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

Okay. Great. All right. Up next, we have PNC. We're delighted to have with us today Bill Demchak, Chairman and CEO; Rob Reilly, CFO. Bill, Rob, thanks so much for joining us.

Good to be here.

Bill, let's get into the environment as we've been starting a lot of these conversations. You have a broad view into the economy across a diverse set of markets. What are you seeing across the bank? Are you seeing any impact from high energy prices or any of the concerns that are out there in the economy?

We're not. You're not going to hear a different story from us than you're probably getting from all of your clients. Corporate activity is very strong. Capital markets activity very strong. Retail high end or higher net worth consumer spending up 6% year-on-year. Even in the lower income brackets, ex energy spend is still up 3%, 4% year-on-year. Deposit balances across all cohorts are up. So consumer is healthy, a little struggle at the lower side, but I would tell you, even in our consumer book, our delinquencies in card and in other products are materially lower than they were last year. So much better credit this year than last year, healthy consumer, strong corporates things feel good in the moment. Lots of things to worry about in the future. But in the moment, things feel really good.

All right. Rob, maybe you should bring this to the second quarter with about 2/3 of the quarter behind us, how are things tracking?

Yes, I'd say they're tracking well. We're having a good quarter. We guided to having a good quarter, and we're having it. Essentially, our guidance remains where we have it. What I would say, though, is 2 months into the 3-month period, we're probably tracking to the high end of the ranges of our guidance. So revenue, a little bit on the higher end both NII and fees there. So we feel good. And credit remains very good. We've guided to charge-offs of $225 million. And right now, we're tracking right to that. So I expected a good quarter, and we're having a good quarter.

And any updates for the full year?

Yes, we'll hold the full year right now. Obviously, we've got a way to go with the second quarter. And then when we get out into July with our earnings call, we'll have the quarter complete, and we'll have a more near-term vision of the second half, and we can update you then.

All right. Perfect. And then Rob, I know that there's -- that you've disclosed, you intend to participate in the Visa Shale exchange offer this quarter. Can you provide a little bit more detail about that a if you can also tell us how are you going to use the proceeds on that?

Yes. Thanks, Manan. So over and above what I just said about the guidance on our performance, Visa is aside. That's not part of our guidance nor is it contributing to what I just said. What is contributing to what I just said, though, is we did like to participate in the exchange of our B shares, sort of the second installment of that monetization, which will result in a gain for us of about $400 million, a little bit more than that. we'll do what we did similar to the last time we had the exchange, although the exchange was twice the amount. We'll offset that with a foundation contribution, extend the swaps of our remaining B shares. So we'll continue to have another $400 million behind us at some point that we'll exchange. And then we'll take a look, like we did the last time, we'll take a look at some securities. If we got some low-yielding securities, we might reprice some of those. So most of the gain will be offset if there's some that is an offset, that's just some additional capital flexibility. And again, that's on top of the guidance.

And that would be all this quarter and...

All this quarter. Yes.

Okay. Perfect. All right. Great. So with that, maybe we can peel back a little bit Bill, in your CEO letter, you call 2025, one of the strongest years for PNC, and you spoke about not just the organic investments you're making, but also retail scale as billers of the business and pillars of the strategy. So as you look out over the medium term, what are the most important strategic priorities for you?

Well, in the short term, it's the successful conversion of First Bank, which is coming up in a couple of weeks. We're well set up to do that. We've obviously spent a lot of time on it. This build-out of retail where we get density in markets where we already exist, but try to get over 7% market share, the 300 branch builds we've talked about will bring us to over 7% in 26 of the 40 large MSAs or 50 large MSAs that we operate in, up from kind of 14 today, and we'll do that by 2030. We have to get that done. Retail is up for grabs right now and is being consolidated by the largest banks. You gained share when you have 7% presence in a market, including digital share. We open it's the #5, 6, 7x the number of digital account open when we have branch density. So you remember, we tried once upon a time to build 10 branches and open digitally, it didn't work. When you have brand density and open digitally, it's 7x, and that's what we're doing. So that's high on our list. This whole technology agenda reinvesting in our platforms to allow in multiple cases for agentic to take hold. We are building our own AI factory in the back in video, we will have our own GPU compute. We will not be as reliant on burning external tokens than what we will do internally for our own large language models. That's a big deal, not today, tomorrow, even the next day. But ultimately, as we roll forward and the impact that AI can have on the productivity of a bank, that productivity can be taken away by the cost of tokens unless you're optimizing that expense base, which we're doing. And then finally, just the continual execution, which we've had for years in wealth and C&I in particular and taking our model to new markets, being patient, persistent, consistent in our offerings. And there's a very real appetite amongst our C&I clients to bring in a third or fourth bank against the dominant 2 big players in the space, and we wouldn't share because of that. We have more shots on goal because of that, and you see it in our loan growth relative to perhaps some of our competitors.

Yes. I think we'll dig into each of those opportunities. So maybe in the near term, you spoke about the First Bank conversion. I think that's later this month.

Yes.

So how is that integration tracking? What are the competitive dynamics you're seeing in those markets right now?

Mechanically, we've run 3 marks. We're very comfortable with what we're doing. We've actually improved our data factory from the BBVA deal and patented our new data factory, which allows us to do the lift and shift we've talked about for a period of time. The bigger deal with the conversion is how are you keeping wowing your new customers and employees. You remember, we kept all of the frontline employees for First Bank. They are terrific. We spent a lot of time training on new products. By and large, we are lowering fee levels from what First Bank charge to its customers. We've offered, I think, for the first time for any bank conversion, early access to First Bank customers, so you can actually log in, pre-credential your stuff in P&C and get used to our functionality, both on the corporate and the consumer side. We'll have branch buddies in the branches. We've even ended up, and we didn't know this going in. We've actually hired almost 400 of their technologists set up a tech hub in Colorado. It turns out they actually had a lot of very good engineering talent in that bank having built most of their own systems as opposed to relying on vendor. So a lot of good things, a lot of good progress trying to do some things that we got a little bit wrong in BBVA, try to fix those. And importantly, did all of that without stopping anything else in the bank, right, with side -- I don't want to call it a side project because we had people who really worked hard on this. It didn't cause us to lose our strategic momentum and anything else we were trying to accomplish.

Does that make the integration easier than having built their own core systems?

It's a really good question. What happens in a smaller deal is what makes it harder or easier is mapping the products and mapping to data, but an organization has clean data that they know how to define. It's a lot easier for an acquirer, right? We have a data factory. I just need to map their data into my factory and then put it into our applications. If they don't know what their data is, it's hard. First Bank is pretty good.

Got it. All right. So Bill, you spoke about AI. And I think you've said about $1.5 billion of addressable spend that AI can help take out over time. Remind us what the use cases are and longer term, what that means for expense ratios.

In the initial instance, we've identified 200 different opportunities inside of this $1.5 billion spend. The big 5 that were focused on in the immediate term is inside of our care center support commercial mortgage servicing [indiscernible] go through it.

So start with the coding, agentic coding software, which is our largest retail operations, the client care center [indiscernible]

And AML fraud. But part of the reason I'm kind of jumping through those things, what we are and everybody else is doing, right, at the moment is further in the process of automation that we've been going down for the last 20 years. So we're helping -- AI is helping us accelerate some automation. It's not yet changing process and organization structure. And where we spend a lot of time without exact answers yet is this AI-based operating system that allows you to an effect to replace our production line mentality that we do in customer service segments or in development, technology development or many other things, where today, a human being does something or a committee does something. They submit it. It goes through a filter check. It's submitted to the next thing and the next thing. And an AI in an agentic development environment that can all get done through a single agent that's controlling other agents. When that happens and it will happen the productivity opportunity inside of our organization will be well in excess of what we're going to pull out of that $1.5 billion. It's a massive opportunity set for us down the road.

How far out [indiscernible] do you think that is?

I don't think anybody has done it yet. I think there's a couple of large tech companies who are getting close. I don't think anybody has done it in financial services because of the regulatory audit trail that you need to the extent you're going to use a genic for coding. I think it's doable. But the moment you're able to start just changing fundamental process in favor of agenetic process, it pulls an awful lot of cost out and importantly, changes the productivity level in your client service level. you can be very iterative in product development and reacting to things that are in the moment when and if you do that. That kind of goes back to this whole cost equation where you get lots of people now saying, "Hang on a second, these tokens are really expensive," which they are. Part of this engine is making sure that you're building a harness around your development that actually points you to the most efficient compute that oftentimes is at the $35 token, it's the $1.50 token may well be our token inside of our own data centers where we will be running our own open source large language models.

So I want to double click into that because not many are talking about optimizing the cost of tokens there. So I guess, what is the process there? Is it giving people more training? Is it having that overlying layer that allocates the open usage? How do you optimize that cost?

Yes. I don't think -- look, at the end of the day, we just turn people loose to burn tokens, they're going to burn tokens. I think the bill for those tokens go up as they start pricing compute even a breakeven cost, which are not today. A harness against your product development allows you to look at the problem you're trying to solve and choose the best model to solve that problem. And in many instances, you don't need the best model. You need the third best model. Some models are better at mathematical computations, some models are better at text reading and organization, some models are better at simulation. So all you got to figure that out, you need to optimize your spend. The harness that you build in development is what allows you to do that. That harness doesn't exist at scale right now. We have tiny harnesses that run our -- we just built a new rewards platform using agentic. We just built a new mobile banking platform using agentic. They all have very product-specific harnesses around that development that doesn't operate system-wide.

Got it. And then if we think about -- so a lot of that is on the cost side. What about the revenue side? Are there more opportunities there as well?

There's going to be. I mean, at the margin, you'll be more creative in the products you offer. We build our rewards platform, for example, where for the first time ever, we could start rewarding our more affluent customers with multiple products with linkages that improve retention with us. The thing that we think about a lot, though, is how does the whole even being seem to think sequentially. And AI offers the opportunity to just completely gain change what is financial services. I don't know how that's going to happen. I mean some people talk about agentic commerce. I don't know, but that's the thing we spent a lot of time gaming out how does something just fundamentally change in financial services through the availability of this product. That's -- if there's a big revenue shift, that's where it's going to come from.

Okay. Let's pivot on to loan growth. You just noted that PNC has delivered some of the stronger organic loan growth numbers in the peer group. And there's been some strong growth in the expansion markets as well. Can you talk about what's driving that strength in the commercial loan growth side right now?

Look, shots on goal. I mean a couple of things. We -- first of all, we have a strong specialty lending area. Don't read that as higher risk lending area, but rather things that take more than commodity capital. So our asset-based lending, securitization business, equipment finance, real estate business, other things. But secondly, because we planted the seeds back in the newer markets starting in the Southeast with RBC, 10 years ago, 11 years, 13 years. We did BBVA. We opened some new markets cold. We're just doing First Bank. We have very low banker turnover. We hire good people. We keep them. We're patient, persistent, consistent. We call on clients with good ideas. And if you pick the right clients and you call on them for 5 years as bankers turn over everywhere else, you get the business. That wave of new business that we started 13 years ago, that's what keeps us going. Our growth in newer markets is 2x our legacy markets. Our loan balances from new markets are now larger than our loan balances in legacy markets. We have 5 markets that have higher sales productivity than Pittsburgh today. That's why -- so at the end of the day, if there's HA growth, we're going to have growth. We ought to be better in every instance than if it's sensible growth because we'll have more shots on goal because of our newer markets I don't think people fully appreciate that amount.

And that's why the branch expansion strategy because it gets you deeper into these expansion markets.

Yes. I mean part of the ability to expand -- we're really good at C&I. It's C&I. We can go into markets. We have good product sets. We're local. We know that engine. We know how to do it. We've done it for years. ultimately, that runs out of steam, if you can't fund it with a commensurate retail base. So we're going heavy after retail, these branch builds we're going to be 300 branches over the course of the next 4 or 5 years, we'll do 60 this year and grow that at pace with the opportunity set we see in C&I, which is wildly fragmented. I guess all the -- against all odds, I don't think anybody in the country has more than 4% or 5% share in Corporate Bank.

Yes. So let's talk about that funding side. So what are you seeing today across consumer and commercial deposit markets, we're increasingly hearing from some banks that it is getting more and more competitive out there. What are you seeing from both the consumer and the commercial side?

Not that. Jump in here, Rob.

Yes, sure. Look, on the retail side, we will have growth in spot deposits. We will have -- on the corporate side, growth in noninterest-bearing, shrinkage and interest-bearing just because of some seasonal things and our rate paid with balances up and our rate paid will be flat to down.

Yes, everybody -- I don't know if the noise is coming out of smaller banks that are already running a high loan-to-deposit ratio or just don't have other levers to pull, but we're growing deposits. We're not paying up for them. Importantly, we're growing households inside of our retail network at a pace that we haven't been able to do for years, and we're not paying up for the deposits to do that. So things are kind of working.

Yes, well said. And the only thing that I would add to that, what we're seeing so far, at least on a period-end basis or spot end basis is higher noninterest-bearing deposits from the commercial side. to the extent that they hold our spot deposits will grow pretty nicely.

And also -- look, there's -- without question, there's a fight to show deposit growth in certain markets for new entrants and so forth. And so it's logical that in some markets, somebody might choose to pay up to grow share. We're not doing that.

Got it. Okay. So I mean, the core metric there is more household growth and more core deposit growth. The other piece on the deposit competition side has been around AI-driven cash optimization and what that might do. I guess what are your views there?

I don't understand where all that's coming from. Look, we've been on a journey in banking for years for cash optimization the ability to move money quickly with little burden will be more driven by open banking and API connectivity than it will be on AI. I don't need AI to figure out that if it's super easy and I care, I couldn't just move money into my Vanguard account or my Fidelity account or just shop P&C internally for the best rate. I think it's logical to think that over time, our average consumer balance is $10,000 or something in our checking accounts, people aren't trying to invest that extra $1,000 to earn another 20 basis points. the monies that are above that, that jump from being my transactional accounts is true for corporates as well into now it's an investment account, it's an excess. I want to earn something on it. that markets become more and more efficient over time and your choices today are the $7 trillion money fund business or increasingly on us. Our wealth clients largely earn the same they would earn from a money fund today. So the whole noise if I'm going to have cash mix here and I'm going to visit all around through open banking and I'm going to arm the last basis point on of this person with an $8,000 balance, it sounds like somebody made that up on a sound bite. You guys all ran with it. You don't need that.

Well, maybe if I can push you a little bit on that. So I guess it does make sense from the wealth management side, corporate and institutional side, these deposits are fully optimized or close to being fully optimized. But I guess when you look at the...

You make it -- so assume corporate is assume wealths on retail, the money is -- I mean, we can argue about what a straight deposit plus operating account ought to be, whether you keep in your checking account. We saw when rates jumped to 5%, that boundary was pretty well defined, right? All the lazy money moved in a hurry and then you just had transaction balances. The money that moved in a hurry is still not priced it so for minus 5, where the corporate money is. And over time, maybe it becomes so efficient that it does. It's not AI driven. That's open banking driven, that's competition driven. It's just basic common sense. How do you win in that environment? By the way, that's not today, that might even be tomorrow. I mean how much money do you leave in your sweep account at Schwab that pays you zero.

No that much. Got it. All right.

It just -- it will happen. But how do you win in that environment. You're going to be a low-cost producer with really good products and services that somebody doesn't want to trade away from you for 50 basis points on $2,000.

For the record, [indiscernible] accounts at Morgan Stanley.

Yes. All right. Perfect. So let's round out the conversation in the NII and NIM side. You spoke about the fixed asset repricing story. How are you thinking about the trajectory of that repricing story from here, especially given the value of the curve is higher, the long end of the curve is higher? Help us think through that.

Yes. It continues, obviously, in terms of the repricing, and that's part of our guidance that we have. And what we've said before is' '26 is pretty much mechanical now because we're neutral. So a 25 basis point hike or a cut is not going to take us off of our numbers. And we also said we expect to inflect NIM at 3% in the latter half of this year, and we're sticking to that. We're pretty close now. So everything that we thought would occur is, in fact, occur.

Okay. Perfect. So everything is on track.

On track.

I should maybe just get questions on how much fixed rate is rolling off this quarter. It's kind of the wrong question, right? We have a balance sheet that has liabilities with certain assumptions and rate paid and we have assets with certain assumptions, rate paid and they rolled out. What we've been able to do, if we just look at the forward rate, we will grow NII at a good clip for the next several years. Our management of that has been locking in forward rates at opportunistic times such that we reduce that volatility of earnings against that forward curve. But the momentum you've seen in our NII that we've largely locked in for this year, we will, through time, lock in for 27 and for 28 against for current movement. Right now the way everything is moving, it's in our favor, right? We're making more we'll make more in the future than we had assumed even 6 months ago.

But that's a good point. That's what we've been doing for several years now. So this is not a departure in terms of the way that we manage what is a constructive look for the next couple of years.

Got it. All right. So let's move on to fees and one area where we've seen continued outperformances on the Harris Williams side. And you are getting some periods of market volatility here, but it still feels like it's been fairly consistent. What are you hearing from clients around M&A activity and sponsor appetite right now?

Harris Williams has done well through all cycles. They're going to have a great quarter and a great year. Remember, they focus on private equity buyers and sellers, larger middle market as opposed to a large corporate. And that environment has kind of opened up and pipelines are good and activity levels are good. But I'd remind you, inside of our capital markets franchise, Harris Williams kind of gets all the headlines on top line number. They're not even third or fourth in our actual bottom line contributor. We look at business we get from debt underwriting loans indications, foreign exchange derivatives and trading. We have $1.5 billion capital markets business. And we would expect it to be correct and expecting that our activity across all those books is up, commensurate with market activity and some of the comments you've seen from the large capital markets players. So it's a good quarter in fees and as will also be part of that.

Got it. And well, maybe on the wealth management side, that's become a bigger focus for you as well. Can you dig in on the strategy of that business where you see the biggest growth opportunities here?

Our competitive advantage in that business, which we have sometimes forgotten over time, is that we are actually a bank and not just a wealth manager. And we don't always act like a private bank. We haven't been terribly effective in lending money to rich people, which is if you look at loan growth in many of our competitors, that's been a healthy source of growth over many years. We have done an okay job, but we need to do much better connecting with our existing clients in that platform. So we cover because of our C&I franchise. We actually know all the clients we would aspire to cover in a wealth relationship. And of course, we ought to be able to do that. So our growth, which, by the way, has been paced by our new markets is coming on the back of linkages with existing clients and then offering our single competitive advantage is that, hey, we're a bank, we can take deposits, we can lend you money. Of course, we can help you manage money. But that's becoming a more and more generic thing against the ability to fulfill all of your financial services needs.

The other piece to that, that I think is important. Bill touched on it is the expansion market opportunity. So when we acquired BBVA USA, they didn't have a wealth management business or not much of one. And First Bank, of course, didn't. So part of our plan in terms of the organic growth is staffing wealth teams in all of these markets that we're in. We've done that. They're fully staffed, and they are picking up momentum as we go which feels really good.

And as you expand your branches in different areas as well...

That's part of that ecosystem.

That's part of the ecosystem. Got it. Okay. And then we -- so I guess as we're on that topic of just branch density and growing these in your local markets, have you learned anything from the branch expansion strategy that you've done so far? And when you're expanding into new regions, what learnings are you taking from what you've already done in different geographies?

Here's a couple of things. One is things are going better than we had assumed in terms of activity levels in new branches. Secondly, higher front rates changes the whole economics of branch banking. So we're in a good environment for that. I think we've gotten much better with still a lot to learn on how you activate a new branch, right? It's a big deal. You're in some exciting part of a new market city? And how do you actually bring it to life. One of the things, Mark is in the audience here, talks about all the time, Mark Wiedman, our President, is how do you use marketing to bring the brand alive in markets where people don't necessarily know exactly who PNC is and what we stand for. So all of that stuff, building a branch or building 50 branches in a particular market is a massive statement and an arrival. Now we've already been in the market, we're all of a sudden saying, we're investing a lot in new market. How do you bring that alive. What marketing do you do? How do you activate it? How are you out and about in the town we're getting better at it. But look, it's been a long time since the bank built 50 branches in a year. JP has done it. I don't know who else is on.

Beyond that, though, within the new markets, if you think about it, Bill referenced it, really going back 13 years to RBC. We've been pretty much nonstop going to new markets, introducing ourselves and building teams and building businesses for the better part of the last 13 years. And when you -- like anything in life, when you do a lot of it, you get better at it. So that's why we've got a lot of confidence when we go into a First Bank situation. We know what to do.

So you brought up First Bank. I guess, there's a lot of organic growth opportunity here. But at the same time, you have excess capital. We're in an environment where it's easier to do bank M&A. I guess, when you think through the strategy, how are you balancing being patient versus taking advantage of what might be a smaller window of opportunity here?

I think it's a myth that the opportunity set on exist to do M&A in the future. I think the anomaly in history was the Biden administration, not today's period. I think there's a well-accepted argument now that both the Democrats and the Republicans agree on that we need competitive scale in banking below the G-SIFIs. So I don't worry about some window to be able to do something. I worry about doing something smart that makes our shareholders money and fits our long-term strategic objective. One of the things that was quite unique with First Bank was they were a pure retail franchise. Every single one of their branches across Colorado and Arizona, they built themselves. They weren't old FDIC assumed bankruptcy branches in the wrong places. They were a retail bank with real retail clients and real retail deposits and their deposits weren't tied to their commercial lending, incredibly unique franchise. And they also -- the reason they came to market had more to do with generational wealth of the private owners than it did that they had failed or they're trying to get. It's just a different situation. There are not sellers today. It's too easy -- it's easy being a bank today, right? You're going to make more money today and tomorrow that you made yesterday and you're going to tell your Board that and your Board is going to be happy, you're going to get a bigger bonus. Nobody is going to sell unless they're really broken. So what do you do? You do what we've done for 165 years. You hold a little capital, you watch some is going to break. It always breaks. We're in the business of banking. And when you're the person of cash in your pocket and a good balance sheet and something breaks, you take advantage of it. That's not today. We don't need it. We can do this organically. We have a good plan to execute organically, and we're on pace to do it.

So let me ask another question on capital, and I'll look quickly across the room if there's any questions. But as we think about Basel end game and the changes that we're seeing there, I think you've called out it reduces RWAs by about 10%. How are you thinking about any incremental capital deployment opportunities here on the organic side?

Well, I would say the -- if you take a look at the Basel rules, we had said in the first quarter call that it would reduce our RWA under both methods by about 10%. As we're getting more and more nuanced, figured out, the expanded approach actually is a little bit better for us, maybe 10 or 20 basis points or so. And we'll keep you up to date in terms of as we continue to work through all of that. But to answer your question, we're running right now at 10% CET1 under the old method. And that feels like the right level for us right now. You can make the argument that we could run lower. But at the moment, the opportunity cost of some of that extra capital, particularly with the eye towards maybe loan growth, which is the highest and best use of our capital in the near future. 10% is the number we feel good about.

Got it. Any questions in the room? So I think we covered a lot here. We were very efficient with the time. We're just about out of time. So maybe, Bill, to conclude, as you look across the bank today, any parts of the business that you think are underappreciated by investors?

I just think the organic growth opportunity that we've set up in front of us. People forget, I think the investment that we've already made. We don't need to make it. We're in these markets. We have the technology backbone to succeed. We front hired people, right? So we've had people on the ground in these markets who are just now becoming productive. And I think we can look at an organic growth path as long as the eye can see right now in a favorable rate environment with a good credit backdrop. And I just don't know that there are a lot of banks out there that we compete with who have that same vision of the future and opportunity set in the future.

All right. Perfect. With that, we're out of time. So Bill and Rob, thanks so much for taking the time.

Thank you.

Thank you.