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

Great. Next up, very pleased to have PNC Financial with us. On the stage, pleased to have Bill Demchak, Chairman and CEO. In the audience is Rob Reilly, Chief Financial Officer. I think by far, the longest duo of CEO, CFO combination in the large-cap bank space. So welcome back.

Here -- maybe put up the first ARS question for the audience. I guess, Bill, I could anything new? Maybe just start off, clearly, you kind of kicked off the conference yesterday morning, even though you aren't presenting today with a the announcement of the acquisition of FirstBank. Just maybe just talk about it, you didn't have a conference call. So maybe just kind of your first opportunity to talk on a mic about the transaction, strategic rationale and why you decided this one was kind of the one worth pursuing?

Yes, sure. I mean, hopefully, the strategic rationale is pretty obvious. We just effectively bought Colorado with a leading J.D. Power branch network, low cost of deposits, impossibly low historical charge-off ratios, really good retail brand and franchise that brings us an opportunity to cross-sell our other products into that market. Why now? Banks are sold, they're not bought. And for a variety of reasons, the private ownership of that entity not just wealth transfer, there's been some articles about that, but also the need to bring better products to their clients and for their employees to sell kind of put it in our lab, which is how we ended up with it.

I guess when we think about the transaction, is there anything we should be reading into the fact that you chose to acquire FirstBank as opposed to maybe waiting for something larger to acquire scale? Or do you see a larger deal unlikely? Or can you just do -- this doesn't preclude you from doing a larger deal?

The path to growth is long and curious and unpredictable. I would say that if you ask me a year ago, if a small bank existed that looked like this one exists, I probably would have said no. They're all kind of broken and put together from old FDIC deals. Yet here this is. So if we saw something else like that, we'd likely do it. I think on the big bank side, it's just a really good environment for banking and people don't want to sell. They're all buyers. People you think might be sellers are actually buyers. Interest rates are normalizing, credit is good. And I just -- I see no reason that you're going to see anybody raise their hand and sell anytime soon. In fact, I'd be somewhat shocked by it. And we don't -- we're not going to push on that string, right? We react to opportunity sets. And if there aren't any, that's fine. We have -- our organic growth right now, new customers will hit record levels this year based on all our new markets, and we're fine just doing what we're doing.

Clear. Maybe shift gears we usually start just on the macro environment. Starting to see the impact of tariffs maybe come through in some of the economic data, likely feels like get a rate cut next week. Just how are you thinking about the current outlook for the U.S. economy?

At the margin, it's slowing. I think we see 1% growth this year, maybe 1.5% next year. We're in this strange place in the labor market where unemployment remains low, both because the supply is low and the demand is low and there just isn't churn that feels a little bit unhealthy long term, which is probably what's going to cause the Fed to act. Consumer remains really strong. We saw record spending, I think, this quarter across both our debit and credit cards. And I think as long as that keeps going, the economy otherwise stays pretty healthy, notwithstanding the noise both near term and potentially a little bit longer term on tariffs.

And I guess maybe to the consumer side, be getting some more questions there, but you obviously have a large retail franchise across the country. Maybe just dig into the health of the consumer and just any recent changes in behavior that you observed against the current macro backdrop.

Nothing alarming. We're actually seeing deposits grow at the margin. They're across all categories, the worst, I would say, is they've stabilized and at levels much, much higher than they were pre-COVID, which is encouraging. We've seen strong spend, probably larger growth in spend at the lower credit quality end, still underleveraged relative to history and no real cracks in delinquencies or anything, but long term, that's a downward trend as it were relative to what we've seen. We've seen a tiny uptick. We track everybody who gets unemployment payments going cohorts going back years. And we've seen tiny increases in that measured in basis points. But the turnover in that, so how quickly they get on and off those roles continues to be really fast. So nothing alarming.

Got it. And I guess, against that backdrop, you had your outlook slide in your earnings deck. Any updates to the range you provided in July?

No, we're -- Rob is getting really good at this after all these years. The -- no, we're kind of hitting on all numbers. And if anything, we're edging towards the upside of the ranges we provided. It's a good quarter.

And if anything -- let's do it this way. But maybe just talk about -- maybe start with loan growth. We saw some pickup in the second quarter. You mentioned strong levels of new production as a driver. I guess maybe have you seen that continue into the third quarter? And just maybe spend a moment on kind of our demand client activity across the commercial book.

Yes. So we guided to average loans up 1%. That feels likely where we're going to end up. We saw the big jump in utilization first quarter, a little bit into the second quarter, and it's held. But growth off of that is largely coming off of new production, not off of new production in terms of client share, not off of what I would say is activity in the broader economy, right? CapEx away from energy and data centers is somewhat subdued. And I suspect it stays that way until we get some clarity on exactly where tariffs land.

Got it. And then you've talked in the past about just the opportunity in the Southeast and Southwest markets. That was, I think, a driver of some of the loan growth you talked to in the second quarter. Maybe just dig deeper in terms of the growth strategy in these new markets. And do you feel pretty established in these markets? Or is there still more work to do?

No, there's always more work to do. But there -- the dynamics in Florida and Texas and in Colorado, Arizona are just wildly different than the dynamics in the Northeast in terms of population growth and corporate growth, just shots on goal of new people into the market. So our growth rate there has been really strong. We've invested heavily into it, and we have -- we're good at executing. And we've seen -- I don't know what the current percentages are, but just way outsized growth in percentage terms, in dollar terms, in number terms in the new markets relative to the old markets. And that ought to continue. It's a market where share is shuffling aggressively, and there's a big opportunity.

I guess as -- it seems like a lot of people -- I don't want to copy your strategy, but are doing similar strategies in terms of in those markets. I feel like a lot of banks yesterday today talked about expanding in the Southeast. Has it kind of altered the competitive landscape as much or changed the kind of the opportunity set or hasn't really changed?

Not really. We compete locally with 100 different banks and nationally with 3. And -- we go into a market. We do it with patience. We do it with the right people. We do it with the right investment dollars, and we're there to stay. And it makes a difference. Sometimes it takes us 3 and 5 years to actually gain share on the corporate side even after we call on them month after month after month. And eventually, they say, you know what, you're the only banker that's actually been with the same institution since you started calling on me. So come see me, we're going to do something with you. So it's a good strategy, so I don't blame them for doing it. But we're doing just fine being a couple of years ahead of the game.

And then I guess when you think about PNC's loan portfolio, it's almost 70% commercial. Is there anything more you can be doing to grow in the consumer side of the house?

A lot of stuff, but it's not going to change the percentages. We have revamped all the technology behind what we do on consumer credit and the front ends and the decision process and the speed and the line sizing and the pricing and the people, which should allow us through time to get a greater share of wallet with our existing customers. We're underpenetrated with our existing customers versus where we should be. And that's on us, and it's an opportunity set. We're never going to be the player that's mass market non-branch-driven retail credit. It's not who we aspire to be. And it would be illogical given our strategic plan for us to acquire a consumer credit company that just did that, right, simply because, hey, it's an asset type. Look, the bank that's probably the best this in the world in the U.S. trades at book value. So it's not a big value driver for us.

Got it. And maybe just sticking with the balance sheet. Deposit dynamics have certainly been in focus. In just in terms of what you -- maybe some color in terms of what you're seeing in terms of deposit behavior, maybe mix balances...

It's been positive this quarter. So noninterest-bearing has been stable. We have grown deposits largely on the corporate side. So you'll see just because of the mix shift, our total deposit costs go up a couple of basis points, but it's mix shift more than anything else, not -- I saw some comments on people saying there's big deposit competition. I don't know that we see that.

And I guess a couple of basis points last quarter interest-bearing deposit costs feels like...

Yes, some of it -- there's 2 different things. One, if you simply get more corporate deposits as a percentage relative to your -- so your growth is coming from corporate, which is more expensive, you're going to see that mix shift. And the second thing is on the consumer side, at the margin, we're repricing a back book as people roll CDs and so forth. So that has an impact, but a smaller impact.

So presumably, the Fed is going to cut next week. Can you maybe just talk to kind of what impact that has? I think betas have been kind of in the high 40% range. Is that how to think about it?

That should hold. Yes. I mean we ought to behave the same way we did through the last cuts.

And then one thing that caught my attention when we're kind of rereading transcripts to prepare for the conference was your comments on the second quarter call in terms of how you're thinking about deposit pricing elasticity, especially in some of the newer markets. Maybe just dig deeper into that and talk about how you're balancing this idea of growing deposit share in key markets while staying disciplined in your approach to deposit pricing.

What I said that, and I'll say now is we're thinking about it, right? So our focus has been on growing households. Ultimately, that will lead to deposit growth. Yet we recognize the investment in new branches, particularly as we saturate a newer market, could benefit in effect from pricing up deposits. It'd be geo-fenced and everything else. I'm not sure it's worth it, and I'm not sure it's actually long-term value creating, but it's a conversation that we're having at the moment. I don't know that you would necessarily see it inside of our large numbers. But if the headline somebody gets us is, oh, I'm growing deposits in this region at this pace, yet they're paying way over market to do it. Maybe good optics and bad economics and should you play a little of that game? I don't know yet.

Got it. Why don't we put up the next ARS question. And just maybe kind of tying together Bill, you talked about loans and deposits. Maybe just talk about NII growth.

Well, this will be good. Just looking at this.

Well, let me see this, and we'll get to that.

I don't know the answer to that.

We have obviously visibility into NII growth for this year, which you started to lay out, I think, 2 years ago at this conference. You increased your full year NII guide in July. I think you were talking about NII up 7% for the full year, up 3% in the third quarter. I'm not sure you're thinking about that, if you want to update that? And just how you're starting to think about momentum into next year?

So next year, we've talked about this, and we'll put some numbers out at the turn of the year or something. But you should expect largely driven off of asset repricing that the growth trajectory that we've seen in '25, you'd see again in '26. I mean it's just -- it's kind of math under the assumption that the yield curve stays anywhere near where it is today. And we have been selectively locking in those forward rates, remembering that we're -- I got to look. Remembering that we're rolling off 1.5%, 2% assets. And if we're rolling into 4%, it's a huge increase. So anything is better than what we had. We're locking some of it, and it's pretty predictable, and it's an easy statement to make.

So I think this year, you've talked about NII up 7%. So '26 looks like the room is not fully at 7%...

I can't help that.

I guess maybe just talk about NIM. You've talked about, I think it's on the call NIM approaching 2.90% by the end of the year, maybe approaching 3% sometime next year. In terms of the declining rate environment, where do you think PNC should operate in terms of NIM? And can we get above 3% at some point?

Yes. Historically, we've been -- I don't know, was it 2.70% to 3%, and we ought to flow through that next year by a bit. We do have the potential to go higher, at least based on my view of forward rates. I think we're going to have a pretty steep curve. I think even if the Fed starts cutting in the front end, I'm not a believer that the back end is going to rally and that bodes well for our net interest margin and net interest income. So we operate in an otherwise normal world, somewhere around 3%, but we might see a period where it's a bit better than that.

And that's -- I think it was 2.80% in the second quarter. So, yes. Some improvement from there. I guess maybe moving on to the fee income side of the house. I guess in July, you kind of trimmed the full year guide. I think you said up 4% to 5% versus up 5% prior. Obviously, it was an uncertain market. It feels like it's a little bit more certain now. Just maybe talk to anything you've seen so far in the third quarter that suggests that uncertainty abating is kind of translating into those revenues.

We had a bit of a hiccup on our private equity book and that realizations were kind of delayed. And so what you should assume is everything we thought at the start of the year, absent that little piece is now kind of on its same path. We've seen good growth in capital markets, syndications, Harris Williams back on track as that backlog starts to clear, which is actually pretty bullish for the economy. So now we feel good about our fee guide. Kind of it literally was -- there was like a month of -- we had a miss on a couple of deals in private equity and then Harris Williams had an off month, and it kind of took us off what is otherwise now the same growth rate.

Got it. Maybe dive a little bit deeper into capital markets. You touched on a pickup in activity there. Harris Williams is M&A shop. We've seen a big pickup in just kind of the publicly announced transaction. Talk to the outlook.

Things are moving, right? We talked about even when they were slow, these record backlogs. By the way, there's still a record backlog, but deals are starting to kind of move through the pipe and this whole notion of buyers and sellers are just in different places is starting to close, and we've seen a lot of activity this quarter.

And then treasury management is something you've been talking about for a long time. It seems like a lot of banks are newer to talking about it, at least at this conference, like a lot of them talked about it in the last couple of days. Maybe just talk about what you're offering when you kind of say treasury management is versus others? Are they kind of catching up to? And is that becoming maybe less of a differentiator for PNC as others kind of catch on to that?

It's a cool thing to say. I'm going to be the primacy bank and offer treasury management and treasury management can mean somebody has a DDA account with you or it can mean that you're netting their global FX and netting their global cash settlement means many different things. We've been investing in it for years. And during the course of that investment, we've taken our entire tech stack, both in TM, but also in our core franchise and basically made it cloud native and micro services. Why is that important? So today, if you use Oracle as your ERM system or any number of other ones, you can actually load our products into that through APIs. We're, I think, unique in the ability to do that. We're like -- we're in a whole generation down the road, I think, of people who are just waking up to the opportunity set in this market. And I think it's just huge barriers to entry. It's a product that when you get in the door with a basic product, the upsell opportunity is continuous. The menu never really ends. The retention rate for us is 98%. You'll remember, I don't know -- I think it might have been at your conference, we talked about we're #1 in every category of TM across the country as we measure this through surveys. So I get why people want to do it. It's a $4 billion business for us. We grow it at double digits, low double digit, and we'll keep doing that. We'll keep investing in it, and we keep gaining share in it.

Got it. Maybe put up the next ARS question. I guess as we shift gears to expenses, historically, you talked about this continuous improvement program to kind of fund the portion of technology investment. Maybe just kind of dig deeper into your expense base, how you're thinking about the comp position evolving over time, particularly as you continue to invest in technology, AI and whether that might become a more meaningful portion of your expense base going forward?

Yes. It's a great question. So if you track back through time, you would have seen our expense base shift from occupancy into equipment, which is our tech line. You see personnel costs up, but personnel headcount largely flat. So the cost of people going up is the degree of expertise that we have across things increases. That continues. The introduction of AI I don't know, we spent $50 million today on it or something, probably not including what we put into our data center complex. Where you're likely to see the biggest impact of that away from the impact you don't see today in fraud and other things that save us money is in headcount related to technology, right? So agentic AI and the ability we're using it today to create, for example, the top of the screen new mobile experience we'll have. We don't need the coders anymore. We need the engineers and the people who can describe the outcome they want. So you end up describing to an agent that's an AI agent, how to create this screen. I want it to look like this. I want to bring this balance here. I want the other balance below it. And because everything we build is micro services, the AI agent can actually simply write the script to connect the micro services to produce that above-the-screen instance. That massively changes the number of programmers that we need through time. The way it will show up for us is probably in a much lower consultant expense. You don't see it, but our headcount, you have base level employees and then you augment it with consultants up or down depending on the project. That number ought to come down through time pretty aggressively.

And we asked the room what they think about expense growth for next year as you start to enter the 2026 budgeting process. So they looked like up 2% to 3%...

I don't know yet.

Looks good. It's a bar chart.

Normal distribution there.

Let's see. Certainly equates to nice positive operating leverage. If you take what they said on the 6% to 7% NII growth, call it, 2% to 3% expense growth, continued fee growth. Just maybe on the credit quality front hasn't really been a big topic at this conference, but there's a lot of tariff-induced pressure in certain pockets of commercial. Maybe what are you watching? What are you monitoring? Any areas of concern?

By and large, our clients in corporate America has kind of figured out how to deal with this. I think everybody was shocked on tariff day, whatever the word is. And subsequent to that have come up with all their battle plans of I'm going to source differently here, I'm going to pass this along. I'm going to eat some of this. And so everybody has a playbook dependent on what happens ultimately with tariffs. And inside of our credit book, as we go through our book, you saw us take some tariff-specific qualitative reserves first or second quarter or maybe both. That was largely around the assumption that margins would decrease and we would have downgrades at the margin because corporate margins, which are at records would decline. The people who really get crunched are the ones who are entirely dependent on tariff impacted imports as their core cost of goods sold. A lot of that's in small business. And in small business, they're bigger depositors than they are borrowers. So it doesn't really -- we're not particularly worried about it other than the impact potentially to the broader economy.

And then office CRE is an area of focus for the market. I know you're not as big in that, but last year at this conference, you made the comment we're only in the first inning of that cycle. Just how has that evolved over the last year and where you say we are in the office credit cycle?

So in our -- remember, we focus on kind of our multi-tenant office space. And I think we still hold 17% reserves against that book, which there's plenty. What's changed last year to this year is we've dropped our balances as we've resolved a bunch of these. But importantly, a year ago, if you were taking a building to market, you might see one bid on it. Today, you see 5 or 6. And so there's credibility now in your assumed appraisals because you see transactions, the levels are terrible, but it gives us a high degree of confidence vis-a-vis our reserves and our ability to go forward from here.

Got it. I guess you own Midland servicing, I guess, anything observations from that you'd like to share that you're seeing in terms of the overall.

Look, their balances are up at the margin, not a lot. They're turning properties. Same thing. The bulk of what they're seeing is office, but there's bids in the market, and they're moving their way through it.

And I guess on the capital front, once again, you're kind of at the regulatory minimum in terms of the SCP-driven requirement. Maybe just talk to kind of capitals for managing or priorities for managing capital at that 10.5% CET1 ratio. Is that the right number? And just how do you think about that and just the whole AOCI impact?

Well, I assume -- I think it's a safe assumption. AOCI is going to roll into our capital ratio. That's fine. We'll change the way we manage the balance sheet in terms of which buckets we put duration in. We're still well capitalized. You count it. You don't count it, you count anything you want. We're well capitalized. The binding constraint today is more Moody's than it is any of our regulatory ratios. Our SCB, we got to 2.5%, but we were well below that. I think we had the lowest drawdown again versus any of our peers. And I can't explain Moody's math as to why they think we need to hold that. But that's a constraint, and that's what you'll hear from probably all of our peers in terms of what's keeping us where we are.

Got it. Maybe we'll put up the next ARS question. We should add -- should acquire another bank to #2. But I guess, against that backdrop, maybe just talk a bit more, obviously, growing the franchise is the #1 priority. Buyback has been modest. How does that fit in? I know in the deck, yes, on Monday, it said kind of the deal doesn't impact your buyback program. Just maybe elaborate on that because I guess the buyback pace has been relatively modest and just how you think about that versus the other opportunities.

I mean we'll update this perhaps in the third quarter. But you should assume at the margin that we'll do more than we've been doing. If it was up to me, we would have done a lot more cash in this deal and knocked our ratio down. The sellers love our stock. So it is what it is. We hold capital in the first instance to support our clients and grow our loan book, but we have a lot of capital. And typically, we have an ability to generate more capital than we can intelligently deploy. So we offer a healthy dividend and buyback during the ordinary course, and we'll keep doing that.

And I guess just staying on the topic of M&A, in addition to the transaction you announced Monday, starting to see activity pick up within the industry. We've definitely had a few other announcements over the past few months. Do you think this is a function of a more kind of friendly regulatory environment? Are we starting to see other banks recognize the need for scale, which you've been very vocal about. Just maybe talk to that.

We've seen -- look, every deal is unique. Regulatory environment is easier, but you heard me say in the prior administration, I thought we could get a deal done, and I believe that to be true. Maybe it's a little bit easier at the margin now. And by the way, FirstBank is really simple integration-wise. It's super low risk, simple products, great people. It's just not a big deal on pulling that thing together. But every deal is unique. And as I kind of said earlier, banks need to be up for sale. Smaller banks are coming to the conclusion at the margin that it's tough for them to compete and they see eroding franchise value. There's not a lot of -- we don't have a lot of interest in a typical smaller bank in terms of where they're valued today. So you see a lot of little banks getting together with what I would suggest is maybe inflated currency. But there are some gems out there. We found one of them. So it's just -- you look at what's out there and you make a decision as to whether or not you'd rather pursue organic growth because we kind of know the return in doing that takes longer but we know we can succeed at it or if an opportunity arises, you do it. The whole big bank, are you going to do some giant bank deal to cement your size, some big -- none of that, that's banker talk. That's not PNC talk, right? That's -- if one of those things made sense for our franchise and it made sense for our shareholders and you actually had somebody who had any interest whatsoever in pursuing it with us, we'd look at it. None of that's true right now.

Got it. It looks like the #1 answer is to do additional bank acquisitions in the Southeast and Southwest from the audience. So that's not always the case for every bank.

What did this look like for other banks?

More buyback is -- don't do deals, do buyback instead. We have some time left. I'm not sure if there's any question or 2 from the audience. I guess, Bill, I'll ask the next one, rather shy. But maybe talk about the recent announcement with Coinbase. Certainly, the segment is getting a lot of attention. But what does this mean for kind of PNC? And just how you're thinking about PNC strategy on crypto or stablecoin?

Yes. So we've known Coinbase kind of since the beginning. And back pre the regulatory freeze on crypto, we were actually close to bringing them on as a white label supporter for our wealth clients and ultimately retail. So we did that. It's a simple thing. They have great technology. We bring it on to our systems. we'll merge it into our mobile and online apps and allow our customers to trade crypto and see their balances if they want to do that. I don't know that it's any sort of moneymaker for us, but I think if that's going to be a thing that people want to do, we need to offer it as kind of table stakes. Same for our corporate clients, if and when -- I don't think it will be, but if and when it becomes a payment mechanism, the corporates want to use, it will just be one of the menu items in our treasury management suite along with real-time payments and wires and ACH and so on and so forth. The other side of that was just our banking relationship with Coinbase, which was also prohibited, but is taking our TM suite and offering it to them as a corporate client. And not surprisingly, they move a lot of fiat currency and have a lot of deposits. So it's pretty exciting to us.

Got it. Any other questions?

[indiscernible]

I think we put it in the press release, but it's like 10 basis points by the time the thing closes.

The question for those listening in was what the capital impact of the recent acquisition to CET1. I see one over there. The question was the impact of stablecoins on PNC's business model.

So we are involved. I'm involved in industry-based conversations as to whether or not one of our industry utilities should promote its own stablecoin and/or build rails to move that. And it's likely you'll see an announcement in the not-distant future that we will talk about an industry offering. Domestically, it's a real struggle to find a use case that makes sense for stablecoin other than onboarding on the blockchain to be able to trade Bitcoin. It is not cheaper as a payment rail. Doesn't pay more interest than everybody assumes, I think, correctly that whatever interest is earned by the issuer is going to be taken away by rewards pretty instantaneously. But we'll see. I think we look at international transfers and then importantly, unrelated to kind of how it impacts PNC, I worry a lot about the dollarization of smaller countries because there is a real use case for individuals in foreign countries with volatile currencies who want to hold dollars to use stablecoin to do that. So that's almost a savings mechanism, and it's one that has afforded consumers in foreign countries in a way that doesn't have to go through the same AML restrictions that we would offer should they want to open up a bank account. So that's kind of a regulatory arbitrage that at some point in the future is going to be figured out and shut down, but not today. So our business model, it's all -- we can do anything anybody wants to do in stablecoin, but I don't see it as a big change agent in our payments business or in our revenue model.

Maybe I'll ask the final word. But Bill, maybe just at a high level, just kind of what excites you most about PNC's position in the industry and just the longer-term growth opportunity?

It's just the new markets we're in. I mean it's hard to describe unless you are trying to grow your business in Pittsburgh, where we have 60% market share. The shots on goal you get in these new markets with new people moving into the markets, but just the number of corporate clients who are either there or moving there is phenomenal. And we're good at winning business. We go head-to-head with people. We win business. We have great bankers, and we continue to hire more, and we have a great product set. And I can remember at points in my career and at PNC early on where you'd look and you'd say, how can -- like I don't know how to make this bigger, right? Because you can't invent your way into a new product, you can't -- there's no financial alchemy. I mean there is, but it always leads to tiers. And in front of us today is this giant menu of new markets and growth opportunity that we just need to execute on. No big stretches, no change in products, no new focus on this strategy or that strategy or selling this or buying that, just going to work every day. And it's just staring us in the face. It's huge.

On that note, please join me in thanking Bill for his time today.