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

Do you want to take...

Sure. So it's all about going -- deepening our relationships with our existing customers and expanding into our expansion markets. And in that take on the corporate side, -- it's about capital markets activities, debt and derivatives associated almost always with some kind of lending situation. Second, our M&A advisory business with Harris Williams, and treasury management and put all that together, it's 40% of our corporate bank. So -- and it's up dramatically in last year, and we're seeing clients wanting to do more and more with us going forward. So that's a huge driver for us. On the consumer side, it is by cards, debit cards, expand our credit card business, all these are fee generating together feels pretty good. And it's all about an integrated relationship with the customer as opposed to just looking at the lending relationship.

I'd say, if you take a look at the way that we reported, our fee businesses are having a good year, and we expect that to continue. Asset Management, obviously, because of the equity markets is benefiting, although we don't rely completely on the equity markets. but that's helpful. This is just the order that we report them. Capital markets is having a record year. We're aware of that. We're a little bit different. And Mark mentioned this, is a big percentage of our capital markets business is M&A advisory through Harris Williams, which is having yet again, another record year to card and cash management. It's a steady Eddie, and we see growth there. The only fee category that's flat, and that's within our expectations as mortgage where there's not a whole lot of that, but we're not big in mortgages and particularly reliant on that. So field businesses are healthy. And I think you didn't ask this, but they're big businesses in and of themselves. -- where we're making investments. And in these growth markets, the application, particularly in First Bank most recently and the receptivities of the client base to those fees is really strong.

I guess you've heard about investments in card needed investments, international payments, investing in these new markets. We got to spend on technology, you have to spend on AI. Just how should we think about balancing between kind of maintaining positive operating leverage and investing in the franchise for the next several years?

Well, positive operating leverage is table stakes for us. I think, if not the longest record in delivering positive operating leverage year-to-year, we're pretty close to the best. So that remains an objective. And we've got a continuous improvement program in place that you know that has been successful in terms of being able to offset what we invest in. And we're investing in a pretty clip. There's no question about that. So I think we'll be able to maintain that. This is in '27 guidance or '28 guidance, but positive operating leverage is really important, and we'll sustain it.

And maybe just talk about your kind of approach to AI, just how do you plan to leverage it over time? Where do you expect to ultimately drive efficiencies across the company?

We'll let you start, Mark, and then I can add in.

So a few key levers that we see as being big opportunities for us and potentially for banks generally, One is continued automation. About 15 years ago, we had the same number of employees we have today, we build the bank. -- productivity growth has been automation. And we know there's a lot more to be unlocked with AI. We've got a big 5 program, which is the areas that we're targeting for improvements, including retail operations, commercial loan servicing, fraud, et cetera. And what we're seeing is the deeper and deeper we go, we find more and more applicable capabilities across the bank. I think that's a pretty generic story across all banks of some scale that are thinking about where they can automate and where there's opportunity for them to actually get more efficient and actually fund a number of the things you described. The area where I think we are turning a couple of areas were turning -- on the positive side, and then I'll give a little bit of what we're concerned about is around technology spend and software development, where in the last year, we implemented agent assistance to developers, and we're able to put out our mobile app and our total rewards, which is basically treating at retail customers as an integrated client as opposed to individual products pulling all that together -- we're able to do that at about 40% more efficient than we've been able to do software development in the past. What we're seeing now is we think about using agents as the center of how we develop software as opposed to just assisting is 5 to 10x productivity improvements. So things that would have taken 10 weeks get done in a week or less. -- that changes the scale dynamics we think in the industry. It's going to over time benefit. We think banks that actually have the ability to build that software in-house that can actually have -- alter the relationship with vendors, for example. -- early days as to how -- and that's a big frontier for us. And so that's a big priority. We are taking control of our destiny also in how we spend money on compute, both by owning our own data centers and actually owning our own GPUs and actually bringing in our own actually proprietary actually, SLM, small language models because it turns out you don't need the whole kit and caboodle for most of the problems we have to solve. Put all that together, that's a lot of opportunity. Where is the worry -- the worry is risk, risk management, cyber, obviously. But I'd also say, as we've seen very notably in public discourse in the last few days, making sure agents are doing what they're supposed to do and not doing something else is a top priority for us. So we got to walk cautiously because that's going to be a challenge, I think, for every large organization using AI is the agents going be a little bit too aggressive in what they're trying to get done. So we're trying to make sure we keep that under control. But broadly, it's a big opportunity. Over time, that creates margin. Does it get competed away? Reasonable question. But we -- that is a huge priority for us for the back.

I think what I'd add to that is, just from a PNC perspective. So last year -- and we talked about it last year, out of the box, we just said, hey, there's a big cost save opportunity, but let's focus on the biggest impact areas. And as Mark mentioned, that was the big 5 that we talked around, which was coding, operations, AML, et cetera. I think the update this year and what we've been working on that I think you'll find interesting, and Bill talked a little bit about this on the second quarter earnings call was this decision to do more in-house. And Driving it ourselves as opposed to relying on vendors is where we're going. So as Mark said, we're doing our own compute -- we're using the frontier models with the hyperscalers. But we've got open weight models in our data centers with no data sharing in the Chinese model. And where we're doing developing, when you talk about agentic development of harnessing capabilities. We're doing that in-house, too, and not relying on vendors. And there's 2 reasons for that. One is it appeals to our general high control nature of our own data. But Mark alluded to it, there's a big difference in terms of the efficiencies in terms of being able to focus on the task, which might not require the highest cost approach, which often vendors, either deliberately or nondeliberately or can't do. And that's a big thing for us in terms of just our approach and our thinking.

Interesting Yes. Maybe shift your credit environment, somewhat unique, strong loan growth, credit quality, very benign. Just any industries where you're intentionally being more selective or underwriting standards remain particularly important?

I'd say, generally, and you've heard it over and over again, credit is really good at both commercial and consumer. On the commercial side, no big pockets, nothing that is thematic or bubbles building Obviously, there's some pressure with health care with changes in the Affordable Care Act. We were talking about we have some distilleries around a secular change in people drinking less maybe some on the margin transportation-oriented obviously, in terms of the price of fuel. But nothing that you point out and say, "Hey, something is really going on here, which which is good. " And we were talking earlier about the economy improving in the quarter, our criticized assets have come down. Our nonperformance, -- all the leading indicators are improving. So things are good.

Just add in addition, there's one sector, and Rob, you touched on this earlier, where we've been very selective relative to the broader credit activity, not switching banks but broadly in the financial system, which is around AI infrastructure and data centers. where we've been very selective around extremely well structured credits that have the protection of a hyperscaler behind them and a high credit quality hyperscaler and a contract that we see as both roof. And what that's meant is we've been selective. We've invested in a number of projects, but we are doing so very carefully because one worry we have is a lot of contracts may end up not actually being so bulletproof. And we don't want to be involved in that kind of lending that will leave that to others. But we've been very selective there. Broadly, however, in most of our sectors, almost all, credit keeps improving from a pretty healthy basis even at the beginning of the year.

Sounds good. I guess shifting to capital. the regulatory environment more constructive than it's been in several years. Just how are you thinking about kind of long-term capital targets, regulatory reform ultimately reduces required capital across the industry -- is it realistic to expect a reduction?

Yes. Well, I'd say a couple of things there. One is where we are right now, roughly 10% in our CET1 ratio. It feels like the right place to be right now. The Basel rules when they get completed and if they get completed along the lines of what everybody thinks, we're likely to add a point of capital. At some point, we have a lot to select whether it's the expanded risk-based approach of the standardized approach. Right now, the expanded approach looks a little better, which makes sense because of the discount on the private middle market credits, that is sort of our wheelhouse. So that sort of fits logically. So that will add a point. We obviously worked that down. Ideally, the way that we do that is through loan growth. But beyond that capital return, which has been part of our story for a while will continue. -- ultimately to ask your question in terms of, hey, where does it ultimately can can you come down from those levels? We'll see. The stress test certainly suggests that we can as an industry. And if that's the case, because we stress better than most, if not the best sense reason, whatever it will be, will be the lowest, right?

I guess against that, you talked about exiting this year with an 18% ROTCE based on your guidance update.

Yes.

Sounds good, but as you kind of look beyond year-end, just how do you do you see opportunities for further improvement? Or it's kind of maintaining that level a more appropriate way to think about the business overtime?

Well, we -- so when I came up at the end of last year, we said, hey, we would expect to exit 26% at 18% even though we don't provide targets, right? But we needed to work through our first bank. We don't provide NIM either, but I always provide that too because they're outcomes. And in all seriousness, what we really wanted to point to was based on our business composition, we have a higher return businesses. And that's why whatever the industry is and wherever the industry is, we're at the high end of that range in terms of the [TCs. So We said, okay, throw out 18%, we think we're comfortable with 18%. I'll point out, we reached 17.9% in the second quarter. So I'd argue that we're in that neighborhood. And all else being equal, it's going to ebb and flow depending on where you are, but we would see that increasing. The -- but the point is -- the key point is we have on average or better than average for high-return businesses.

Got it. And maybe just update us on new branch expansion efforts. In the past, you've talked about 7% branch share in those markets. Why is that the right number?

Yes, I can start, Mark, and then maybe fill in a little bit. The -- so we have an aggressive plan in terms of building out our branches. We've committed to building another 300 on top of the 2,300 that we have and all the places that you would expect in these high-growth markets that we've entered in the last handful of years, either organically or through acquisition. The key is though we're furthering our investments in those markets as opposed to entering those markets. And that's a big distinction because going in coal did a lot different than going in on a base of success. In a lot of those markets, we've established a 3% market share, branch market share. We think if we can get to 7. And we know this through the markets where we have Sean you get an exponential lift in terms of that critical mass in terms of -- so that's the next step of a multiyear plan that we've had in place as we've gone into those markets, now investing into the success of those markets to reach exponential gains. And it's happening.

Just add, there's branch build is one of the legs of our broader national expansion. The other legs are marketing. So if you've been seeing our ads, which we think are pretty funny, I hope you think so, too, and actually having a really good digital offering, we didn't have before. All those pieces are working together, and what we're discovering is one -- last year, we did about 25 branches. This year, we're doing about 55%. We're learning we can do it. We've picked the right sites. -- that the revenue we're picking up in those branches is tracking above or at the targets we had. So we kind of know what we're doing. And we see that leading through the end of the decade. So we'll get to about -- our big challenge is we're in lots of states, but we're not thick enough in those states. And so -- just to give you an example, when we reach of that 7% really an S curve, you start to see increasing returns to deepening your branch presence. And below it, you have kind of -- you have to kind of get up there to get up to maybe 20% increase in productivity simply by hitting that 7%. That's the upside we get. It also leads when we have branches, and this is a little counterintuitive. Our marketing to purely digital customers is 6x more effective if there's a branch nearby even if the customer never walks in the branch because Americans like to see the branch. You put that together with the marketing and a good digital experience, and we see growth in the Southeast and the Southwest and obviously, in our Easton home markets as well.

Got it. And then I guess on First Bank, maybe touch on it, but you converted in June, maybe just give us an update how things are going so far? Any notable kind of early wins? And just what's been the reception of the PNC products and services to that customer base in Colorado?

Yes. I'd say -- so we closed -- we announced it here last year. we closed in January, and we converted in June. And I would say every financial measure that we expected last September, we've either hit or exceeded which feels good. The cultures of the 2 companies, which we suspected we're very compatible when we met, proved to be very true. And Mark was pointing this out earlier when we were talking about it, many of the first bank executives and folks are now part of PNC's executive team. taking on greater responsibilities across the organization. So that's really good. The surprise to the upside has been -- we knew that First Bank had a high profile in Denver and the surrounding community. And the whole idea was to our products and services that First Bank didn't provide we'd be able to leverage the high-profile nature that's happened much faster than what we would have thought. So a lot more looks in our commercial book and prospects, a lot more looks in our asset management products and services, which is actually the fastest-growing market right now in our footprint for asset management, those types of things. We expect it to happen but not as quickly as they have.

I mean, it's really -- it's the private bank. First Bank had all these relationships but didn't have wealth manage banking capabilities, and so what we found is by literally -- I mean, much faster than, for example, we found with BBC is that actually introducing them to PNC capabilities has led to Colorado now being our fastest-growing market, which was novelly expected -- we did not expect to see such fast growth. But it reflects really on the quality of the team we brought into PNC, and we aim to retain 100% of the client-facing staff. That's what you get when you make that kind of commitment. All right. So there's -- I would say P&C has obviously consistently highlighted significant organic growth runway. But as you look out over the next several years, is that organic opportunity sufficient enough to achieve your long-term objectives? Or is there a point where M&A becomes an attractive way to accelerate growth what would transactions need to look like to clear that hurdle. And Mark, I saw you quoted in the Ohio paper a couple of weeks ago talking about National Banking, quoted out of context Keep going. Yes. But just let's address that. Let me just talk to just M&A in general.

Yes, I'd say our response to that is very consistent with what we've been saying. So no big update there. We do have a very aggressive organic growth strategy in place that we feel will be very successful in a reasonable amount of time. And that's what we do every day when we go into the office every day, that's what we do. So I do think it's sufficient. On the acquisition front, when a bank deal comes up, would we look at it? Of course, we would look at it. And so would everybody else even if they tell you that they wouldn't -- the key is that we would be very disciplined about that. Part of the issue is -- all I can say is take a look at our track record in terms of our discipline. Part of the issue of improving the risk is seeing the deals we do, but you don't get to see the deals that we don't do. And if you did, I think you'd be very assured that we have the shareholders' interest in mind that if we do anything, it absolutely has to be the best move for the shareholders or we don't do it. and we're not reliant on it. So if an opportunity presents itself, of course, like I said, we'd established it. I would say, right now in terms of current valuations of these potentially what you would logically sort of determine as an acquisition target or an acquisition candidate. I think the valuations are very high right now, and I think the bar to get over is really high. So I think it's unlikely.

Just add on organic growth, it's kind of an abstract word. It's pretty simple. It's about clients asking us to do more with them. So in the corporate bank, what we're finding is, particularly in the Southwest, in the West, in the Southeast, which are our expansion markets. Companies are saying, "Could you do more for us?" In reality, I only have two large national competitors that I deal with, can you be that third? Can you work with us? And that's why it's led to today, more than half of our geographically tied loans are actually in our expansion markets. That's continuing to grow. And in the expansion markets, we're growing double the speed of our Keystone or legacy markets. So it's that client pull forward is the reason that we emphasize the organic growth.

So I want to be clear on this, Jason, because we get asked this a lot. So the question is, is our organic growth sufficient enough for our purposes, yes. Are we reliant on acquisitions to meet our objectives, No. Are we capable of buying somebody.

Yes. Is that price right now in terms of those dynamics conducive to that?

And then I'd add to that, which probably would slow us down is if anything, in terms of the acquisitions were to impede our AI priorities, we would pass on the acquisition because we wouldn't want to miss out in terms of everything that AI has potentially to deliver by being distracted by some big acquisitions. So I just want to be very clear about that.

That's helpful. I guess maybe as we kind of begin to wrap up, good environment for banks, PNC in particular. So maybe what do you think is still underappreciated aspect of PNC's earnings story today? And why should investors be excited about the next several years?

Do you want to -- well, -- to me, it's about the compounding effects of our expansion markets. We have ended in the Southeast, more to go. We're doing it in the Southwest and the West and it's not really about where our retail footprint is and obviously, that will expand. Our corporate bank is a national bank and in the retail footprint, where we're expanding. All these are places where we have lots and lots of client-driven growth ahead of us. That I would say is whether it's underappreciated or appreciated. That's the center of what we're focused on every day. That and the AI transformation, those are the 2 things we're talking about in every management meeting.

Yes. And I would add to that, obviously, these growth markets, we're really excited about it and we're investing in them. And I think the First Bank acquisition has only increased our enthusiasm what we can do. We're having -- I mean it's a great banking environment, banks are doing well. But inside of that, a P&C, a lot of energy and a lot of enthusiasm that just continues to compound, that's the right word. That has us really excited.

I guess, Mark, in the final minute, your biggest positive surprise joining PNC? And maybe 1 thing that I want to say disappointed, but the biggest opportunity?

Sure. biggest positive surprise, the culture of the bank runs deep. I was a little surprised to find that. Most financial institutions culture is a pretty thin thing that is on the wall. And what surprised me is whether I'm sitting in like an office in San Diego or Raleigh, People talk about the same reasons they're at the bank. They care about the bank, which I met the to management and the Board when I interviewed, but I didn't know that would be there. That's really great because I go to sleep thinking no one's going to -- people care about the institution that are going to mess with it in the dark. That's really important. I'd say the biggest opportunity is -- we are a very client-oriented bank that have 100% consistent in that application and how we've gone to market. So there are products where we've led with the product, not the client relationship. That's in the retail bank. It's about simply bringing the entire customer relationship together. That's an obvious opportunity with the launch of our Total Rewards, which has gotten take-up from customers much faster than we expected because customers want more from us, but we got to treat them as a customer. Same thing would be true with sponsors or with TM clients who want us to actually, for example, do euro and sterling. Those -- as long as we meet those needs which are right in front of us. I actually think that organic growth path we talked about is ours to lose.

Perfect. On that note, please join me in thanking Mark and Rob for today.

Thank you.

Next Up, Bank of America in the lunch room.