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

[Presentation] Moving over to Bill Demchak, Chairman, President and Chief Executive Officer of The PNC Financial Services Group.

Thank you, and good morning, everybody. On behalf of our Board of Directors and management team, we are pleased that you've joined us this morning for our 2023 Annual Meeting of Shareholders. As Chairman of The PNC Financial Services Group, I will preside as the Chair of this meeting. To begin, let me provide an overview of how our meeting will proceed. After calling the meeting to order, I will introduce our director nominees, executive committee members and representatives of our independent registered public accounting firm, who will be available to address questions. Next, our Corporate Secretary will provide a report on procedural matters. I will then introduce the formal business of the meeting, including the 4 items on the agenda. We will then pause for questions regarding those 4 items and open the polls for voting. After the polls are closed, our Corporate Secretary will report on the preliminary voting results. Following that, I'll adjourn the meeting and provide remarks on our 2022 performance, recent events in the banking industry and our continued focus on serving all of our stakeholders. Immediately following that brief presentation, I will use the remaining time to take general questions submitted by shareholders through our virtual meeting portal. I now call this meeting to order. I would like to introduce our director nominees who have joined the meeting today: Joseph Alvarado; Debra A. Cafaro; Marjorie Rodgers Cheshire; Andrew Feldstein; Richard Harshman; Daniel Hesse; Renu Khator; Linda Medler; Robert Niblock; Martin Pfinsgraff; Bryan Salesky and Toni Townes-Whitley. Also on the line are all the members of our Executive Committee: Carole Brown; Richard Bynum; Kieran Fallon; Debbie Guild; Vicki Henn; Greg Jordan; Stacy Juchno, Ganesh Krishnan; Mike Lyons; Alex Overstrom; Bill Parsley and Rob Reilly. Also on the line is Tom Kelly of PricewaterhouseCoopers, our independent registered public accounting firm. They will be available to answer questions during the general question-and-answer session. Joining me today on the panel are Greg Jordan, our General Counsel and Chief Administrative Officer; Laura Gleason, our Corporate Secretary; and Bryan Gill, Director of Investor Relations. This meeting will be conducted in accordance with the regulations for conduct, which are available on the virtual meeting portal. By attending this meeting, you agree to abide by the regulations for conduct. Because this is a meeting of our shareholders, only those who entered the meeting as a shareholder using a control member will be permitted to vote and submit questions. Shareholder questions are welcome. To vote or submit questions, please follow the instructions available on the virtual meeting portal. We will only answer questions submitted in writing via the portal in consistent with our regulations for conduct. You could submit questions at any time during the meeting, even now. We will now turn to the formalities that are necessary for a record keeping. Laura, will you please present the secretary's report?

Thank you, Bill. I have in my possession an affidavit from Broadridge Financial Solutions, PNC's distribution and tabulation agent. The affidavit provides that the proxy materials were mailed to shareholders commencing on March 15, 2023, the day we began providing access to our proxy materials. Certain other shareholders were mailed paper copies or received electronic delivery of these proxy materials, including the notice of Annual Meeting beginning on March 15, 2023. The materials were distributed to shareholders of record as of February 3, 2023. Janice W. Castillo LLC has been appointed as the judge of election for this meeting. The judge of election keeps the listing of all shareholders of record. On behalf of Janice W. Castillo LLC, Janice Castillo is supervising the voting, and she has delivered her oath of office to me. The affidavit, notice and oath will be filed with the records of this meeting. The judge of election has certified that the beginning of this meeting, they were present in person via virtual format or by proxy, 362 million votes or 90.44% of the total voting power. Therefore, a quorum is present. Copies of the minutes from the 2022 Annual Meeting of Shareholders are available from me upon request. I would like to remind those attending the meeting that today's presentation contains forward-looking information. Cautionary statements about this information are included in today's presentation, which is also available on our corporate website, pnc.com, under Investor Relations, and I urge you to read the cautionary statements regarding such information. This concludes my report.

Thank you, Laura. Based on your report, I can confirm that this meeting has been properly convened. The purpose of this meeting is to consider and act upon 4 management proposals. First, the election of 13 nominated directors; second, the ratification of the Audit Committee selection of PricewaterhouseCoopers as our independent registered public accounting firm for 2023; third, the advisory approval of the compensation of our named executive officers; and fourth, the advisory approval of the frequency of future votes on named executive officer compensation. I will now ask for a single motion to introduce these proposals. May I have such a motion?

Mr. Chairman, my name is Bryan Gill. I'm a shareholder, and I so move.

May I have a second to this motion.

Mr. Chairman, my name is Greg Jordan, I am a shareholder, and I second the motion.

Thank you. I declare that these proposals have been properly introduced and moved. We will now pause to allow for questions related to these 4 proposals. Questions unrelated to these 4 proposals will be addressed as appropriate during the general question-and-answer session that will follow the adjournment of this meeting. If multiple questions are submitted on the same topic, we'll do our best to summarize them and respond collectively to allow us to address as many questions as possible. We'll make every effort to address questions and comments that are consistent with the regulations of conduct.

At this time, we have no questions related to the proposals.

Thank you, Bryan. All proposals are now formally before the meeting, and I declare the polls to be open. Shareholders who have sent in proxies or voted by phone or Internet, do not need to take any further action. Shareholders who have not voted or wish to change their vote may do so now on the virtual meeting portal. We will pause briefly to allow voting to occur. [Voting]

All right. I declare the polls to be closed, and I'd like to call upon the Corporate Secretary to report the preliminary voting results.

Thank you, Bill. The judge of election has provided a preliminary report to me, which certifies that a majority of the votes cast were for the election of all 13 director nominees; for the ratification of the selection of PricewaterhouseCoopers; for the advisory approval of the compensation of PNC's named executive officers; and for a frequency of one year for future advisory votes on named executive officer compensation. I will file the preliminary report with the records of this meeting, and the final vote tally will be disclosed on a Form 8-K that PNC will file with the SEC.

Thank you, Laura. Subject to certification of the final voting results by the judge of election, I declare that all 4 management proposals have been approved. This concludes the formal business of the meeting. I declare the annual meeting to be adjourned. Before we begin the general question-and-answer session, I'd like to take a moment to reflect on our success in 2022 and provide some context on the current environment. And just to start, I'd like to thank our more than 61,000 employees for their incredible efforts and the work that they do every day to support our customers. I'd also like to thank our Lead Independent Director, Andrew Feldstein, and our entire Board for their continued guidance and support over the past year. I'd like to acknowledge Dr. Renu Khator, who joined our Board in May 2022 and serves as the Chancellor of the University of Houston System and President of University of Houston. And of course, I'd like to thank you and all of our shareholders for your trust in our company. In short, 2022 was a year of growth for our company. We performed well with $6.1 billion in net income and more than $21 billion in revenue, both increases from the prior year. But just as important as how we did it, we delivered our Main Street bank model to more customers and communities across our coast-to-coast footprint, including within new and expanded markets. we built and nurtured long-term relationships by delivering products that address their fundamental banking needs. We grew loans in a disciplined manner, and our credit quality remains strong. We controlled expenses well, resulting in substantial positive operating leverage, and we maintained strong levels of capital and liquidity. No, we did not do this because we expected things in the banking system to play out exactly as they have. We did this because this is the way we've consistently managed the company in the way we manage the company positions us well to be a source of strength and stability through the cycle. So let's fast forward to March of 2023. It's important to point out that the events that kicked off fears about the banking sector, including recent failures, have taken place within just a few banks and those banks have business models that are substantially different than PNC and the overwhelming majority of other banks. Inside our company, we really haven't seen any meaningful impact from impacts from these events. Our balance sheet remains strong and stable. We are operating the company in the same way we were at the beginning of March. And as you saw in our first quarter results, our credit quality remains solid and has trended better than our own expectations. Now in the short term, the dynamics in the industry may contribute to some headwinds, including pressure on our net interest income. Notwithstanding that, we were the only bank in our peer group that grew deposits on a spot than average basis in the first quarter of 2023. And over time, we actually expect that PNC will be a beneficiary from this process. Meanwhile, our focus every day is the same, providing products and services and deploying capital to help our customers move forward financial -- opportunities for employees and helps us attract and retain top talent, investing to help the communities in which we work and live, prosper. And through all of this, creating value for you, our shareholders. We are patient, persistent and consistent in the way we run the company, and we're optimistic about the opportunities for PNC in 2023 and beyond. I will now pause to allow for questions from our shareholders in the remaining time allocated for this meeting. I will respond personally or designate another person to respond to questions we receive that are appropriate for the discussion. As a reminder, if multiple questions are submitted on the same topic, we will summarize them and respond collectively. We'll make every effort to address questions and comments that are consistent with the regulations for conduct. We will not respond to questions that were already addressed in today's presentation. If you have a question about a matter of concern to you individually and not of general concern to our shareholders, please contact our Investor Relations team through our website, pnc.com. We have allocated one hour for the meeting, including all questions, so we will address as many questions as possible. and we've received several questions submitted through our virtual meeting portal prior to today's meeting, and we'll address those first.

Okay. Our first question, given the failures of Silicon Valley Bank and Signature Bank, what do you believe are the ramifications for the financial services industry and for PNC in particular?

Timely question. I think there's 2 ways to go at this. One is what are the regulatory ramifications and I think it's pretty clear that the regulators are going to push some regulation downhill to smaller banks. I think even in our own case, given how large we are, that we will be subject to potentially higher liquidity and even higher capital standards. But whatever comes our way, we'll be phased in through time, and it's part of our planning process. And I don't expect that it will affect the operation of the company. I do think that the failures of Silicon Valley and Signature highlight the risk associated with monoline and smaller subscale institutions. I think PNC's diversified business and just the scale in the markets that we operate in, stand out in an environment like this and serve as well.

Okay. Thank you, Bill. Second question. Has the acquisition of BBVA USA replaced the earnings that were divested through the sale of your equity ownership in BlackRock.

Yes, by multiple times, it's a short answer. Our PNC's pre-provision net revenue has actually increased $1.8 billion compared to 2019, if we take BlackRock out of that. During the same period of time, the increased contribution we would have gotten from BlackRock, given our ownership stake would have been $160 million. So we're literally more than tenfold higher in earnings.

Okay. Our third question, can you talk about the success you've had with the BBVA USA acquisition?

Sure. I mean I would just remind everybody that the strategy behind the purchase of BBVA was to introduce the PNC brand and capability into newer markets and in growth markets, which it did. We -- our plan was to both offer our larger suite of products to BBVA existing clients and importantly, to grow right share in the markets that we entered, a couple of sound bites just on progress. The revenue year-on-year, so first quarter '23 compared to first quarter '22 for our C&IB business is up more than 45% from those same markets. And then in our retail distribution network sales are also up north of 40% year-on-year. So substantial progress in our original objectives. And importantly, that opportunity set gives us runway for the next multiple years. We talked about 10-year opportunity to grow that out to get to parity with some of our legacy markets.

All right. Our next question is basically asking, could you please explain PNC's rationale behind this participation in the multibank liquidity support of First Republic Bank. Does PNC believe that we'll get this deposit back? And have you taken reserves related to this deposit?

The rationale was actually pretty simple. We're pleased to be part of the solution, helping stabilize the banking system in a moment of crisis. As banks fail, it hurts the entire system as we've seen that for a variety of different reasons. But we do expect to get our money back. Nonetheless, we treat it like a deposit at any other institution that we take a reserve through our CECL process and we've done that.

Your next question. PNC stock price was approximately $226 in January of 2021 and is currently in the $120 range. Can you explain what has driven the decline?

Yes. So it isn't a decline in earnings. I think on the comparisons in the question, our earnings are probably up. It's a decline in multiple, the multiple that the market ascribes to our earnings, which has occurred throughout the industry. So when we were at a price higher than $200, we had a forward earnings multiple of something on the order of 16 and that's falling to 8 or 9 or 10 today. I don't know, 9 today, I think, Bryan and the rest of the industry has fallen as well. And that's a function of the perception of forward earnings power of the industry and the worries that are out there right now about a shallow recession, about credit costs increasing and importantly, about funding costs increasing on the back of some of the stress the banking system is seen.

Our next question regards branches and your views on that? And can you explain your rationale for branch consolidations?

Sure. It's -- ultimately, we want to serve our customers where we are -- where they are through multiple channels. We do that through digital, we do that through physical and branches, and we increasingly do it through mobile branches to get to markets that have very thin or nonexisting branch networks. We open branches and we closed branches based on population ship activity. Withstanding all of that, there is clearly an underlying trend across all banks across the country for branch traffic to decline. It's decline steadily over the last 10 years, we expect that will continue, and we'll adjust our physical footprint and increase our digital footprint, if that's what clients demand as that continues to happen.

Okay. Next question that was sent in, PNC lends over $2.82 billion to companies involved in the nuclear weapons industry, how does PNC ensure that financing activities are aligned with its commitments to sustainability and ethics.

So I think we've gotten this question every year for a bunch of years. Just to lead off, we don't finance north of $2 billion. We actually -- at our estimation, we financed about $195 million. And importantly, in March of '22, we published our environmental and social policy guidance for responsible lending. And it provides a description of a framework that we employ evaluating industries that some of our stakeholders may consider sensitive as well as our escalation path for decisioning around that. PNC's activities with weapons producers are in conflict-affected and high-risk areas are governed by applicable laws as well as enterprise and line of business methodology, policies and procedures. And our exposure, not by design, but by outcome as we go through this process is actually quite small, and in fact, it declined year-over-year.

Next question that came in. What have become PNC's strongest markets across the U.S.

That's a great question. Our historical strength in the franchise came out of Pittsburgh and Philadelphia and New Jersey in our legacy markets. Increasingly, as we just look at sales and revenue growth, you see Washington DC show up. Texas, Houston is fantastic and growth opportunities all through the Southeast and Florida. So it's changing over time. Importantly, we still continue to grow our legacy markets, but the opportunity set in these newer markets in just growth capacity, the percentages increase year-on-year are massive relative to legacy markets.

Okay. And we have no further questions at this time.

Thank you, Bryan. And thank you all for your questions. Again, if you have additional questions or your question was not answered, you can reach out to our Investor Relations group through our corporate website. Thank you all for attending, and thank you for your interest in PNC.

The conference has ended. You may disconnect your lines.