The PNC Financial Services Group, Inc. (PNC) Earnings Call Transcript & Summary

I think to your question, if you looked at our fee lines and you said what are cyclical to capital markets activity or market levels across that. We probably have half that are exposed, some are countercyclical. Treasury management is really sticky in some of the other ones. But look, it's a great year in capital markets. We see it all in the G-SIBs and were there to be a slowdown. We'd have some slowdown, not nearly to the level they would.

Just because of the different composition.

You guys always have had good expense discipline. And I'm curious, how do you manage the investments, the branch expansions, the technology spending with the discipline and keeping that positive operating leverage going forward.

Well, you serve that up for me. You got to have a good CFO. And Alex is well schooled in that that's going to continue. I mean no, in all seriousness, as you know, we've had a continuous improvement program that is part of our DNA and our company. Positive operating leverage is essential to our strategies. I think we probably have as good as, if not the best record of delivering it over whatever period you want to talk about. And that comes from a place in terms of within our DNA, understanding we need to fund with expenses.

Just recycle. The other thing, Rob and I were talking about this a couple of weeks ago. I can't think of a time since we've run together where we have shorted investments. -- we've actually, where we said, all right, well, let's slow this down because we need to print a number. I can't think of a single instance that we did that. And I can remember early on, just go back in history where we used to say we're not overspending, we're under earning. And everybody got made at us, but we've been on an investment cycle for 15 years. And so this notion of harvest, first grow, right, you're investing, you're growing your top line. You look at the growth in the company over a period of time. but importantly, to Rob's point, harvest stuff that is not as important as growth categories you have, and that's a strong muscle in our company.

Yes. We'll open it up to the floor after this question. On your fourth quarter expense guidance, Rob, tell us or share with us how the growth in fees have been so strong and you have some probably incentive comp that has declined? And is that a good jumping off point into '27, whatever the number turns out to be in as well?

Like I said in my first fab, we're not giving 27 million other than the NII. guidance on a GAAP basis. No, in all seriousness, yes, so fees in the fourth quarter are tracking a little bit higher than what we would have expected. -- beginning of the year, but it is being driven by the fee revenue. Capital markets, we expect to have a good quarter in addition to that, and we mentioned this on the call, our private equity business, which is in other noninterest income out of the fees is having a very good quarter. So that's driving the expenses up higher than -- we'll take that all day. And the important point there is we're pointing for the full year of 4-plus points in positive operating leverage which is Great. .

Oh, yes. Very good. Maybe, John, anything you can bring the microphone over here to Mike.

Yes. Why are you here? I feel like I met on [indiscernible].

I just missed you might.

I'll make involve the choice. Answer number 1 is because you want to reinforce the management changes. -- answer number 2 is the new branch initiative reinforces that. Number 3 is the political change certainly is going to be on your mind or number four, acquisitions and your appetite. So it's an ADC or or -- what are you thinking -- it is great having Rob would love you.

It's super simple, right? Rob and I have been together for ever, and we've announced this thing. And I'm here to show you that we're still together and we got a lot to do. And I take all the mystery out of whatever it is, you conspiracy theories people might come up with. There's no more complete. Yes. And I'm just off a week of strategic planning board session. So it's kind of good to get out of town to do something different. .

I will maybe go to the specifics. The as far as your acquisition appetite and the political landscape given the changes from this winter.

Yes. I honestly don't believe that the changes in political landscape have anything to do with our ability to acquire or not. I don't -- I think we could have gotten a deal done, it would have been delayed longer in the prior administration. I think that there's a recognition that over time, challenger banks are a good thing to the G-SIBs. Having said all of that, where we sit today, and I think I said this on the earnings call, the opportunity in front of us to reset our operating framework using AI is so massive, and it's going to happen so quickly. that if you took your eye off the ball from that opportunity set to do a larger integration, you could wake up in 2 or 3 years and be done. because you'd have to freeze everything. Small deals, so we did First Bank with a smaller team, and we did it without slowing anything else down. So they're still kind of out there. But I would tell you the prices are -- you can't pay anywhere near the prices where people trade today, just doesn't work. It just doesn't work. Yes. I mean a lot of these -- a lot of the smaller institutions are pretty stretched out on funding. heavy on CRE need big investment, which we didn't need in First Bank into branch networks to actually accomplish our objective of increasing our retail share. So it's tough to see that happening in the near future and then the opportunity cost of getting that wrong, given what we see in AI makes it even harder.

Yes, I think we did talk about that on the earnings call. So stated in a different way. There's always variables that you had around acquisitions in terms of returns and whether it works or whatever.

I'm curious. So when we think about like stable coins, there's not a lot of demand for them, but the entire industry is preparing for the eventuality maybe there being I would imagine like right now, there's probably not a ton of demand for news or whatever to actually go into a system, but precip the industry has to for it. It's a little different with agent. There are these huge liability questions and then you've also got presales just to put it much differently. So what's your best guess as to how this might evolve from sort of a demand standpoint and then how the industry prepares for it as well.

I almost want to ask you to give the mic to Alex because when news hit and even before it I would tell you that retail banks across the country have kind of focused on nothing but that. How do you compete with a technology that exists, right, and will get better -- and I think our answer to that, and you're going to start seeing it into you'll see it when we start rolling out features inside of our mobile and online banking using agentic coding and agentic control is, in the first instance, give our customers the ability to do very easily anything they want to do. with their bank information, with their bank finances with find this, find that, transact this and replace the whole notion that you need to go somewhere else to make that easy. So build a decent defense against it. We're far along the path to be able to do that. I think the eventuality of are you going to hand control to an agent over transactional outcomes, either goods or services and money. I think we're just years away from that because the liability framework is not set up for that. And its most basic form, if you think of the card networks and other ways you transact, there's rules. Product is broken, product doesn't show up, who pays it. There's fraud, who pays it, something broke, who do you call to get it fixed. And until that is set up in an agentic environment, it just doesn't work because it's the first time there is a problem. If you read the muse disclosures, it basically says we're not responsible for anything that this crazy thing does. So go ahead and use, but don't call us when it breaks. And in the end, I think the fact that the technology exists is very different than having the market framework to allow it to succeed. So I think there's a bit of a delay to it. But in the meantime, we have to get on our horse and make sure that we're serving our clients and giving them technology that is as good as what we're seeing from potential interrupters.

Mikael Stanley. As you think about more bands focusing their branch expansion strategies in some markets in the Southeast. I guess it's a bar for how many branches you need to open in these regions. Has that gone up in terms of like the deposit rate you need to offer in these markets to gain share as the bar is basically higher now?

Can you pass the mic forward -- to put Alex on the spot. Let's test them out. .

It's a good answer to your question. Look, I would start by saying it gets a lot of attention -- but of the 8,500 banks and credit unions says, it's just a handful that are really actually putting up new ranches ourselves 3 or 4 others. And I think we've been really clear is, and frankly, some of our peers have been around the level of investment needed a degree of density. You've got to get inside of each of local markets. So we're seeing -- as we progress towards that 7% branch share, the benefit we're seeing in DDA production and deposit balance growth, not just inside of those branches, but also across the market in visual deduction as well as then the not kind of become credit card PNC Wealth Management and the Asset Management business, both in our private banking inside of retail. So I think we feel really good about the density. We obviously look at it every day. We underwrite every single one of those branches individually. We track their performance. every day. I visual branch level. But so far, it's exceeded our expectations and give us comfort [indiscernible] to press very excited around what we announced today in Georgia and.

And if I remember the goal here, which when you look at stats on market share growth, across the market. You have literally just a handful of banks, mostly the big banks that are consolidating retail in this country at the expense of everybody else. We're actually growing our -- growth rate is higher than our share rates. So we're participating in that. But what we're in here is a ground for the retail market share in the U.S. And so I don't really care how we get that share. We can build branches everywhere. We'll do digital. We'll do whatever we want, but when the music stops, you have to have critical share if you want to be a real retail player in the country. If 10 years from now, branches are completely irrelevant, which I don't think they will be, but if they were, and we end up with material share. I don't -- happy to write them off. It was a great investment. So we've got to do this today because the game is going to end I think there's only 4 or 5 players that even realize the game is going on. And we've got to be a winner that comes out of the back end of that.

I'd add to that. where we're a little bit different than some of the others is we're going into markets that we entered years ago through our purchase of BBVA USA. So we're not going into novo. We're going in really with the second level of investment that is on top of the first level of investment that has exceeded our expectations. And as Alex and Bill mentioned, it's about getting to a more critical mass on the branch market share to where you actually get an exponential lift of growth once you achieve that. So we're not going into new places and introducing ourselves. That's a different thing.

By the way, we tried that once, it didn't work .

Well, that's a harder as part -- that's for obvious reasons. And I just think that's really important when you think about all that .

Maybe shifting over to capital for a minute. With the Basel III end game coming hopefully be finalized by the end of the year. What are the implications for PNC's capital requirements and establishing maybe a more definitive CET1 ratio?

Yes. And I can answer that. The -- so as you know, under the current calculations, our target is 10%. We're a little bit below that just because the loan growth has exceeded our expectations, and we continued share repurchases, which is important. But we're in the right place. With the Basel III, when it first shows up, we'll lift -- and I said this on the earnings call, approximately 1 point or so -- and there's the negative -- or I'm sorry, the negative impact of AOCI phase in, but that does -- that happens over 5 years. So we expect our negative AOCI to Bill's point, with a short duration to diminish over the next 5 years. But even if you're fully loaded in, we're at our target level. So we're in a good place from a capital perspective. We generate a lot of capital. The rules are working in our favor because they sort of reward what is our wheelhouse of these private loans are using being higher credit quality ratings and getting less capital against those. That's what we're like the poster child for that. So we feel good.

How about with rates rising and obviously, AOCI would increase? Is there any interest to increase the HTM portfolio. And then with the new FASB comments about maybe giving you guys the ability to hedge that. Does that give some optionality?

You could always hedge it. There degrees of difficulty in mismatch if you had prepayable assets and that books of straight mortgages. So that doesn't really change a whole lot. What I would tell you about our AFS book versus our held-to-maturity book, we have set a stress limit in terms of how much capital in a stress interest rate scenario, we could draw down through and we manage it to that, and it's not a material amount. And we'll -- so the mix on where we'll notional be will be driven by outcomes knowing that we don't want to lose more than I don't want to guess the number, but it's less than 1 point of capital or something and a stress is a function of AOCI drawing down, which I think is a good way to run it.

So we're not actively looking to change our mix. .

Got it.

You mentioned on the call -- on your third quarter call about repurchasing continuing to repurchase stock in the fourth quarter. how are you thinking about these -- the repurchases? And I know you don't want to talk about '27 -- any thoughts about '27.

Yes. So let me go back to that. We're not providing '27 guidance. We've done a lot of repurchasing, as you know, through '26, and we'll continue that. And that's part of this capital generation and our ability in terms of we are. I don't have official guidance for '27. But what I can tell you is our business model is we generate a lot of capital. And typically in typical times, we generate more capital than we can deploy intelligently. So we'll have to take a look in terms of our loan growth, all the things you would look at, but I would expect right now that our share repurchase would continue. I can't give you an amount in a meaningful way. And we like our share price.

Got it. Maybe we're running out of time. So to summarize here, at the end, there's a lot of big regional banks and Bill referenced 4 or 5 that you really know what's going on in terms of retail banking. But how should investors be thinking about your positioning in this environment? And the reasons for coming in with their capital and then with the changes that you guys announced and how that's going to benefit you guys going forward?

I -- I'm always amazed by the willingness to put the same multiple on every institution independent of what you really believe their long-term viability is. The short-term nature of how people are looking at things. I think we're set up to be a winner. We have a growth path in front of us that is all about execution, which is partly related to why we did some of these moves. Never had the energy literally since I've been in the building that we have in the energy today around the opportunity set. Now why is that, right? It's all the new markets we've entered. It's the branch builds, it's the power. We've laid this technology foundation for the better part of 15 years in terms of our data centers, our data construction. We've sptent more in data construction, getting one source of truth all in the same place, readable quickly than we spent on AI, right? Our data centers themselves with GPU chips, like we're set up to take advantage of this. We've got this massive new client onboarding through all these new markets. We've got capital, we've got a clean loan book. We've got a great management team. I mean, yet, we sit there and we match up against somebody else who doesn't have those things. I literally look, if somebody put me in the seat at another company, what would I do? I'd probably sell it, which maybe is why it has the same multiple -- but that's a hell of a way to invest, guessing it's going to get sold next.

Coming back to -- I know we're out of time, but a real quick one. On the 15 -- year -- and you're right about your investing in data centers the data -- the money that was spent 15 years ago, is that early absolute? And I mean, obviously, you guys...

Yes, because we've and you'll see it in our tech numbers, the depreciation numbers that we -- that are right now coming online from our complete refresh or further investment. And that's all in our forecast and that's nothing new. But yes, we've redone it. But importantly, through that whole process, right, we didn't jump into the cloud. You didn't jump into the cloud because you can't -- it's hard to get out. and if you're storing data up in the cloud and now you're in an AI environment, the ability to move the data back out of the cloud to use on AI is crazy expensive. So it's just this mindset that we're going to own our own, we're going to build our own. We're going to control our own data. We're going to know what it is. We're not going to shortcut. We're going to make the investments in compute and switches, in resiliency in data center, synchronous transmission between our East West pairs. And it -- and then you get to an opportunity like we see right now with agentic and you're ready for it. You don't have to hire somebody else to come in and build your agents. You don't have to make stuff. It's like right in front of us, and we're executing on.

Yes. I think I think that's an important point. The equipment itself in terms of what needed to be refreshed.

But we do that every 3 years. .

But to Bill's point, the dynamic, the energy, the investment in our technology capabilities has been something that's been in place for the better part of the last 10 years.

Yes. Please join me in a round of applause. Thank you, Bill and Rob.