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

Good afternoon, everyone. This is Gerard Cassidy from RBC Capital Markets. We're very pleased to have PNC Financial join us for this fireside chat. As many of you know, PNC is the sixth largest bank in the United States with approximately $560 billion in assets. The company has a market cap of approximately $75 billion and trades at about a 40% premium to book value, and it has a dividend yield that's approximately 2.7%. We are very fortunate to have with us Executive Vice President and Head of Treasury Management, Emma Loftus. Many of us in the investment community know that PNC has a very strong and value-added product for their commercial banking business in the treasury and management area. And Emma is heading up this area and is focused on building it out through both organic growth and also building out with the recent acquisition of BBVA. She joined PNC in 2019. And prior to that, she was over at JPMorgan. With that, Emma, take it away.

Thanks, Gerard. It's really great to be here with you virtually, and I appreciate the opportunity to update you all today on PNC's treasury management business. Joining me from PNC is Bryan Gill, our Director of Investor Relations. Perfect. Let's advance to the next slide. What you'll see here are some cautionary statements regarding forward-looking and non-GAAP information here on our website. I encourage you to read these statements. Thanks, and let's advance to the next slide. Great. As I mentioned, I'm here today to talk to you about the treasury management business at PNC. We are part of the overall C&IB business. And I think I could start here so that you can see actually how TM fits in. Within the C&IB, we serve clients with revenues over $5 million. We have over 17,000 primary relationships with the C&IB with average loans of about $164.8 billion and average deposits of $151.3 billion. Our strategy within the C&IB is pretty simple. What we want to do is to deliver high-quality products and services to help clients run their businesses better. Over 9,000 employees are deployed across 90 locations so that we can deliver on this value as close to our clients as possible. Treasury management is a key driver of C&IB results. If you look at the pie chart on the right, you can see that we contribute about 26% or about $2.2 billion of total C&IB revenue of $8.4 billion. Let's go to the next slide and take a closer look at this. So as I mentioned, treasury management generates about $2.2 billion in revenue. This is significant business to PNC and puts us at about #5 in the industry. Treasury management itself is a very attractive business. The capital intensity is low, incremental margins are high. The market is large and highly fragmented. Pricing power actually still exists, particularly with leading players who offer comprehensive solutions and their strong secular trends driving changes across treasury management, largely driven by technology. We're leveraging this strong position at PNC to innovate and accelerate our growth. What we're doing is modernizing our technical infrastructure to enable processing and scale. And we're also building end of the tip product capabilities to deliver complete and comprehensive solutions to our clients that we believe to be differentiated in the market. As I mentioned previously, our value-add strategy in the C&IB is focused on helping clients run their business better. What this looks like in treasury management is we deliver clients to help -- we deliver solutions to help clients accelerate their move electronics in real time. We give them solutions to help streamline their payables and receivables and to help them reduce the reliance on paper and manual processes as well as optimizing their cash. We believe that leading with these value-added solutions is going to help us grow into the significant opportunity we see in the new market expansion territories as well as some of our underpenetrated BBVA markets. And we're differentiating ourselves from the competition by making at least a year to implement these solutions, we're deeply embedding them in our clients and experiences, and we're delivering them through the TM platform. Let's turn to the next slide and talk a little bit about this differentiation. We'll be hearing from our clients is they want to work with people they know and trust. Treasury management is the circulatory system with really many companies. And what clients tell us is they want to work with people that they can depend on to deliver for them day in and day out. Clients tell us that they want end-to-end solutions. Frankly, patchworking multiple banks and nonbank solutions to deliver a seamless experience. It's really difficult for companies to be able to delight their employees as well as their customers. It's expensive for them to do this. And frankly, it's also very risky. Clients also tell us they want to partner with some of you can make it easy for them. They want to work with partners also to make them smarter, technology, markets, industry, really everything is changing so rapidly. Our clients want advice on how they can best position themselves for success. We're listening to our clients and working to deliver on this value for them to solutions that are completely digital to eliminate paper, as I mentioned, solutions that are intuitive and smart. And then we're helping them to assure settlement and protect themselves against fraud. We also want to deeply integrate these solutions so that it's not difficult for the client to implement. And frankly, we want to be able to be the back-end side their own experiences. The key share to all of this, and for example really great, but you're wondering if you help what's different from how anybody else is going to market. The key really here is innovation. We're treasury management over the past several years has felt the impact of the rise of fin tax has been in the adjacent spaces of our business. It's not the settlement of the transaction, it's the collection of the lockbox receivable. It's reconciling these receivables and payables to be able to enable the client to go straight through to their GL. It's not information reporting, given client's data on the transactions that they performed at the bank. It's helping them create an accurate cash forecast to be able to help them better predict the cash. And it's not a check, it's not a wire, it's not ACH, it's being able to determine which settlement experience is the best fit for the experience that our clients are trying to achieve, whether it's for their own underlying clients or their treasurers. And also, by the way, making sure that, that payment is expected to the correct beneficiary. At PNC, we're moving into these adjacent spaces. We're building solutions that are easy for the clients to implement and are deeply embedded in our clients' back office processes. Treasury management is a platform, what we're positioning ourselves is as a gateway for our clients to enable them to take part of the activities using the PNC gateway. As a result, we're seeing strong growth across our business. Over the past 5 years, net interest income has grown 19%. And importantly, noninterest income has increased as well by 70% from 2017 to 2021, really driven by these innovative product and solutions offerings. Let's turn to the page and talk a little bit more about these solutions. As I mentioned, fintechs are attacking the frictional adjacencies in the treasury management business. And at PNC, we're needing this threat head on. Our approach is to build by partner or a combination of all 3. Let me just help you navigate this page. On the top left box, one of the hottest areas in the industry right now is cross-border payments. Fintech has stepped in to make it easier, faster and simpler for consumers as well as businesses to be able to affect these types of transfers. With the acquisition of BBVA USA, we also acquired a global cross-border payments business that allows consumers to spend money pretty simply and easily to Mexico and other countries in Latin America. We've already integrated their technology into our core digital banking capabilities and with really minimal marketing, I've already processed thousands of payments for the PNC legacy clients. Our plans are to add payment core to us, so expand payment distribution beyond Mexico and LatAm. And what we're trying to do is enable our PNC account-enabled services to compete with payment fintech. On the top right, Tempus Technologies, this is another hot area right now in the area of payments, and it's really an omnichannel payments. We acquired in 2021, a leading gateway provider Tempus Technologies. This is a company that we had been partnering with since 2016 to deliver a comprehensive solution to enable clients to collect payments from their underlying clients in-store as well as online. Over the years, going to market, however, it had become increasingly apparent that if roll out the gateway and our client size and actually settling the underlying transactions and the pandemic, frankly, and we accelerated this trend as many of our clients rushed to pivot their businesses online. By acquiring Tempus, PNC was able to bring this core capability in-house. And we've already amplified their growth trajectory by pairing it more deeply with our own underlying settlement capabilities. On the bottom left, another hot area right now is EarnedIt assets, and this is a great example of how we partner at PNC to get to market quickly. Working with daily paying, where we work already supporting for settlement of real-time payments. We went live with an EarnedIt solution last month. Our PNC EarnedIt app leverages daily pay capabilities, enables employees of our treasury management customers with on-demand wage access to card or account of their choosing. And then finally, on the bottom right, how we go into market and pushing back against these fintech incurs into our business and frankly, to be able to better position ourselves competitively even with our core traditional bank competitors. In some cases, we're creating our own disruptive place. Avaneer is a great example of this, and the company is looking at many, many challenges that exist in health care payments today through the lens of blockchain-enabled transformation. In 2019, we announced this collaboration with IBM, Aetna, Anthem, HCSC, Cleveland Clinic and Sentara to be able to explore potential opportunities in this space. CEO, Stuart Hanson was hired in 2020, and the company launched its Avaneer Health at the HIMSS Conference in 2021. We're working with the founding members to deploy several solutions in 2022, again, looking to disrupt this industry for ourselves to drive better outcomes for the clients and participants in that ecosystem. Let's turn to the next page to take a look at how the strategy is actually working. It's all of the numbers, of course. So let me walk you through a couple of statistics. For example, working with clients to optimize their payment activity for the experience that they are trying to achieve for the treasury operations or their underlying clients, it's driving a 249% increase in the ease of real-time payments. Working with clients to minimize fraud and to ensure that their payments are settled to correct beneficiary is driving a 391% increase in account verifications. Embedding with our clients, in other words, putting PNC capabilities inside our clients' operating model, is driving 133% increase in API integration as well as an 880% increase in API calls, pretty significant transformative growth. And making it simple for clients has also significantly accelerated onboarding. We've seen an 83% increase in clients leveraging our off the shelf pinnacle connect integrations to connect to some of the most common and popular ERP platforms. And an 80% reduction in the time cost for accounts to be set up or it is being achieved when clients pursue digital end-to-end journey. Let's turn to the next page. As I said it's all in numbers, but frankly, it's also about our clients say about us and just last week, PNC received several Greenwich cash management awards for our treasury management business. These awards affirm that we have been delivering product services and innovation, frankly, that the clients themselves are looking for. Our brand has been recognized for trust, reflecting the fraud protection, accuracy of operations and our ability to resolve problems when they occur. Our cash management specialists are highly valued in terms of overall customer satisfaction as well as educating our clients on new and innovative capabilities. We've been recognized for innovation and digital and importantly, we were also awarded to be likely to be recommended to others, which is a great sort of confidence for our capabilities. These endorsements frankly do give us confidence as we move forward with what we consider to be the tremendous opportunity in front of us to continue growing treasury management in our expanded markets and with our underpenetrated clients. We have doubled our calling efforts and more than 30% to 40% of our new pipeline opportunities in these new markets are being driven by treasury management opportunities. As I wrap up my formal comments, I do hope you've taken away that we're hitting this fintech challenge head on in treasury management, whether it's partnering, acquiring or really just disrupting things ourselves, our value-added approach to helping clients run their businesses with innovation is working, and we have a really great trajectory in front of us. Thanks very much.

Emma, thank you very much for the highlights of this very important business to obviously PNC Financial. Maybe we could go back to some of your comments about with the addition of BBVA and as well as the de novo expansion that part of your business has done over the last several years. And so when you look at the growth opportunities going forward, is it more coming from a deeper penetration? You mentioned how the commercial customers, I believe, that BBVA only about 65% to 70% are in these treasury management customers versus your number, which is considerably higher? Or is it going to be from new products and new market areas? And if you could share and compare and contrast the 2 opportunities.

Right. I would say all of the above. So let me dig into a little bit about what that means. With our BBVA client base, what we're trying to achieve is equivalent penetration for treasury management services. You recognize some of the statistics we shared with BBVA clients that 68% to 70% use of TM. So just driving that growth by introducing some of the PNC capabilities that BBVA USA hadn't been delivering directly to their clients is a great upside opportunity with the client base that we already have. Also expansion into those markets enables us to look for new client opportunities, and that's where we're going to be leading with what we believe to be very innovative message. So why is PNC different, let's talk about real time. Let's talk about these solutions that are, we believe, more transformative and forward-looking for clients that we don't think our competitors are actually talking about at the same level of debt that we've undertaken to date. And then it's our existing clients, right? So even in the legacy markets, there's still more to talk to clients about. I mentioned earlier about the tremendous transformation going on across treasury management, it makes it a very, very tightened time to be in this business, but it kicks us to talk about our existing clients. I still have a lot of clients using paper, talking to clients about transforming to digital means of settlement is always topical. Talking to clients about how they want to transform their underlying consumer experiences with solutions like the Tempus gateway is also a great opportunity. So all of the above, driving into the new markets, also talking to clients about some of these innovative capabilities that can transform the business majority with us today.

This may not be a fair question, but I'll give it a try anyway. You mentioned clients still using paper. Do you have any estimate of is it a third of all clients still have too much paper going around or half or 10%, any idea how much is still to be cleared out, if you will?

I laugh. I've been in the treasury management business for more decades than I care to if anyone they've been predicting that tech is going away. Let me tell you, it's not so much about the percentage per client. It's that almost everyone has a little bit and it's a pain to manage when they have it. So when we go to market, and we think the clients we want to provide you with an end-to-end solution, we can't -- it's difficult to say, hey, we'll handle all of this electronic stuff, not that paper stuff, let's talk about a different solution for that. What we do like to do is say, let's look at the breadth of your receivables. Let's look at the breadth of your payables and then let's look at the percentages across settlement types and think about how you're trying to transform the underlying experience associated with that paper. Frankly, a lot of the paper still exist because of the ability to capture a lot of data, right? You've got people paper, you get an invoice. Working with clients to say, okay, what is it that you need to maintain to achieve that operating model, you need the data, what are the electronic solutions that we can introduce to help you digitize that experience. So as we think about real-time messaging and the ISO standards, there's a lot of room in those message formats to be able to carry this data. If it's thinking to clients about integrated receivables, is there a way for us to capture that data for them and to send it back to them electronically. So it's meeting clients head on across the breadth of their payables and receivables. Some clients with more paper, some clients with less and then working with them to transform whatever that experience is into something new and modern. Cash is another example too, where it is manual and is paper-based, and I think what everybody recognized during the pandemic is now is the time to actually make a choice on you're going to move into the feature because with the application of the workflow as many of our clients realize that field model sometimes things aren't going to work anymore.

Got it. Yes. It's interesting, it's very much like cash, how we all go -- we were going to make cashless society and there's more currency in the circulation than ever, particularly the $100 bill that you're probably aware of. My clients in your organization often mentions to us, investors and analysts that when you guys enter new market to lead with the treasury management products and you've got a very strong offering to do that, of course, [indiscernible] that you guys are making in these new markets?

Yes. In many cases, the first relationship with the new client is in treasury management, right, opening their account, so as we think about our new market opportunities and thinking about how we can develop long-term transformative relationships with clients, starting at that level and growing the client through treasury management is what we're all about. Our value-added strategy, working with clients to help them fund their businesses better, is definitionally a treasury management is where the client is operating business. So I think it would be a great leading indicator. When we enter a market and when we talk to clients about treasury management, the opportunities for us to speak at a high level way across the spectrum with all of their capabilities is available to clients and what I'm trying to feel in the market or change of experts to really explain why we're different, where we see things in the market, how we can help them transform, and in many cases, help them navigate the future, here is where we think the business is going to be fine [indiscernible] let me help you fund the businesses better model, treasury management is actually helpful.

I see. How difficult is it in your experience you've been doing this, as you mentioned for a number of years? And to go into a new market, how difficult is it to dislodge if the customer you're talking to are really has treasury management services provided by another financial institution? How difficult is it to dislodge that existing treasury management provider and have the customer come over to where you guys are? And when you do succeed, is it because you just have better products, and the customer sees that? Or is it they're very unhappy with their current provider and they just need to leave?

You know what, treasury management is very sticky business. Once implemented, the deeper it's implemented, it's more difficult for it to move. I think where we -- but it's not impossible. And we think about this ourselves to retain our client relationships. So our goal is to really frequent client contact, really making sure that we have stated the Table 1 clients are talking about the transformation activities, delivering service at high quality that's table stakes. It has to -- this is important operating business for the client. So we need to be able to deliver very efficiently in a highly automated fashion, in a way that delivers quality and certainty for them in all circumstances and then being able to help talk about the future. So it's fielding teams of experts to help clients deliver with their treasury challenges. Introducing new products and services that sometimes may actually obsolete the services that we're already providing. But doing it in a way that clients know that we can help them navigate the future and partnering with us, we have their best interest at heart. And again, back to how do we do this differently from the competition, it's leveraging these great technology-driven transformative opportunities across treasury management and introducing them to the client in a way that's easy for them to consume, understand, integrate into their business, and we don't have to do it the PNC way, we can actually implement it in a way that is deeply embedded into the clients' way of doing business. So it's not API. It's automation, it's leveraging all of those tools to be able to really demonstrate why the client wants to partner with us in the future.

Very good. And when you talk to these clients, when you think about the sales cycle, how long is the sales cycle? And do you offer the full set of products to the client? Or do you try to go in with some leading 1 or 2 products that you know are really quite good and would really help that customer? And then over time, do you plan to add on the additional products?

So you know what our approach in C&IB is very relationship focused. So we try not to kind of come in and an pitch product. And what we really want to introduce the clients' treasury management is the platform of capabilities. Let's listen to how -- what your objectives or goals, what you're trying to accomplish and then present to you things that we think will allow you to achieve that journey, leveraging PNC as a powerful platform to do that. Sometimes, it's a quick sale. In the pandemic client recall, say, I need to get myself up on bill pay tomorrow, how quickly can you get that set up, quick, flip the switch. Ideally, we are meeting with the client to discuss the same their innovation, transformation and critical agendas for a long period of time so that we can be there when they're thinking about an RFP, even perhaps preventing them from going to an RFP so that we can help work together to build that business. So I hate to say it depends. I think we are quick to market and can turnaround solutions for clients as quickly as they need them to be turned around. What we do like to do, though, is have a long-term discussion and the road map of the client introducing them to capabilities that we think accomplish their objectives and making sure they're coming to PNC first, if they have questions about those capabilities, quite frankly.

Great. You touched on it in your opening remarks about some of the capabilities picked up with BBVA to be able to move payments across into Mexico and obviously, the United States. Now you've traditionally served the domestic markets, of course, is there any interest of expanding internationally, especially with the global transfer business that you mentioned?

Yes. We are -- we already operate in Canada and the capabilities that we offer onshore in Canada, it's been a very compelling value proposition to clients pretty much what you experienced in the U.S. Servicing capabilities is very similar in Canada, all delivered through a common windowing platform to help you enhance your treasury. But clients are not just doing business in Canada, they would love for us to support them outside and in other jurisdictions as well. And we are investing in capabilities and starting a road map over the next few years to help build out our international capabilities because what we are hearing from clients is we love you, we trust you, you are a relationship bank, if you could provide these services in other jurisdictions, we'd love to talk to you first about that and we feel following our clients to where they are operating businesses is a good opportunity for us to grow as well.

Sometimes we don't think of Canada as a foreign country. We know -- maybe you can share with us a little bit about the -- I'm not going to pronounce it correctly, the EarnedIt solution and the rationale behind offering that?

There is a -- you've all experiences in your own businesses. The challenge is associated with the labor market today are creating really compelling reasons for employers to think about how employees are compensated and ways that could talk to clients or talk to the employee into working for your firm versus others. Economy has driven a lot of this, hey, I work today, can I get paid today, hey, I contributed value, can I get paid for my value today. And given the impact on the labor market now with employees able to think and explore options on where they're employed, thinking about earned wage access as a compelling differentiator for employers to say, hey, we are not going to let make you wait till the traditional 2 week standard pay cycle. If you work today, you can access those wages today, it seems like a pretty good idea. It's enabled these days with real-time payments. We probably could not have done that as capably a few years ago before real-time payments was as an opportunity to be able to settle same day within a few minutes. And coupling earn wage access is being interesting to employees to be able to access their wages that they have earned and being able to distribute those wherever they may bank or to whatever the card they want instantaneously rather than having to wait through the traditional banking settlement cycle is a pretty compelling value proposition, too. And so we've already gotten a lot of interest from clients thinking about how they could apply that to their current method of paying their employees.

Got it. And maybe we're really out of time here, but I'm going to try and get one last question and it's about -- when you think about your product offerings that you have, are there any areas that you would like to add maybe another product? And could you fill that with a partnership with another company or maybe an acquisition? Or is it better to build when you do that buy versus build kind of analysis, if you could give us some color there as well?

Sure. So I have sorted a couple of examples on how we are pursuing expansion of our treasury management capabilities. We're always assessing the markets for gaps. I wouldn't say we have any key gaps we have, but the market is evolving and the industry is quite dynamic. So we need to keep a close eye on what's going on. And all of the above work. So to get to market quickly, partnering is a great way to do it. And we have the partnership relationships that we have launched scaling periodically, one here with PNC EarnedIt. We buy -- we have partnered for years with a particular partner or if we have delivered services that have then become core. So assessing the partnered activity, it becomes so important to our clients that it is actually now core. We will look to acquire and bring businesses in-house or if it doesn't exist, rebuild like so if there hasn't been an easy a need in the market, we will build ourselves to allow ourselves to differentiate many of our health care payment capabilities, system built enhance over the years because working so closely with our clients, we will very intent to how we could transform to deliver better capabilities. So again, all of the above and constantly reassessing, [indiscernible] approach the strategy.

[indiscernible] for PNC, how it differentiates itself from many of its peers, and thank you for those insights. I think everyone found them very helpful. So thank you, again.

Thanks very much.

You're welcome.