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

All right, guys. On to the next presentation of a very bank heavy day at today's conference. We have the [indiscernible], Rob Reilly.

Thank you, Erika.

Yes. I call Jeremy, charismatic. And you're charismatic too.

Okay. Yes, I was going to say. I might have chosen that one.

And of course, he's CFO at PNC. So welcome.

Well, thank you. Love to be here.

Before we go more into how the company is doing, could you please maybe address the recent departure of Mike Lyons to Fiserv. What does it imply for how the companies run, if anything. And what could it imply about succession and succession timing?

Yes, sure, Erika. So [indiscernible] great to be here again with you. On the Mike Lyons news, a couple of things there. One is Mike joined us about 12 or 13 years ago from Bank of America. And he did a lot of great things at our bank. And he was presented with an opportunity that he decided it was best for him and his family. And he took it, and we wish him well. The good news is when these things happen at companies, it opens up opportunities for others. We've got a deep bench of talented executives, many of whom you'll be meeting. So that part feels good. The approach to market is unchanged. Mike was promoted less than a year ago. So he [indiscernible] real deep into that position. So yes, we're covered. And then in terms of sort of the CEO implication or succession, this is me speaking, Bill may need to speak for himself, but I work very closely with Bill and I can personally attest there's a lot of gas [indiscernible] in the tank that Bill is going to be around for a while. So I think we're in good shape.

Okay. So let's pivot maybe into talking about business sentiment now that we're 22 days into a new administration, moving fast...

Yes, very fast.

Very fast. Has business sentiment changed at all? Because clearly, there are crosscurrents of positives and more negative like tariffs?

Yes. I think -- I mean, we see what you see and what you read about. It's definitely bullish that we expected following the results of the election. We thought we'd see some pickup in loan growth as a result of that and some of that activity, which we haven't seen yet, particularly around the utilization. Possibly some of that delay is these tariffs and sort of the uncertainty following the certainty of the election. But underpinning that, we're constructive, and we think we'll see the growth. We'll get into loan growth and the expectations there. We haven't seen it, but there's a lot of things pointing to it.

Great. So maybe I'll dial back to November because you had such a great update on your national expansion plans. So first, can we talk about the momentum you're seeing in your newer Sunbelt markets acquired from BBVA?

Yes. Erika, you know it's been a success from the start, and it continues to be. So double-digit sales across all of our business lines. C&IB, 25% CAGR growth. About half of our legacy sales are now coming through these new markets. Same with AMG. And then in retail, DDA production up 30% and about 1/3 of our total. So if anything, it's accelerating.

Okay. Well. So in that vein, how are you thinking about rolling out the branch build-out through 2029 that you mentioned in November? And will you initially focus on a certain market or 2? Or will it be more broadly executed?

Oh, no, it will be in the growth market. So as part of the last question, in terms of all the success that we're seeing, what we're able to do sooner than we thought is sort of the second wave of investment on top of the success. So we're not going anywhere new. We're going into places where we're established, but in a bigger way. So we'll be building over 200-plus branches over the next 4 or 5 years and all the places you'd expect the Southeast and in the Southwest, but particularly in Miami, where we are today. We see great opportunity there. So, the important part about that is we are investing aggressively into the success and the momentum that we're experiencing.

Well, Miami is definitely a growth market. In the past few days...

Look around, yes. You just have to look around, right?

Absolutely. So you have been pursuing this new market expansion for a number of years. And recently, you've talked about organic market build-outs in places like Dallas, Kansas City, Minneapolis, Denver, Houston. And like you said, many other higher-growth areas. Walk us through how the economics work in terms of realizing a return on your investment? And how much time does it take to build a meaningful client book and deposit presence?

Yes. No, it's a great question. The backdrop to that is, if you go back to 2012, while you were covering us, we purchased RBC's Southeastern U.S. operations in 2012. In 2011, so right before that, PNC was in 9 of the top 30 MSAs and 0 of the 10 fastest-growing MSAs. Fast forward to today, we're now in all 30 top MSAs, and we're in all the fastest-growing MSAs, which is a remarkable transition, if you think about that over a relatively short period of time. We did that through acquisition, obviously, with BBVA, but we also did with a lot of organic growth in those markets that you were talking about. And the short answer is, generally speaking, it's about a 3-year payback. So we did do in those commercial openings, the first vintage was Kansas City, Nashville, Minneapolis. Then the next year, 3 new markets and then by year 3, those first ones are paying for the third. That was the whole approach. And it's worked out really, really well.

So you got into these markets with RPOs, it's relationship production offices for those not familiar. Talk to us about how you seek to build talent in each of these new markets? And maybe talk about how many senior bankers you've hired since the de novo efforts have begun?

Yes. So this is important, and it's unique to PNC's model where we have a regional president in each of these markets. So we start with a regional president. And then we hire in this case, commercial bankers because that's what these were, commercial relationship officers. Some of whom are legacy PNC that move to those cities and then some of those bankers that are established in those cities that join us from other banks. And it's worked really successfully. Through the time, we've hired over 200 bankers from these other shops and our retention rate has been 90% plus, which is really important, as you know, because a typical C&IB relationship from prospect to meaningful client is probably about a 3-year average.

Where are you going next?

Well, interesting, you should ask that. Salt Lake City, there are not many places left. The Salt Lake City, which is one of the fastest growing, as you know. We've gotten underway there. And just to give you a sense of sort of the growth and what makes us so excited about it is Salt Lake City MSA alone has over 3,000 C&IB prospects, probably at least 10% of those really meaningful in our wheelhouse. So we're going to do in Salt Lake City, what we've been doing for the better part of the last 15 years, and we're excited about that, too.

So Rob, I wanted to double-click on something that you said. How much are these expansion markets, both acquired and organic, contributing to PNC's growth versus your legacy markets? I just wanted to pull up a very staggering stat that you shared last November, which is that Texas and California are closing in on Pennsylvania as your largest growth state and you have been in Texas for 8 years and California for 4, which is like 5 minutes.

That's right.

And you, of course, have been in Pennsylvania for 160 years.

At least, yes, at least. No, you're right on it, Erika. So, in the new markets, we're growing compounded annual growth sales of 25%, which represent about half of the overall sales. That's not total revenues because there's obviously an existing big book in the legacy markets, but this is new sales, new activity in terms of the top line. And it's true for AMG and as I mentioned too in retail as well. So the momentum is accelerating. And we expect it to do well. So when we were on the call when we announced the BBVA USA acquisition, we expected really good things, but I'd say it's exceeded our expectations in all the businesses, both in terms of the amounts and the time that we've achieved the success.

If I was in front of a Bloomberg terminal, I'd be anticipating getting lots of chats saying, why then is loan growth only expected to be 2% to 3%. I mean C&I lending, it's 56% of your book. And you've received the same investor feedback as I have in terms of that number [indiscernible].

Yes, you've mentioned that to me. Well, that's part of our guidance for the full year. So a couple of things about that. One is, we don't control loan growth, nobody does other than our customers, obviously. So it's an estimate. The reality is whatever the HA data is, we'll probably be close to it or maybe even a little above it because of the growth market. But it's really, really hard to precisely time when that's going to occur. I think what's interesting for PNC, though, that we wanted to make sure that we emphasized in the guidance was, even though our loan growth is on the lower end of peers, our NII guidance is at the higher end of peers, up 6% to 7% because we're not reliant on that loan growth for that kind of growth. We're unique -- somewhat unique in terms of the shortness of our duration of our securities. So we are repricing our fixed rate assets meaningfully into 2025, that's not reliant on loan growth to generate that kind of NII. So I think that's important to point out.

Yes. And we'll get a little bit more into that. In terms of commercial line utilization, which you and Bill have talked about, are there any leading indicators that we should look at in terms of what could indicate higher commercial line usage?

Well, like I said, yes, there's a number of indicators, all of which we've talked about in terms of sort of the average utilization in terms of the bullishness. I think probably the best indication of loan growth more sooner rather than later is, we are growing committed lines. So in the new markets, in particular, companies are establishing lines of credit that they pay for that they haven't drawn on. So that's probably the best indication of intensive borrow because you wouldn't obviously pay for something you have no intention of borrowing. I think it's going to be one of those things that when it gets going, it will get going pretty good. Like I said, it's just hard to tell when it's going to start because, if the economy does well and there's bullishness sooner or later, there will be capital expenditures, mergers and acquisitions, even higher working capital levels by definition, that goes with that environment. And that's what drives up utilization.

And just to complete the circle on the loan growth discussion, of course, consumer ex card has not been a contributor total loan growth for the industry. And maybe give us an update on how you feel portfolio trends will shape up for the year in resi, home equity, auto?

Yes, we don't have a lot of expectation for loan growth on the consumer side. We think resi will probably be down a little bit, home equity may be flattish. We'll see some growth in card. As you know, we've got some new initiatives going there and maybe some in auto. But we would expect commercial loan growth to outpace consumer loan growth in '25.

Got it. Moving to the other side of the balance sheet. Another part of your forecasted investors thought was conservative is the slight deposit growth average of 1% to 2%. And we talked about your expansion effort, DDA centricity of it. And you mentioned previously that since 2011, your expansion markets have produced $110 billion of deposits away from your legacy footprint. Your money center peers have all seemed to be particularly excited for deposit growth reacceleration '25. Again, could you unpack this expectation further more?

Yes. I think it sort of goes with our loan guidance and the same sort of mindset in terms of our outlook, and that will be defined obviously, by that. What we see right now within the strength of our deposit base, which is the core strength of PNC. We've seen growth in commercial interest-bearing accounts pretty much for the latter part of the last 6 months, and we've seen that continue into this quarter, and we'd expect that to continue. And then consumer may be down a little bit even though we have new production, our consumers are still running balances higher than pre-COVID levels. So we think we'll see some spend there. And then obviously, in terms of the funding need for it, anybody can grow deposits. All you need to do is raise the rate a little bit, and we saw a lot of that. PNC didn't need to do that, even though we grew deposits on a spot basis back at the height of the crisis and following the failure of some of those banks. So we feel good about our deposit franchise, and we'll grow it.

To that end, if we do start settling into a neutral rate, when does noninterest-bearing deposit growth return?

A lot of debate about that. The good news is that it's stabilized. So the noninterest-bearing as a percentage of interest-bearing has stabilized as we went through the cycle there. So we've averaged out around 22%, 23%, and we're pretty steady there. There's some debate in terms of our shop, when would we see growth? What do you need on the short end? Some people say 3.5%, some people say 3%. I don't know. Obviously, lower the better. But I would expect that we'll see core growth in NIB in terms of the growth that we have in the expansion markets because, Erika, if you think about it, they're operational deposits and treasury management, which is a big, big part of our offering. As we grow treasury management, we'll grow noninterest-bearing, not necessarily percentage, but in absolute amounts.

It's been a while since we've had a neutral rate that's not 0. How should we think about PNC's natural cost of deposits, especially since so much has happened to the banks since that time?

We pretty much say 50%, short Fed funds rates. That's where -- that feels about right.

To that end, you've talked a lot about normalizing net interest margin or NIM towards 3%. What's the rate backdrop that's ideal for achieving this normalized level? And could you approach this by year-end?

Well, the ideal backdrop obviously is the steeper yield curve. So our NIM, you're good, Erika. You know we don't give NIM guidance, but since we're here at your conference, we'll talk about NIM. It's obviously an output in terms of what we have. And the NIM is going to expand, principally driven by the fixed rate repricing. So we finished the year at 2.75%. Our average in terms of where we've operated has been between [indiscernible] historically. So we'll see some expansion in '25, not necessarily in the first quarter, but I could see 10 to 15 basis points through '25, which starts to approach [ 3 ] and then probably some expansion beyond that if the curve is steep and conditions stay the same.

That's great. Thank you for that.

You're welcome. Yes, you're welcome.

So Bill has talked about the importance of Treasury Management and Treasury Management technology for a very long time before that was a thing. Even when rates were 0, nobody wanted to hear about deposit growth. So could we talk about TM growth and how that business is helping you penetrate clients in new markets?

Yes. Well, sure. So I touched on that a little bit earlier. So Treasury Management is a very important business for us. It's a big business. It's $4 billion in revenue, high growth. We grew Treasury Management 15% in '24. We'll do probably double digits, maybe not quite 15% in '25, we'll see. But it is our principal core sort of platform product that justifies our relationships in terms of loans and extensions and the full return. Everybody knows we're best-in-class. Everybody wants to be able to replicate PNC's Treasury Management products and services. All you have to do is go back to when we started 50 years and invest in it. And like you said, even at times when it wasn't vogue to invest in it, like you referenced Bill, we were and we are. So it's a differentiation for us. Hugely important in terms of our prospecting efforts and a central, central role in our corporate banking relationships. In fact, it's so good that prospecting -- when we go and meet these prospects and they're willing to take PNC because they know us in terms of a call, but they're a prospect, Treasury Management is usually the first step because there's something in our suite of products that a company could use right away without having to switch banks, without having to do some big conversion. Something that's good for them, maybe save them some money. And then that's the beginning of our relationship, a prospect goes to a relationship. And then that starts that 3-year sort of buy cycle to something more meaningful.

And that's helpful, actually. Thank you for that. So capital markets momentum for '25. Harris Williams was, of course, a nice stand-alone franchise when you bought it a while back. How integrated would you say the capital markets and advisory arm is within the rest of the commercial bank? Especially given all the new clients that you're adding from international expansion?

Yes, obviously, the answer to that is integrated to the extent that we can. The Harris Williams is the biggest component, but also within our Capital Markets group, our loan syndications, asset-backed financing, interest rate, risk management for our clients, caps, swaps which tends to go along with loan volume rather. So Capital Markets had a good year in '24. As you know, it bounced back from '23, principally through Harris Williams. We expect that to continue in the '25, and our guidance points to high single-digit growth there. And the pipeline is all suggested.

Since you and Bill began your tenure, PNC has been excellent at using continuous improvement to reinvest back to the company. As we think about 2025, what are those investment priorities?

Yes. So a couple of things there. The continuous improvement program is something that we put in place a number -- is it now what, 12 years or? What is your question there? [indiscernible]. So $4 billion plus in expenses that we use when we harness those expenses and realize we can reduce them, we use those to fund investments. That's what continuous improvement is all about. And it's been really successful for us because it's allowed us to generate positive operating leverage, which is important to us in just about every year that we've been doing it, including last year. At the beginning of 2024, in January 2024, we thought because of the rate cycle, we were staring at NII that looked like it was going to go down to $800 million. We thought, hey, no chance at positive operating leverage, but it turned out we outperformed, fees were a little better. We did some securities restructuring, but we delivered positive operating leverage through our continuous improvement. To answer your question, most of those dollars now are going towards the branch build that we talked about in technology, which is something that we've been on for some time and that will continue for some time.

So speaking of technology, clearly, AI is a huge conversation, unavoided. What are the use cases now within the bank? And what are the best use cases for the future?

So yes, AI, yes, I've heard about it. I heard a little bit about it. We always said we were doing AI before AI was cool. And we've got a lot of pilots. We use it on the operational side, typically, in terms of compliance, vast data sets where you're looking for, individual variances. On the client side, sales and service, all the places you would expect. I would say we're seeing some benefit, but we're not at the place where you're reading about it in terms of where it's an automatic department doing whatever is doing all on its own. So, we'll stay at it. We'll continue to invest in those applications. I might submit the heights a little ahead of the reality, at least in the banking industry.

Got it. So everyone's favorite question. You've not been shy about the importance of scale. So what's your mindset today in terms of build versus buy?

Well, yes. So we've said, and we're on a record in terms of that we do believe we need more scale. We have sufficient scale to do everything that we're doing now. We're growing our scale, but we think we need more through time. Two paths to doing that. One is acquisition, inorganic and the other is organic. On the acquisition side, we're an accomplished acquirer. We've done that. I mentioned that since 2012, we did acquisitions even before that. So we know how to do it. The issue with acquisitions is there are windows that appear through random variables that happened to line up. Jim Rohr, who was our CEO, prior to Bill had a great saying in terms of "banks are sold, they're not bought." So, in our case, we just have to be ready if and when those windows open, which at the moment, we don't see them as open. Bill was pretty clear about it on the call. Nobody is really selling because they have a constructive outlook similar to ours, and the valuations are a bit high, but those things can change. In the meantime, we're so excited about the growth that we have and the ability that we have in terms of our resources and our scale to be able to effectively reinvest into these momentum markets at a greater level, where we're already having success. It's another way to scale, meaningful scale in terms of the organic path. And pursuing that, it's a pretty easy bet on what's already winning and you know what you need to do. So that's Plan A at the moment. And the 2 don't preclude each other.

And how conscious would you be of not allowing the organic momentum to be disrupted. So going back, I remember when you were expanding into those new markets, pre-pandemic, before you bought BBVA. And then you bought BBVA and it seemed seemless, like we don't know where [indiscernible].

Yes. No, that was meaningful. You're hitting on it. The BBVA USA acquisition was obviously really great in terms of the return on the numbers. But what it demonstrated was our technology in action, where we were able to lift and shift a $100 billion bank onto our platform and fully convert that within 4 months of closing, which had never been done before, and I'm not sure it's been done since at that scale. So that gives us a lot of confidence that we are a confident acquirer and obviously, technology is essential.

So deregulation has clearly been another theme that we can't avoid. What's on the docket for change that could benefit you guys the most? And where do you guys think Washington should focus?

Yes. So we get that question a lot, obviously, since the election. One of the things about PNC, which shouldn't surprise you is there was nothing about the old rules or the proposed rules or all the activity that was occurring that was necessarily a game changer for PNC because of our business mix. That said, it did take a lot of energy, a lot of time, a lot of management calories to understand the new rules, anticipate the new rules, implement the new rules, even prove that you're compliant even though you were likely compliance by a mile. So I think what our hope would be is that there'd be some recognition that the banking industry is sound. Capital levels are at an all-time high, liquidity, solid, credit is under control, stress tests work. So maybe we can spend our energy on more constructive things rather than new rules coming over the fence at odd times for us to figure out and then send back and say they don't make sense, which unfortunately has been the case.

So in general, what would move the needle speaking of capital on your buyback cadence of $100 million to $200 million a quarter. So you gave this number with your loan growth guide. If we see better loan growth, do we toggle it back? Or would you still buy back?

Well, loan growth would be our highest and best use of capital. So that's top of our mind. In terms of PNC and our business model, and we've said this many times, we have the ability to generate more capital than we can deploy intelligently. So we always sort of have this capability to build our capital, which is what you're seeing. We did that in anticipation of some of the rules that were in flux and they're still in flux in some respects. So we're at a good level now. But because we're able to generate capital, as I said, we were able to reinstitute a share repurchase program earlier than most and some still haven't. So at the current level, that feels about right, and as things sort of clear up, if it's loan growth or as we get some more firm ground around the rules, we can address that in pretty short order.

And just as a reminder, if anyone has any questions in the room, you could scan your QR code on the table and I'll get it in this iPad, which does need to be charged. So as you think about the opportunities ahead, which seem plentiful, your 2 closest peers, [indiscernible] recently drew lines in the sand on medium-term ROTCE targets. One at the mid-teens with lots of capital and one at the high teens with less excess capital. Where do you think PNC fall?

Well, so this is going to be a shocker. You and I were talking about this at the beginning. We don't have a target. We don't like targets because -- and we took a lot of flak for that in the beginning, Bill and I, but I think our model proved that we knew what we were talking about. And the reluctance around targets is that they can often lead to short-term behaviors that are destructive to long-term value. That said, our returns are good. We've got high fee businesses that we talked about. And we've operated in the ROTCE category, mid-teens to high teens in the past, and that seems like the right place depending on how some of these rules play out and where all that goes, we could go on the higher or lower end of that. But again, that would be an outcome, up and above growing our franchise, delivering positive operating leverage and growing EPS.

So we haven't talked about commercial credit much during this conference. You guys, in particular, have a lot of reserves on your CRE portfolio relative to peers. What would cause you to start releasing reserves in this book?

Yes. So our -- so credit quality is good in commercial. The one exception is within the CRE book and specifically the multifamily office book, where we have the highest amount, we have close to 20% reserves, which is driving up our total CRE reserve. So that's a lot of reserves. I would say the -- we're still probably in the first half, and we use a sports metaphor, in terms of working through all of those deals. It has been a little bit of a surprise that it's taking longer back a year -- when that first surfaced, we all thought we'd have a whole bunch of maturities and would all sort of get rinsed and washed, but it's gone longer as most things do. So still a lot to work out. We think we've got the reserves around that. And then naturally, as it is worked out, we'd release those reserves.

And so finally, Bill has stated that he's never been more excited about the opportunities ahead for the company. So do you think PNC has any unique positioning moving forward that could result in differentiated growth and performance?

Yes, I think -- well, we've done that historically. So a lot of the plan, we have a 5-year strategic plan that we update annually with our Board of Directors. And part of Bill's excitement in terms of that quote was looking at that plan, which is constructive. It's constructive for the industry, but particularly PNC. We're going into the right side of the rate cycle with a steeper yield curve. We definitely are in a place where credit problems aren't imminent. So that looks good. And then in PNC's case, with this national expansion that we have that's going that could will, by definition, drive more activity. And if we stick to our philosophy, which we will, have positive operating leverage, those are the things that get us excited. That's why Bill never been more excited.

That's great. Any questions in the room? If not, that was very PNC [indiscernible], it was productive...

Boy, that was a lot of questions.

It was a high quality. And it was efficient.

Fantastic. Thank you.

Thanks, Rob. Absolutely.