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

Okay. Thanks, everyone. Good afternoon. We're happy to kick off the afternoon session here with PNC Financial. We've got CEO, Bill Demchak, joining us. Bill, thanks for being here today.

Great to be here.

As usual in these bank sessions, I think we'll start off asking you about the broad state of the economy. You got the Fed maybe continuing to tighten, inflation is still running high, yet unemployment's low, a lot of uncertainty out there. So what's your take on the macro, both what we're seeing now and your outlook for the rest of the year?

I don't know that we have a terribly different view than consensus. We expect a shallow recession. I'm still waiting for somebody to define for me what exactly that means. But we're assuming, fourth quarter, first quarter, negative GDP. Unemployment will rise to 5% towards the end of '24. The Fed may or may not be done. We're less worried about what happens in the front end than we are what happens in the back end of the curve here. But no big credit surprises, no big dramatic changes in the economy, but a general slowdown, and the Fed does its job. It's kind of our base case.

Yes. We're going to talk about a lot of bank fundamentals as we go through here. But just thinking bigger picture, bank stocks have priced in a lot of stress. Trends are getting tougher. But in a broad sense, the fundamentals, still hanging in there. I guess when you look at the group and where are trading, are you in the camp that we're undervalued as a stock group? And what perspective would you share for investors that have a medium-, longer-term view?

Look, I have a strong view on our own company. But I think we've all been surprised by some of the things we've seen in the market. The couple of big banks have failed. We're almost in a different business than the rest of us. And that's caused uncertainty in the market. I can look at our own bank, and I think of our forward earnings and the strength of our credit book and anything else we have, and I feel great about it. But the volatility, day-to-day, in stocks, I think, is keeping people out of the market. I also think the differentiation between structurally damaged banks as a result of some of this recent turmoil and the push down of regulation, the people who'll ultimately win from this, there's not as much differentiation at share prices as there ought to be today. I think you'll see that play out. Nobody is going to -- that's only going to be proven with forward earnings when we print earnings and people see who does what.

Fair enough. So let's talk about a bit of some of those fundamentals. Clearly, there's been a big focus on deposits across the industry. In the first quarter, your deposits actually grew slightly, but I suspect that might be harder to do in the second quarter. We've got QT seasonality, and we can kind of see [ H.8 ]. And what have you seen so far on deposits? And what should we expect from PNC as we look ahead?

Yes. We're basically trending with large bank [ H.8 ]. We pushed a bit in the first quarter just to prove we could do it. As much as anything else, we're incredibly liquid at the moment. Loan growth is somewhat tepid. And there isn't -- the marginal dollar to grow deposits right now is coming in at full rate, and we don't need it, so we're not chasing it. So we'll decline. QT itself is dropping deposits across the system. And my guess is we'll trend with a broader deposit line.

And what are you seeing in terms of deposit betas and mix shift? In your first quarter deck, you were pretty detailed. You laid out some specific thoughts on kind of the cadence you expected for both beta and mix. Are those trending in line with what you laid out?

Yes. We're pretty much dead on. So no change in the terminal beta of the 42, and a slight tick in the quarter, but that's what we expected. And we otherwise expect, therefore, net interest income to follow.

There's a lot of debate, and we're hearing it this week, about where the industry noninterest-bearing mix shakes out, whether we kind of go to pre-pandemic or back to that early 2000s. I know you've gotten that question. So maybe just some thoughts on whether that could continue to shift. And what differentiates your mix? Your [ NIB ] mix tends to be a bit higher. Can you just talk a little bit about those factors?

So we're -- today, I think we're at 27%, and we've been talking about maybe we'll get down in the mid-20s. And then there's questions out there, well, hang on, some people were at 15 once upon a time. I think our low print, absent the middle of the National City integration, was probably in the low 20s if you go back to kind of '05, '06 or something. And part of that, and it's grown since then, is the amount of noninterest-bearing we get simply through the growth in our treasury management business, some of our escrow businesses, some things that aren't generic noninterest-bearing sitting in the consumer account, which allows our average perhaps to be a little bit higher. But right now, we're assuming we'll trend down towards 25, and that seems to be holding.

And then how about on the loan growth side? Obviously, loan growth expectations have slowed. We can kind of see the [ H.8 ] Senior Loan Officer survey. What are you seeing on that front? And what do you attribute to kind of demand versus supply?

Look, it's definitely slowed. It's -- in its simplest form, you have a supply-demand imbalance, where cost of lending, because of the cost of funding, has gone way up. And the market demand for loans, they just don't want to redo their revolver. They're going to write it up and hope things get a little bit better. But to give you an idea, our loan growth is probably a little bit below H.8 actually this quarter, can change by the end of the quarter. Our spreads are 100 basis points wider for new originations than they were a year ago. That will take a long time to cycle through the loan book because big loan book, but you're finally seeing this price change that we had expected.

And how does that help you? Like if you're not getting a lot of new loan growth, it'll help on renewals and...

It helps on -- you'll recycle the book, and it will reprice. One of the things -- our loan growth last year was off the charts, right? And a big part of that was the new markets we entered with BBVA. We grew revenue in the new markets by 50% year-on-year, a lot of that through new relationships and lending. So now the play is, right, lending has gotten -- liquidity is more expensive. Now you work cross-sell, so same playbook we executed with RBC. It's what we've been doing now. We have the clients. You penetrate with the fee-based businesses. The bankers work on that for the next couple of years rather than to try to grow the book.

So can you talk a little bit about balance sheet positioning? How are you approaching the decision whether to add some swaps or duration and protect against the possibility that rates come down? I know that's not necessarily your view, but maybe just kind of talk about how you guys think about it.

Well, I think -- so ignoring my view on rates, and I've been one direction on this, and it actually doesn't matter, the issue today is the downside risk to banking as rates go up, not rates go down. And choosing to get longer in this environment put your firm at risk, right? We're just over -- we see all the marks, we see intangible equity. Rates have rallied so they're a little better than they were. There's nothing to say that if the curve becomes unhinged, the Fed loses control on the back end of the curve, the situation gets much worse. So I'm not worried about rates falling. I'm worried about rates going up, even though I don't necessarily think that's the highest probability. You always -- and in a world like this, you protect against the worst outcome, and that's if rates rise.

Yes. And I think that's from a balance sheet capital perspective, that's well understood. And from an earnings perspective, I think investors are also confused from a net interest margin and income. Are we rooting for rates to go up or are we rooting for rates to go down?

We're rooting for the curve to flat. But practically, I mean, NIM is going to be under pressure. Frankly, if the Fed goes either way, a little worse if they cut, softened by a flattening curve, which I would otherwise expect to happen. And we're kind of positioned for that.

And you mentioned this a little bit before, like your incremental decisions on pricing of deposits, whether to let them go or go on, like how do you guys think through that? Give us a little color there.

Well, you protect your client base and reprice as you need to. We build technology that allows us, not perfectly, but at the margin to find the consumer who wants to shop and either capture the money in the movement or recapture the money post the movement. We've retained, I don't know, $3.5 billion plus or minus of deposits simply through that repricing of the marginal customer. Chasing deposits, the next marginal dollar beyond your average case consumer growth, which we're having, is coming through brokered money at the moment. And brokered money is kind of a -- bluntly, it's a fool's errand when you don't need the liquidity, then everybody sees it's brokered money, and you're not doing anything for franchise value. So we're just -- there's no reason to chase that.

Yes. I know this question has come up to you, too. When you think about potential for treasury issuance and debt ceiling negotiation, how might that affect bank deposits? And the interaction with RRP is important, too, obviously.

Yes. Well, look, the Treasury is going to issue offers of $1 trillion of bills. And if all else equal, it drives into the money funds. What we're hoping to happen, and it has been part of the dialogue, is that the Fed would change the price somewhat on [ IOR ] and on the reverse repo facility rate. You'd actually see the reverse facility shrink as the bills hit the market. And practically, you end up with not much affect the banks. It's all part of a discussion. So that -- I mean, the one thing I can say is everybody is aware of this issue, we were not -- it's not happening without Treasury and the Fed thinking about it and talking about it.

The Fed's concern about lowering that so far has been kind of the lower bound of Fed funds, I think, or...

I mean, you have to ask them. I think this combination of lower bound of Fed funds coupled with the fact that there was no alternative issuance because Treasury wasn't going to issue bills in the face of the debt ceiling issue.

So maybe with that, they'd be more open to it?

Yes.

Turning to expenses a bit. You increased your target for continued improvement expenses this year from 300 to 400 in your CIP program, but expenses are still expected to grow a little bit this year. How are you thinking about that? And if the rate environment gets more challenging, is there more you can do to lean in on expenses? How does that tie with your investment and plans?

Well, we're thinking about it all the time. And the simplest way to put it, we up the target, we outperformed in the first quarter. We're going to keep pushing on it. I don't know that we're going to make any big announcement on anything, but we're good at this. We're focused on it. Importantly, though, I'd just remind you the growth that we've seen, are seeing and expect to see out of the new markets, like I don't want to take out momentum from forward earnings growth and importantly, not from our tech agenda, which we haven't had to do. And if -- look, if you back out the FDIC assessment from last year, not that no one -- we can talk about those, we're showing 1.5%, 2% the expense growth this year in the face of 3% wage growth to our employee base. So we're actually doing pretty well.

Yes. And just maybe just touch on that topic in terms of the -- we've got a special assessment proposal and maybe some regular way assessments after that. How are you sizing that or thinking about that?

You can go through the math of the estimated loss, and we think after tax is $370 million or something plus or minus the onetime and the assessment after that, so today, we're paying $25 million a quarter on the one they did before. The next one after that, we expect, would add 20 a quarter to that normal course if they do what we expect. So you have the 25, the 20 and the 370. The 20 and 25 are pretax, I think.

Onetime.

Yes.

So sticking on expenses, you've invested a lot in tech infrastructure over the years. Maybe talk a little bit about the core modernization that's going on. And I know you're going to kind of walk out of this year with some real new capabilities. Can you talk a little bit about that, what it does for your processes, for customers and on the expense front, too?

So the core modernization is kind of a -- it's cool buzzword, but that actually isn't the winning endgame, right? That's just saying, now you have the capability to be 24/7 with real-time information on your clients, how you utilize the information and create connectivity and service capabilities for your client, is what we've been investing all the money in? And so by the end of this year, early into next year, we'll roll out new online banking, new mobile, new seamless, single-point service center for all our branch employees, care center employees and anybody who in the moment live needs to solve a customer problem, including the customer. All of that's enabled by bringing everything to be cloud-native microservice API-based, all sounds very boring, but practically, what it means in its simplest form, our existing online banking and all online banking systems historically were 10 million lines of code that if you wanted to change it, you had to rewrite spaghetti from one system to another system. And you were terrified of touching it because if you messed something up and you didn't know how exactly it connected to something else, it's a disaster. Today, it's click and drag an API on our micro service. I need to check in account balance. I need a credit card balance, I need a -- whatever, and I can redesign the screen 4 times a day and roll it back out. What used to take 9 months, can take an afternoon. What it means ultimately in terms of service and clients and costs is the ability in the moment for everyone who touches a client, including the client itself, on our web or on their mobile to solve their own issues real-time saves a fortune, ultimately, in the back office. So we used to think -- remember the conversations when AI first came out. I was going to say we're going to save 80% of the money in the back office through automation. That actually isn't what's happening. What's happening is you've set up the servicing capacity at the front end, so you don't need the back office. You empower frontline employees to make the change and fix it right at the moment. And that's a long tail on what we're rolling out, but it's a big opportunity set. And I think it's a big part of our plan, ultimately, to be kind of a low-cost provider of what is going to be an increasingly frictionless ability of consumers to move money around, like you're going to have to be cheap, and you have to be good, and you're going to have to be simple.

Yes. Yes. I think you've mentioned before, we've learned about the speed and velocity of deposits. And that's going to put more pressure on the industry's efficiency and the ability to deliver.

Yes. But the modernized core is just that's kind of like, "Okay, I choose to run it on this computer instead of a mainframe." Everything else that goes around that is the multiyear build.

And you're in that journey where you're at...

We're at the end of the journey, yes.

And it's been a couple of years, right?

A lot of years, a lot of money. Rob knows how much money.

Shift gears a little bit and talk about credit. Obviously, folks are mostly focused on CRE and office. Just talk about your exposure, the manageability of potential losses there, given what you've done to kind of re-underwrite and scrub and take reserves.

Yes. So we broke that out in the first quarter, and we'll give updates on that. But basically, in office, we have, I don't know, 8.9 billion of total exposure, which is a couple of percent of our total loans. But it's -- inside of the 8.9, there's 4 categories. There's basically government, which is great. There is single tenant, which is great. There's medical, which is great. And then there's multi-tenant, which isn't so great. The multi-tenant is probably $5.4 billion, $5.5 billion. And what we did with that book, we kind of went at it two ways. One way was just through the normal CECL process. We dropped NOI by 25%, values by 50% and ran it and reserved. And the other way we did it was building-by-building bottoms-up change in rent renewals, tenant improvement costs, cap rates and all the other [ market ], they kind of met in the middle. But practically, through all the machinations, the way to think about it is our multi-tenant office properties are reserved to a level that the values of them can fall to 25% of their original appraised value when we did the loan and be wholesale [ over whole ]. That's what we've reserved for. So it's like a 10%, 9% reserve against that whole book. But basically -- remember you appraise a building at $100. So we did the loan at $55. We're assuming that the thing can fall to [ $27 ] and still get out whole, and that's what we reserved for. So it's like we're going to have charge-offs, but we think we're kind of covered against what's going to come in a lumpy form over the next couple of years.

How about broader credit conditions, whether in commercial or consumer? Can you talk a little bit about that?

Not seeing anything as yet. There's -- we can talk about some of the manufacturers in the big-box retailers. You can look at healthcare at the margin. You can worry about auto at the margin, but nothing that necessarily stands out or causes us worry. I think as we talk about our forward outlook here, where we get a slight dip in GDP, still pretty strong employment and payroll numbers. I think it's still going to feel pretty healthy through the credit cycle here, and we see that in our numbers.

Yes. So before we shift and talk about regulatory issues in capital, we did cover a bunch of fundamental trends. Any other updates you want to share regarding the second quarter or your outlook? I mean...

No. I mean, we -- look, we took stuff down at the end of the first quarter, and we're hitting those numbers. I think importantly, NII is showing up exactly the way we thought it would. At the margin, maybe we do a little better on expenses, a little worse on fees, given the capital markets activity is a little better on credit. But we feel pretty good about what we said in guidance, and all of our assumptions are pretty much holding up.

And for the full year, you made a strong commitment to generating positive operating leverage at a healthy margin this year. So you still feel good about that operating leverage?

Yes. I mean, I think we pointed a 2%-plus. We got to be able to hit that without much drama.

Okay. So on to the regulatory. Investors are focused on what's coming and whether we'll see higher capital, higher liquidity. What are your expectations for banks of your size, both in terms of what you'll have to take on and the time frame?

Yes. So think about it in three forms: liquidity, capital and operational complexity with perhaps moving categories. The operational complexity, we're largely ready for. You remember, we did advanced approaches for -- we didn't do advanced -- so all the stuff that we necessarily need to do, which -- by the way, they might get rid of advanced approaches. All the stuff we need to do at the margin, we're kind of already there from a risk management standpoint. We're going to have to do TLAC. And I actually think it's right. We've seen through the resolution of the firms that fail through FDIC that it's tough to get a bank when there is a value mark across the whole industry to be able to do a transaction without help from the FDIC. So we'll do TLAC. In the ordinary course, if you go back to how we funded ourselves in '18 and '19, we would have largely been TLAC-compliant, QT causing deposits to leave the system. We're naturally building our wholesale funding. So we're going to get there through our ordinary plan. We expect and have been given some amount of reinforcement that don't do that either for us out of the bank level or maybe a mix of both, but it will be fine. Capital, separate that out, I think, to the Basel III endgame. And my best expectation, they're going to increase op risk [ cost to ] banks. And in our own planning, we're saying maybe it's a point. We don't know, right? It's -- they're not going to create more capital absent the endgame of Basel III, which is separate from what they do as a result of the recent liquidity pressures on TLAC and LCR. On LCR, at the moment, we're compliant no matter how you measure it. But expectation would be that they're going to push that far down the curve, TLAC as well, my guess, all the way down to $50 billion banks, but at least down to 100. And then they're going to offer -- I hope that they offer, they're talking about -- thinking about offering. You can count discounting of capacity, if you're operationally ready, as part of your LCR requirement. This is what they should do. So we're in a pretty good place. I'm not terribly worried about it. You mentioned earlier this notion of, right, they're going to -- you're going to have to include AOCI in your capital ratios. I'd remind you, at the end of the first quarter, we showed that number, I think we were at 7.6% or something. We did some quick math before we came in here. We'll build that ratio in the ordinary course by a point a year, part of that from earnings, but importantly, a big part of that because of the short duration of that book and the pull-to-par which is kind of $550 million, $600 million a quarter. So the capital build, and I want to get the ratio right, it's the CET1 ratio, assuming you included AOCI.

Fully loaded, yes.

Yes.

So you can get to 9.5 by the end of 2024.

I don't know that you need to go to 9.5. I mean, look, we operated -- we have to be at 7.5. We operate at 8.5 because we wanted a buffer. If they say our 7.5 is 8.5, does that mean I go to 9.5 or I go to 9 or I go to -- my point is that we can pull to par pretty quickly in a way that still affords us an ability to have a strong dividend, which is important to us, and have excess capacity to run the bank.

And while the market might like to look at that forward fully loaded notion, you will likely get time to phase in that AOCI, right?

They've been very explicit that they're going to phase it in. The market, it's interesting. In a period of time where we go back to the crisis and people said, they said, "You're going to have to build on this capital ratio." And the market just held in there immediately. Everybody was still at risk kind of in that moment, right? So there's a risk factor associated with it. The issue today, to me, is less about, "Hey, are you going to build to 9 or you're going to build to 8.5?" But are we over this risk issue that's happening in the industry right now today? So in our case, I feel really comfortable on credit. We're really well positioned on rates, whichever, which way they go. So I feel comfortable about who we are and what the balance sheet is in our earning capacity.

Yes. And with those goals of building some capital, you still have some flexibility to grow the balance sheet. You're not looking to [ gen 2 ] massive mitigation or RWAs or anything like that, that's part of your walk.

No. I mean, all of that -- if we had to do that, you could do that, there's an economic cost associated to doing that, that is window dressing on your RWAs and still leaving you with a residual risk that you started with, which is just [ strong ] earnings. I don't -- I mean sometimes you're forced into that bucket, but I don't see us going there.

Yes. And you mentioned it, but just a reminder, how you think about the dividend payout and dividend growth and wrap that into your...

Yes. I mean, we've talked forever about a 40% to 50% dividend payout, and we expect to keep it there.

Yes. Okay. In terms of consolidation, what are your thoughts about whether we will see industry consolidation pick up? There's obviously some competing interest in dialogue out of our regulatory circles, but it does feel like as an industry, we need to have more consolidation.

Yes. So I think -- look, you're hearing from different regulators and even politicians that M&A is back on the table for a couple of different reasons. One is the basic notion that it would be better to do open bank deals than FDIC deals. But also, I think the recognition that scale matters in terms of risk management, in terms of regulation, in terms of technology, in terms of a lot of different things in there. As much as we would like to say it doesn't, it does. And I think people are waking up to that fact after some of the failures.

Is it feasible to do open M&A now as a bank? Or you've got rate marks as a disincentive and maybe also an incentive to wait to see if there are assisted deals available?

Well, I mean, look, the assisted deals, they're recapitalizing your balance sheet. So they're great deals, assuming you have the capacity to integrate them. Open bank deals, today with rate marks, aren't feasible, given, for almost anybody, you'd have to -- given the lack of differentiation in share price, we'd have to issue additional shares against that base if [ you are ] wildly accretive, but that would be because I'm just pulling their balance sheet to par, so it's not real money. So the math becomes what can you take out in costs against if you had to do an extra share issuance to do it. And it doesn't work at the moment. I think through time, that opportunities could exist because I think you're going to see this real differentiation around share prices.

Right. I think you mentioned today, not enough differentiation between stronger or weaker banks in valuation.

Yes.

So let's talk a little bit about what differentiates PNC, some of the unique aspects of your franchise. And just kind of maybe reminders of where you might have some unique opportunities on the growth front, maybe BBVA and your expansion markets. What's the update there, the progress you've had and where there's still opportunity to further penetrate your new...

It's a good question. And all the doom and gloom, everybody kind of pulls back at us, what's going to happen tomorrow? But practically, we're set up with the new markets that we got with BBVA to have tremendous growth for the next 10, 15 years. We grew revenue in those markets. We call them BBVA-assisted markets because we had some presence in some of them before, but we grew revenue in those markets by 50% last year. We grew transaction activity in the branches by 47%. We pulled the branches from a 60% performance versus our legacy branches to 75 or something today, and they keep growing. And that's ongoing. We -- last year, as we talked about, we grew loans substantially. Now we've planted the seeds in effect to go cross-sell and harvest the corporates, the treasury management capabilities, which would continue to be kind of 1 or 3 or 4 players in the large TM space. We've got a defensive balance sheet. We've got a lot of liquidity. We're good on capital. We're indifferent to rates. We're otherwise in a pretty good place to take advantage of what's going to be dislocation in the market, both with clients and then potentially inorganically.

All that growth last year was that on the consumer side and the corporate side, both?

Mostly on the corporate side. I mean, we're -- look, we're more of a C&I franchise than we are a consumer. We grew both. We grew AMG as well, I didn't mention. But the C&I growth -- and we did this with RBC, where I talk about it in terms of advertising dollars. So when liquidity is absolutely free as it was for the last couple of years, it's easy to go and participate, provide credit to somebody, get a margin on. Today, advertising is really expensive, fund is expensive. So now we have all this planted the field over the last couple of years, now we go harvest. We've done that repeatedly through our history, and that's what we're in the process of doing with all new clients we onboarded last year, which is massive.

And how about some of your fee businesses? Maybe just give us an update in terms of treasury management, corporate services.

TM corporate -- well, TM is doing great. Cyclical Harris Williams, capital markets activity, derivatives, FX and so forth, bond issuance is down. And we're following the trend that you'll hear from others, which is why I kind of said for the quarter, the margin fees are weaker. Our big gorilla fee is TM, which is doing great. Smaller fees are off with the margin. I think that's going to play out...

[indiscernible] too.

Yes, we've expensed. But I think that's going to play for a while. It doesn't feel like M&A is going to come roaring back anytime in the near future. I hope I'm wrong. But that kind of feels right to me.

What about strategically, what's going on with Harris Williams? You have done some small acquisitions there or add on organic?

Yes. No, look, it's all products and services related to private equity that aren't necessarily providing capital. So we do everything from Harris Williams with advisory, Solebury on IPOs. And we do this for our own clients too, but the biggest targets are private equity guys, fortressed with escrow management for M&A deals. We actually do offer TM through concierge service to the portfolio of private equity companies. So we'll market to one private equity company, who will offer our services effectively at bulk to the clients that they have. And we onboard them that way, and it gives them a single view into their company portfolio. So there's a lot of stuff we're able to do there that isn't capital-intensive. And then we do, I shouldn't leave it out, asset-based lending, which is a high-return business and more often than not has private equity clients.

And that is an area that historically picks up a bit during trickier times, right? Is that happening yet? Or...

Spreads and fees are going up. Not enough to make a huge difference.

Yes, yes. What usually happens as things get tougher there on the asset.

No, I mean, it's a fascinating business, right? Their charge-offs -- they're risky loans from a default basis. They are high-recovery loans with very low loss content. Spreads are high, fees are high, restructuring workout fees are high. And so traditionally, as you actually see losses, you end up making much more revenue that cover whatever charge-offs you might have in that period because the rest of the portfolio is getting charged up on fees and spread. And it just grows when -- because other forms of credit aren't available to corporates.

Yes. So a couple of questions that came in through the audience here. You mentioned loan growth may be a little bit less than [ H.8 ] this quarter. Is there any particular vertical you're pulling back from? Or it's just kind of quarter-to-quarter?

Yes. There's nothing special. I mean, look, we're not going to add to office. There's actually a lot of office deals I'd like to do, but the headline number of "Hey, your office exposure went up" isn't worth it, which is kind of the unfortunate truth about banking, right? They -- people are watching numbers.

Yes. We've heard that this week from [ ours ] as well. Even if the spreads got wider, it's...

Oh, they're really wide. Yes, this private credit will have a fun time with the office.

And while you don't have a lot of consumer credit exposure, what are your thoughts on what kind of consumer credit cycle we might see ahead?

It's got to get worse than it is. I mean, look, it's been surprisingly good, and consumers continue to be in good shape. You can find your pockets of worry in auto if you want to, based on car prices. We shrunk that book over the last year. So it's just there's nothing that we're particularly worried about. We keep talking about some sort of normalization, but it hasn't really happened.

Yes. The other question that's come up here is whether private credit is likely to play a role, both in kind of filling some of the bank lending and maybe taking off some of the commercial real estate off the bank's hands.

Look, there's a lot of money that's sitting on the sidelines in private credit. And they do well when capital and liquidity are scarce. So they're both in primary lending. In the near term, we're buying assets for people who don't have the capital or liquidity to support them. I think they'll do well. I think structurally, longer term, private credit shines when it is optically or through regulation, difficult bank to make a loan. It doesn't -- they don't necessarily make better economic loans. They differentiate by having a capacity to do things that on a piece of paper, you'd look at and say, "it's crazy." But if you're a lender, you look at and say, "That's actually a good deal."

Yes. And talk about the incremental funding. You mentioned this earlier, but what are some of the incremental funding options if you don't like what you're seeing on deposit pricing? And just talk about the kind of overall -- we have other options for funding.

Well, I mean, I'll just start with the $30-plus billion cash sitting at the Fed in an LCR that's well over any requirement we might have. I mean, you add to that the practical notion that we know we're going to issue into TLAC through wholesale, and it kind of -- and all of that's in our plan, by the way. That kind of need to worry about what's going on with deposits, to be honest with you.

And in terms of kind of the overall impact on ROE for you, if you have to run a point higher on capital, TLAC's manageable. You already ran higher than your minimums for a long time on regulatory. So I guess kind of what do you see as the potential impact on long-term ROE? And what are the possible offsets or puts and takes?

Yes. Look, in the end, right, that the mathematical outcome of having to hold a point more of capital is less return on equity, all else equal, offsets -- there's always offsets -- today, ROE is very high because our capital is low because of marks, right? Tomorrow, loan spreads will be wider, and our capital will grow because marks will -- today, the curve is inverted, which means you have horrible carry on everything you own. Tomorrow, the curve will flatten and/or steepen, then you'll get a positive curve, and you'll get carry again. So I -- all else equal, all that I know in a given environment, if I hold a point more capital, I'm going to have a mathematically lower total returns. But I think the other variable is so dwarf the amount of capital you hold in a given year that I don't particularly worry about it. The other thing, I'd just remind everybody, we said, "Oh, hey, banking needs to make 15% return on equity, and now it's going to be less because you hold more capital." Some banks made 15%. Some didn't, as we're finding out, right? It is an industry where you can lie about your cost of goods sold until you blow up. And so that return on capital numbers, this fictitious number you guys stare at every year that actually has nothing to do with the reality unless you mature the balance sheet, that's why -- be careful throwing that number around for some annual period that here's your return on equity because the balance sheet is a long-living thing, as we've all discovered here in the last year. It's not about next quarter's NIM.

Yes. And again, we haven't seen the proposals. We don't know. But your thought is you've run historically around 8.5, and maybe you have to run a little bit higher than that, but you still produce a good return on equity if you're running at 9, 9.5.

Yes. And by the way, the other issue as you guys are all staring at the CET1 ex-AOCI, I think that thing pulls to par a point a year, is our rough math. You got to remember that, that -- the securities book, basically, is fairly short dated relative to a lot of other people's out there. So it's pulling $550 million or $600 million a quarter, plus our retained earnings. So the capital moves fast.

And that's just...

Yes, that's just...

Maturities, yes, not relying on rates.

Yes.

And just remind us too, you've got a loan swap book that's currently depressing NIM like [ it had a lot to ] burn off. Yes, just remind us on that.

Yes. I guess it's a 2-year average life. I mean, it's -- I don't know it's a 1%, 1.5% coupon in a 5% world. So it's $42 billion or $40 billion, right? So whatever that math is, we're burning $1.6 billion, $1.5 billion pretax a year that will overall [ off for ] the course of the next couple of years.

Yes. So you've got NIM pressure from the environment. But as that burns off, that helps a little bit.

A lot.

Yes.

Yes.

Great. Well, we covered a lot of ground, Bill, appreciate it.

Good to be here.

Thanks so much.

Yes.