The PNC Financial Services Group, Inc. ($PNC)

As many of you know, PNC Financial Services Group has a market cap of about $80 billion. Total assets now are about $574 billion. The stock trades at about 1.8x tangible book and it has over 2,400 branches throughout the United States. With us today, we're pleased to have Mike Thomas, Executive Vice President and Head of Corporate and Institutional Banking. He's had a 27-year career with PNC and he has headed up the real estate area in the past as well as having many of their divisions like Midland loan services report up to them. So we're really pleased that you're able to join us today, Michael.

Thanks for having us. Great to be...

Maybe let's start off one of the topics for this year for the industry, specifically for PNC, it's about commercial and industrial loan demand. And so can you talk to us about what you're seeing? What are the drivers of that? And what's the outlook you think for 2026?

Yes. Well, we've had really good growth out of our C&I book. We have really 2 things going on last year. Once Liberation day came and the volatility entered the market, we do what we always do. We spend a lot of time with clients trying to help them kind of work their way through the difficulties. We thought we would have some struggles at the beginning of the year. It was a little bit slower, but we came on strong towards the end. We ended up with really good momentum. And that was driven by pretty broad-based activity across C&I, at the same time, we were working through some issues within the real estate book related to office, which have been well documented. So that was a bit of a headwind. All in all, we ended up with about a 9% growth in the fourth quarter, which was really good, solid growth for us. In the C&I book, we were down a bit as we expected to be and had planned for within real estate. So ended up the year with about 5% growth in that book. And as I say, it was really led by -- across our corporate banking book in our business credit area as well. Our ABL teams have had some good growth. So we would expect that to continue into '26. The good thing for us is from a real estate perspective, we think we're at the tail end of the reduction in that book. And so we'll begin to see some inflection, which I'm sure we'll get into here. But overall, the clients have weathered the volatility really, really well. Shockingly for us, we've heard from a lot of them that the volatility that they've had to navigate really since the pandemic has made them a much more responsive business and they've learned to deal with the tariffs, et cetera. So they've built resiliency into the business, which helped them to grow over the last year.

That's such an important point, I think, which investors sometimes overlook about the pandemic, what your customers and other corporates had to go through to get through that. And now the resiliency that they're seeing from that, those lessons.

Yes, we've had some surprises as we've talked to clients and we did a survey of our C&I clients last year and they came back and said that they actually thought that, that volatility had net-net helped their business, which is a very surprising result for us sure. Now certainly, we've seen impacts. If you look at consumer discretionary, consumer staples, some other places, you've seen margin compression in a couple of those but they've largely been able to pass along a lot of the tariff impacts and -- but they've gotten very flexible in their supply chain management. They've gotten much more efficient, and it's allowed them to be better businesses.

Got it. I know we'll talk about real estate in a second, but coming somewhat linked to it. We've seen the stories of all the data centers being built in the United States. But from the C&I side, are you guys seeing any evidence of the guys -- the folks in the field saying that the HVAC company or others that have lines of credit or drawing on them to fulfill their business and building out these data centers?

Well, we do see some of that. And we've got businesses that, I think, intersect well with data centers at the periphery. We do some data center lending. It's a relatively small part of our book. We've got about $2 billion or so of exposure to the large data center companies. But we also do equipment finance. We do some renewable energy project finance, et cetera. That is -- as an adjacency to the data centers. And as you say, HVAC and lots of other places intersect with that industry, and we have seen some pickup in business for sure in some of those places.

Got it. Coming now to real estate. As you pointed out, it looks like you're at the tail end. Rob has talked about Rob Riley maybe an inflection in commercial real estate portfolio this year. Maybe share with us when do you think it could inflect in any specific areas within real estate its such a broad category where you could see some growth?

Yes. Well, we're beginning to see it now. We still think that we've got a shot at seeing that inflect in the second quarter. Now what we'll actually see from a spot basis in the first quarter, we'll see some growth for the first time. But on an average loan basis, I think that will -- there's a timing issue there that will slip into the second quarter. Most importantly, if you look at our pipelines, we're about 300% up in our real estate banking lending book from a pipeline perspective. So the opportunities are there. And it's -- again, it's fairly broad-based. We've been more focused on multifamily in recent years because we continue to have a housing shortage in this country. And so lots of opportunity there. But importantly, there are some other places that have been underinvested in over the course of the last few years coming out of the pandemic because there's just been a deemphasis on real estate. So if you think about retail, for example, at one point, it seemed like retail was a dead industry for us. But the lack of investment there over the last couple of years has actually really strengthened the performance in the retail book. So we're beginning to see some more investment that's coming. We think we'll see opportunity there. And then industrial and warehouse, again, had also slipped a bit over the last few years, and we're beginning to see some more opportunities there. And even in the office space, as that's gotten cleaned up, we had a -- post our BBVA acquisition, we peaked at about $10 billion of office exposure. We're down to right around half of that today. The books gotten cleaned up. Performance is strength and you've seen a lot more return to office mandates and as a result, in places like New York and a couple of other strong markets, we've actually had opportunities to go and do some additional lending into office as well that have been pretty strong with really strong sponsors. So I think we'll see more broad-based real estate opportunities going into the remainder of the year.

Got it. And -- are those opportunities more in the construction loan side or commercial real estate mortgage side when the pipeline is up that much, they mostly construction loans or mortgages a combination of both?

Well, it's a combination. We'll see it in construction for sure. But real estate investment trust, for example, will have more opportunities this year. So we'll do more financing there. We've got some opportunities to do fixed rate mortgages, some 3- to 5-year term loan sorts of loans for multifamily. So you'll see it in a lot of different places. Importantly for us, our real estate business is not just a lending business. We do a lot of things there. So the commercial loan servicing business is impacted positively when you have more activity, you start to see more CMBS activity. We get a lot of business that comes through our multifamily platform. So we do long-term fixed rate loans for Fannie and Freddie. We do tax credit investing. All of those things are impacted when real estate starts to come back, and we've seen great activity in all those places.

One of the questions that investors are wrestling with is deposit growth. And when you look at the loan-to-deposit ratios for the industry, they're still low relative to history. But now as loan growth accelerates, could we see more competition for deposits? What are you guys seeing on the commercial -- the corporate side, obviously, in the consumer. But what are you seeing on that from a deposit standpoint?

Yes. Well, I think the deposit competition is always strong. So we're always in a fight for deposit side. We had some good growth last year, we were up about 8% versus our 5% growth on the loan side. So we did reasonably well. And maybe most importantly, we were able to do that without impacting our rate paid. And I think a lot of that was because we had new client growth. We did see some defensive building of liquidity for our clients as well. So there are a number of reasons that we got that growth, but we had strong results, and we're continuing to see that. We've been very disciplined about how we pay rate there. And as we've seen the Fed cuts come, we've maintained our ability to move our deposits. The deposit beta has been about 85% last year. We expect it to continue to be somewhere in the mid-80s. So I think we will continue to do reasonably well there.

And coming back to the pandemic again and resiliency, are your customers keeping more deposits on hand just for liquidity purposes due to what we went through during the pandemic or no this we're back to pre-pandemic kind of thinking?

Well, in some cases, yes. I'm not sure I would make a broader statement about what they're doing there. I think coming out of the pandemic, they become more efficient generally. What you did see in light of Liberation Day was the buildup of inventories to try and get through that. And so you saw some drawdown within individual businesses so that they could fund inventory. They've worked through a lot of that as we've gotten through the year. And I think now it's pretty much BAU. Although the uncertainty in the market certainly causes them to think about having more balances on average than they've historically had.

The markets are very concerned about what's going on in the software lending area that you're well aware of and the potential disruption from AI. Can you share with us your exposures there? And what are you guys doing to manage the risk and also may be some opportunities that might arise.

Yes. And what's interesting. So our biggest exposure there is in our recurring revenue book. That's about, call it, $5 billion, $5.3 billion in exposure. And maybe we'll spend a second just talking about what we do there. We've been focused on managing that book actively for years now. We've been in the space for 15 years plus. But we lend in a super senior position. We lend in that book out of our business -- what we call business credit. It's the place where we have the most active management and scrutiny of our portfolio. We are, call it, 1x recurring revenue. From a leverage perspective, we are often backed by last out capital there. It's all private equity-owned firms, the valuations on that book are routinely in the, call it, 6 to 8x. So we've got the right leverage. We've also got the right structure. We've got covenants that allow us to be first at the table. We can control whether or not we need to sell the loan, sell the company, pull more cash flow into the loan. So we've got a lot of ability to impact our outcomes there. But maybe most importantly for us, and this is applicable to lots of places within our book, it's client selection. So we think a lot about AI, and we have been for a few years now. And we try to make sure that we're banking companies that have a very strong business model. And what I mean when I say that is they need to be part of the system of record for their customers. They need to be heavily woven into the business of their customer we like them to have what we call a little bit of a moat around their business. Now there's nothing that's not going to be impacted at some level with AI. But we believe if they've got really good data that's proprietary that insulates them a little bit from the large language models that are coming in, that are really helpful. And we also like to bank innovators. So I think one thing that gets lost in some of this conversation is a lot of these software firms are incorporating AI solutions into their business. So they're not just sitting there waiting to be picked off. In many cases, they're the ones that are going to be doing the picking off, so to speak. So we spent a lot of time thinking about this portfolio and these businesses. We have a team that's very experienced. The equity and the debt that's behind us is also very experienced, specifically in technology and software and we do quarterly portfolio reviews. And every single time we have some loan credit action, we assess it not just for the current performance, but we also assess it for impacts from AI, et cetera. So that's a book that continues to perform well. We haven't had any issues, knock on wood there. But we manage it closely.

Sure. Speaking of AI, just to follow up. Obviously, there's a lot of concern that AI could lead to some meaningful layoffs, higher unemployment rate in this country. And when you guys think about that, are you looking at it differently with your underwriting? Like you said, you've been in the business for quite some time. Share with us what you're thinking now where maybe there could be elevated unemployment?

Yes. Well, I think we try to underwrite on a through-the-cycle basis. So we don't change our credit box. We don't change the way that we think about underwriting unless we have a real reason to think there's been some sort of a sea change. We haven't seen that show up in our book. But certainly, as we underwrite transactions, we think about the impacts of AI, not only on that business, but on the general economy. So as I say, we haven't really seen it show up yet in the books. I think there are going to be gives and gets. There'll be folks that get hurt, there are going to be folks that improve. And that's a big part of how we think about underwriting generally.

Yes. Absolutely. Someday I'll be AI robot it appears. How about -- when you -- outside of the whole AI software discussion, are there any other areas of credit that you're keeping your eye on? Not the downtown office, which you guys are very clear about. But outside those 2 areas, anything else that you're keeping an eye on?

Well, there's nothing specific. I think in a moment of volatility like we're seeing today, there are obvious areas that you want to take a look at. So when you think about the conflicts in Iran, there are energy impacts. There will be some benefits there certainly within the -- some of our companies, but there will be others that will be impacted transportation, trucking, those sorts of places by higher energy prices to the extent that this is not transitory. So we think about that. We certainly think a lot about the consumer in all of this. So if we get to a place where we think we start to see a pickup in inflation again and how that might impact the consumer, given the K-shaped economy that we've got, you start to think a lot more about consumer discretionary, consumer staples, those sorts of things. But there's nothing right now that has popped up as a particular area of concern. It's more kind of general shock to the system and how do you model that through your portfolio by portfolio.

Got it. One of the tailwinds or bank stock investors aside from the credit being benign generally is the regulatory changes in Basel III endgame proposals should be coming in the next 2 to 3 weeks apparently from what we're hearing. Can you share with us how it might impact your business -- the capital ratios within your business and what you're looking for potentially in this proposal?

Yes. Well, I think the most important thing is what we think that we might get is not going to impact our minimum capital. We'll have plenty of cushion there to our 7%. And it won't really impact or move the needle on how we do our business. We're always thinking about capital efficiency. But we do think that we'll get some relief from a risk-weighted assets perspective, I think as much as $40 billion of risk-weighted assets. We could get some relief there. That's largely related to how they treat investment-grade assets. Before you were really looking for investment-grade assets that had a public security we may now have the ability to look at assets that don't have a public security attached to it. So that would allow us to include more of our book. There's also some positive impact potentially to how we think about mortgages and mortgage servicing that I think would be helpful. We do expect also that ACI would be included. But we'll see. When the proposal comes out, we'll take a look at it, and we'll react accordingly. But I don't think it has a material impact to how we operate the business.

Got it. Okay. if we can pivot over and shift over to fees, one of the hallmarks of B&C is the treasury management business and it continues to grow. Can you share with us the outlook here for the treasury management business, but also everybody seems to be rushing into treasury management you guys have been doing it for a while. But just -- how do you differentiate yourself from maybe the new players coming in and doing it and share with your thinking there?

Well, I think first of all, -- it's a big business for us. It's probably $4 billion plus in revenue, roughly 40% or so of our business. So it's a big business. We've gotten there through a lot of investment. It's a business that has a need for continuous innovation, technology investment. So that's difficult for folks that want to rush into the business. It tends to be a pretty big barrier to entry. But in terms of how we differentiate ourselves, I think it's really how we go to market in that business. Treasury management is a place where you can get really close to your client. And that works well with how we think about client management. We're a high-touch business despite the fact that we bring really sophisticated products and capabilities, advisory capabilities, et cetera, we try to be high touch with our clients. And coming to them with a platform approach to treasury management, where we talk about their holistic business, we embed ourselves in the payments that they do with their customers. that all lends itself to what we like to do in helping people to run their businesses better. So I think it's our approach and how we partner with our clients to be able to do their business better. That's really what's allowed us to get the growth that we've gotten.

Certainly. As part of that whole fee structure, you also have access, obviously, the capital market products to help your clients with those needs. Maybe you can share with us how is it complementary to the treasury products of the capital markets and how do you leverage the full suite of products where you give the plethora of products to your customers?

Yes. Well, it's a great point because again, if I go back to how we think about client management, we are trying to be great partners to great businesses, and that means wrapping our arms around them with all the things that we do well. And we put the client front and center. So we're very focused on issuers and all of the capabilities that we've built out within that space, whether it's Harris Williams, it's Solbury the continuous build-out of our debt capital markets businesses -- all of that has been very focused on being a good advisory partner for them. So what does that mean in practice? It means that our product partners are calling alongside our bankers very, very often in the field with our clients, even if there's not a particular deal on the table. So from an advisory standpoint, that's actually really, really helpful. Because we become go-to for solutions. And then when there is an opportunity to transact, we're hopefully at the front of the line. And so our debt capital markets bankers are rates and FX bankers, our advisory teams, we actually have a team that advises just on value creation and value drivers and kind of the nuts and bolts of how companies run their business, they will all go out with our bankers and spend lots of time with clients. And just having that ecosystem available to them all the time is a huge impact for our clients and builds trust, and that's how we've been able to grow those businesses.

Sure, sticking with capital markets. There's been a fair amount of optimism about the capital markets business this year. Some of the larger banks have given thoughts that year-over-year, we could see mid-teen growth in your investment banking activities. Can you share with us what you're seeing in activity, your pipelines in this area?

Well, our pipelines continue to be strong. We had a really strong year last year in debt capital markets in our rates business, FX business. We would see that continuing into the first quarter here. And we would expect that we'll have mid- to high single-digit growth in the advisory businesses and capital markets businesses. So those are still working well. As we got to the end of last year, we really strengthened in Harris Williams pipeline. We'll be up -- I think at the end of the fourth quarter, we were up 50% on the pipeline for Harris Williams and up over 30% in the pipeline for Solebury. And we've had similar kinds of pipeline strength within the capital markets businesses as well. Fortunately, we continue to see -- even despite the volatility, the markets are operating in an orderly way. They're very constructive around debt issuances. So we're getting all of the opportunities that we expected to get so far. And so we're pretty happy with the momentum.

Got it. And that growth you mentioned is a year-over-year number on the capital margin. We've recently seen some acquisitions, some of your peers buying capabilities. Are there any areas that you may want to fill in with an acquisition? Or are you comfortable with the products that you currently have?

Yes. I mean I think we're always looking. We actually just bought a business last year that provides some advisory services on capital raising into the private equity space We've, over time, bought some other Solbury and Harris Williams were notable years ago. And then we've done more in the treasury management space as of late. So we're always looking for opportunities. We don't see a big hole there today based on what we hear from our clients and how we're advising them that we think we've got to fill, but we're open to it.

Got it. PNC has done a good job of expanding into other geographies, especially with your area and also increasing productivity in existing markets. How much more on the productivity side do you see in the existing markets? And then also, can more improvements come from the expansion markets as well?

Yes. Well, that's our most exciting opportunity. We've talked about it quite a bit. I think there's lots of room there, which is the most exciting part because we've had great growth. And as you know, it takes a long time in many of these markets to be able to grow our client relationships. As you enter into some of the BBVA markets, which is where we've had the highest levels of growth. In many cases, you're encountering clients that don't know your name very well. And that can take 2 or 3 years to really get in and get the right opportunity with them. So we're now at that place where we've had lots of connectivity, we've spent lots of time with them and we think that, that will bear fruit. But even with that kind of long runway we've still been able to make great progress. So we had 700 new clients that we -- that were largely concentrated in expansion markets in the Southwest. And we've grown by, I think, 150% our new lead relationships and syndicated facilities in those same markets over the course of the last year. And that momentum continues. So I'd love to see that at the same time that we think that we've just scratched the surfaces in markets like L.A. and San Diego and San Francisco and markets in Texas, where we've got still relatively small market share. So we'll continue to go after that opportunity. We'll build out teams as we grow. I think we've got lots of opportunity to continue to grow. The other thing that's really, I think, exciting for us was the first bank acquisition. So that's -- Denver was a market where we had strong teams. But now we have the opportunity to go to market where we've actually got the largest market share. And from a name recognition standpoint and a client relationship standpoint, we lead to the front of the line. And that's really exciting for our teams. It's largely been talked about as a retail story and small business, but it's actually going to impact us into C&IB as well. And so our commercial bankers, our real estate bankers are tax credit multifamily bankers, all of a sudden have access to a set of clients who have great client relationships but did not have the ability to access a lot of the more sophisticated products and capabilities that PNC has. So I think it's going to be an unbelievable opportunity for us to grow in that market as well. With this growth, how do you guys balance the growth versus prudent risk management, Yes. Well, I think the best way for us to do that is to maintain our commitment to being ourselves. We've got a long history. It's 160-plus years of doing this. We've been growing and expanding for quite some time. We really started the expansion in 2012 with RBC, and we've continued that. And every step along the way, we've been very, very disciplined about how we go into these markets. Our credit box, as I mentioned earlier, doesn't stretch and change because we're in a new market or we're encountering a new industry. So I think that's the important thing is it just continue to operate the way that we have because the growth has been there and we haven't felt like we needed to go and do something different. It's important to us that we show up in our communities that we're serving all of our constituencies. So we have this regional president model that we talk about a lot. That's important for how we show up in a market and really serve our community, our customers, our employees and our clients. And when we get there and we put that team on the ground, and we're showing up with one set of solutions that's all coordinated and people see that we're serious about being there for the long run. That works. That moves the needle. So as long as we're doing that, we maintain our discipline. We've got plenty of opportunity to grow without doing anything outside of our risk appetite.

Good. Well, we're running out of time, but I would like to wrap up the discussion on just if you could summarize the strategic priorities for your business and how those priorities will position your group for sustainable growth in success in the upcoming years?

Yes. Well, we touched on a couple of them already. The expansion markets are by far our largest opportunity. When we think about the growth that we're going to get over the next 5 years. There's probably 40% of it or so that comes from our expansion market opportunities. That's across everything that we do. And we're capitalizing on that. We've got good new client growth. We've got the right teams calling on it. We make sure that we have good continuity with our teams, good employee retention, et cetera. And so that's a big opportunity that we'll continue to go after. Next is treasury management, which we talked about as well. That is a very important business for us for a lot of reasons. First of all, the growth has been significant. It is a very sticky business for us. Our client retention there is about 98%. So that allows us to maintain great relationships and get really embedded into and close to our clients. And that helps to drive the larger relationship with all the products that we go after and we continue to invest there. And then we also are very focused on building out advisory capability within the capital markets businesses. And so for the balance sheet that we've committed, it's important for us to be able to get kind of our fair share of the activity that our clients are engaging in. And increasingly, that's across the capital structure. So our ability to advise them on term loan Bs and other places of the capital markets, loan syndications, their bond businesses, et cetera. just growing our capability there and being able to help them with all of their needs will be really, really important for our growth. Those 3 things are the biggest areas of focus for us.

Well, great. Please join me in a round of applause. Thank you, Mike, for joining us today.

Thank you. Appreciate it.