value that we could do that and that of course, we would do it but that's a value question.
Yes that would accelerate what we're doing but today at today's prices in today's opportunities. It's a much much lower return than doing what we're doing.
Got it all right. Thanks a lot.
The next question comes the line of Brian Clark with Keefe Bruyette <unk> Woods. Please proceed.
Good morning, gentlemen.
Good morning.
Robin I had a quick follow up question on the guidance around revenue for the full year.
Yeah. It seems like the idea of taking the first half of the year and the guidance for the third quarter. It seems like the fourth quarter would imply.
Somewhere around a 140 $150 million of revenue higher than the third quarter guide.
So I think you have in there.
There's probably the gain in there related to the.
Mutual fund business that part in your selling to federate right right right is there anything else in there or is that that I think that was like a 52 million dollar sale price if I'm, if I remember correctly.
Yes so.
Let me just take a shot at it.
And so I think the spirit of your question is yes, we stand by our guidance.
In.
And feel confident around that.
There is some volatility in that other noninterest income number and that's nothing new.
And it tends to average out over the course of the year. So.
And the second quarter was a bit elevated because of all the reasons I mentioned in addition to.
The sale the retirement business, so ran a little bit higher than what we expected.
And that was included in our guidance so when I look at the third quarter guidance.
How I do that is I combined what I see in the next 90 days along with patterns that tend to emerge and then beyond that I go by the pattern. So.
So probably a little bit less.
In the third quarter and other non interest income than we had in the second quarter and then in the fourth quarter to your point.
We do have a sale of the mutual fund business that we've announced that will be in there that will otherwise elevate that number so you're on your on the right track Yep. Okay. And then the rest of the day like you said you had some good capital markets business. So that other piece of it could just be some of the seasonality that might go through yeah, that's really reliant on order, yes, thats right. Okay.
Hi, Thanks for your time appreciate it sure.
The next question comes from line of Saul Martinez with RBS. Please proceed.
Hey, guys.
I wanted to get your perspective on.
That sort of the trajectory of deposit cost deposit betas on the way down because obviously you know deposit betas were you know.
Low on the way up you can make the argument that they'll be low on the way down.
But.
Well also wanted your perspective on the timing of when we actually see fed rate cuts start to filter into interest bearing deposit costs, because historically I look at the data, there's usually a quarter to quarter lag between when the fed cuts and when you actually start to see the benefit in deposit costs. In there is even a little bit of a lag in terms of when deposit migration stops happening into interest bearing account. So how do I say you know with the with if we were to see a July kite.
How quickly do you think it actually filters into your deposit your overall deposit costs is it is there are one or two quarter lag or do you feel like you'll you should be able to see that.
Filter into the the deposit cost, which I think was 103 basis points this quarter.
But remember that the wholesale.
Cnine deposit rates will kind of drop instantaneously. So we're really talking about what happens.
In retail and I think you will you will see it take effect all else equal.
Pretty quickly the one thing that concerns me a little bit as if you look at the entire industry there are.
You know people who have been pushing on.
Loan to deposit ratios.
Protecting them by effectively.
Allowing deposits to run off and they are now trying to reverse that so competition for deposits even as rates drop.
Could continue as weve seen loan growth outpace.
Deposit growth for most of the middle sized banks for a period of time now.
So that's kind of the unknown in my mind in terms of what actually happens to consumer deposit costs and just debt.
Add to that so it will be driven more by competitive pressures rather than the banks abilities to move quickly yes.
And do you think the greater importance of online banks digital banks today then.
We've had in the past also plays into that and maybe.
Limits view.
Limits, the ability or willingness banks to reduce costs, especially on the consumer side.
Yes, I think it does I think we have seen the impact of online banks.
On deposit growth.
And mix generally and I think thats going to have an impact not not just.
If rates go down, but as we roll forward.
Increasingly over time.
I think you will see betas actually be faster and faster because the online bank rate is more deposits ran a great.
It becomes real time.
Right, Yes, I don't have a timeline for that I, just it's happening.
You can't ignore it.
Right.
Quick follow up on commercial credit.
Obviously, you you made clear that the uptick in MPS you are not overly worried about that but are there any.
You have segments or.
You know geographies or size of companies that you you feel have a little bit more strain or is there anything you are keeping a closer eye out for in terms of potential credit weakness.
It's the traditional stuff that theres, some real estate on the margin on the retail side that everybody's talked about but it's fine there's.
Transportation companies are struggling for a variety of costs.
At the margin, but we're not over exposed to the assistant Theres, a bunch of little stuff, but theres nothing inside of.
You know to Rob's point I went through every single add to our watch list.
And they all had their own idiosyncratic story all in separate industries. All you know with a reasonable explanation that largely had nothing to do with the economy.
Right.
Okay. Okay. Thank you very much.
Sure Yes.
The next question comes line of can news then with Jefferies. Please proceed.
Hey, guys. Just does thanks, just one follow up on tailoring so.
Still having heard all the commentary you made about just the long term environment for the sector.
How would you start to prioritize the potential benefits from that capital free up if even you go forward and say there is no value opportunities for traditional banks, how do you start to strategize and prioritize about what the best and incremental uses of that capital. If a deal is not the right amount right usage at the time. Thanks.
Well I think look you're going to get the standard answer.
Of course, we invest in our business and we've been investing a lot in our business. So you know for the last multiple period of years and that will continue.
You know, but we have an ability.
For the foreseeable future in my view to generate capital in excess of what we can intelligently deploy and growth and so we get into a question of dividend and share buyback and I guess I would suggest you just look at our actions this year.
To give it to you.
Foreshadow the way, we think about that.
And what we might be doing going forward.
Yes, and is there anything left in the kit that you don't have on the non bank side that.
We've been getting out of some businesses as you've called up and streamline some other things but is there anything that you are still looking forward to deepening or the other aspects of things that you don't have that you still need to offer as you're getting round out that that product offering.
Yes, there is a lot of stuff, we look at at the margin inside of payments and and.
Other things, we're doing in the sea an eye space on advisory.
You know the issue in the payment space is.
Finding value there given the multiple you pay in our our need to be able to scale.
Whatever that business model is to justify the multiple we look but but we haven't really hit on anything of any size, but we will continue to look at there is no material theres not a whole right yeah yeah.
Got it all right. Thanks, guys.
Yes. Thank you. Thank you.
There are no further questions.
Okay.
Thanks to everybody. Thank you.
This concludes today's conference call you may now disconnect.
Yes.