Business Description
PNC is one of the largest diversified financial services companies in the U.S., headquartered in Pittsburgh, Pennsylvania, with a coast-to-coast retail branch network and strategic international offices in four countries outside the U.S. The company operates through three main business segments: Retail Banking, Corporate & Institutional Banking, and Asset Management Group . PNC offers a wide range of financial products and services, including deposit accounts, lending products, investment management, and advisory services . Revenue is generated from net interest income and noninterest income, with significant contributions from the Corporate & Institutional Banking segment .
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Corporate & Institutional Banking - Offers lending, treasury management, capital markets and advisory services, and commercial mortgage banking activities to mid-sized and large corporations, government, and not-for-profit entities. Provides products like secured and unsecured loans, letters of credit, and equipment leases .
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Retail Banking - Provides a wide range of products and services, including deposit accounts, lending products such as residential mortgages and credit cards, brokerage, insurance services, investment management, and cash management products. These services are offered through branches, digital channels, ATMs, and phone-based customer contact centers .
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Asset Management Group - Focuses on private banking for high net worth individuals and institutional asset management. Provides investment and retirement planning, customized investment management, credit and cash management solutions, and fiduciary services .
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Q3 2024 Summary
What went wrong
- Management expresses uncertainty regarding loan growth, with CEO William Demchak stating he is "befuddled" by persistent low loan utilization rates, and admitting that they have no loan growth factored into projections for record NII in 2025.
- The bank anticipates additional charge-offs in the CRE office portfolio, acknowledging that lower cap rates may not sufficiently improve valuations for severely under-occupied office buildings, which could significantly impact asset quality.
- In the C&I loan portfolio, management notes that there are more downgrades than upgrades, driven by margin compression among borrowers, suggesting weakening financial conditions that could lead to higher future credit losses.
Q&A Summary
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Record NII in 2025
Q: Will you achieve record net interest income in 2025?
A: We feel confident we'll achieve record net interest income in 2025, and this is not dependent on loan growth. -
Net Interest Margin Outlook
Q: Where will net interest margin normalize?
A: Our net interest margin is increasing, and we expect it to approach 3% over time. -
Loan Growth Expectations
Q: When will loan growth pick up?
A: Loan growth has been lower than expected due to low utilization and a pause with the upcoming election and rate environment. We continue to add customers and loan commitments, and we expect loan growth is not too far off. -
Deposit Cost Decline
Q: Will deposit costs decrease soon?
A: We're in a down beta cycle and expect our terminal beta to be approximately 50%. Rates paid will come down, particularly in higher interest-bearing commercial and wealth deposits. -
Office CRE Reserves
Q: Why are office CRE reserves increasing?
A: We're just now starting to see buildings clear in sales, and challenges in the office sector will play out over a long period. It's early innings, and we expect it to be noisy for a while. -
Acquisition Possibilities
Q: Are acquisitions likely in this environment?
A: We don't see value in an acquisition at the moment. Potential targets don't make sense considering their balance sheets and required investments. -
Consumer Lending Growth
Q: What are growth drivers in consumer lending?
A: We're underpenetrated with existing clients in consumer lending. We see material upside by increasing penetration to match our peers, and we're investing to achieve this. -
Capital Markets Outlook
Q: How is the capital markets pipeline?
A: Although some fourth-quarter activity shifted into the third, pipelines are strong and momentum continues. We expect some lumpiness quarter-to-quarter but overall positive trends. -
Deposit Stabilization
Q: What's the outlook for noninterest-bearing deposits?
A: We've stabilized noninterest-bearing deposits over the past couple of quarters at current levels after prior declines. The effect of lower rates on compensating balances is uncertain. -
Economic Conditions Impact
Q: How are clients' demand trends and economic health?
A: There's a pause in loan demand due to the election and rate environment, but we're seeing constructive signs like increased loan commitments. Companies are healthy, though margin pressures exist due to inability to pass on prices. ,
Key Metrics
Revenue by Segment - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Retail Banking | 3,024 | 3,150 | 3,360 | 3,391 | 12,925 | 3,381 | 4,118 | 3,484 | ||||||||||||||||||||||||||||||||||||||||||||||
- Net Interest Income | (206) | (412) | (687) | - | (2,337) | (1,030) | (1,101) | (1,122) | ||||||||||||||||||||||||||||||||||||||||||||||
- Noninterest Income | 159 | 32 | (27) | - | 181 | (1) | (477) | 49 | ||||||||||||||||||||||||||||||||||||||||||||||
Corporate & Institutional Banking | 2,269 | 2,170 | 2,225 | 2,605 | 9,269 | 2,408 | 2,473 | 2,618 | ||||||||||||||||||||||||||||||||||||||||||||||
Asset Management Group | 357 | 353 | 362 | 38 | 1,452 | 387 | 398 | 403 | ||||||||||||||||||||||||||||||||||||||||||||||
Residential Mortgage Banking | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
BlackRock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Non-Strategic Assets Portfolio | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Other | (47) | (380) | (714) | - | (2,156) | (1,031) | (1,578) | (1,073) | ||||||||||||||||||||||||||||||||||||||||||||||
Asset Management and Brokerage | 356 | 348 | 348 | 36 | 1,412 | 137 | 364 | 383 | ||||||||||||||||||||||||||||||||||||||||||||||
Capital Markets and Advisory | 156 | 213 | 168 | 415 | 952 | 190 | 272 | 371 | ||||||||||||||||||||||||||||||||||||||||||||||
Card and Cash Management | 643 | 697 | 689 | 704 | 2,733 | 281 | 706 | 698 | ||||||||||||||||||||||||||||||||||||||||||||||
Lending and Deposit Services | 181 | 298 | 315 | 439 | 1,233 | 171 | 304 | 320 | ||||||||||||||||||||||||||||||||||||||||||||||
Residential and Commercial Mortgage | 42 | 98 | 201 | 284 | 625 | 97 | 131 | 181 | ||||||||||||||||||||||||||||||||||||||||||||||
Other Income | 159 | 129 | 94 | 237 | 619 | 17 | 332 | 69 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Noninterest Income | 1,783 | 1,783 | 1,815 | 2,193 | 7,574 | 1,881 | 2,109 | 2,022 | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | 5,603 | 5,293 | 5,233 | 5,361 | 21,490 | 5,145 | 5,411 | 5,432 | ||||||||||||||||||||||||||||||||||||||||||||||
Revenue by Geography - in Millions of USD | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
Americas | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Europe | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Asia-Pacific | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Total Revenue | - | - | - | - | - | 5,145 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
KPIs - Metric (Unit) | FY 2013 | Q1 2014 | Q2 2014 | Q3 2014 | Q4 2014 | FY 2014 | Q1 2015 | Q2 2015 | Q3 2015 | Q4 2015 | FY 2015 | Q1 2016 | Q2 2016 | Q3 2016 | Q4 2016 | FY 2016 | Q1 2017 | Q2 2017 | Q3 2017 | Q4 2017 | FY 2017 | Q1 2018 | Q2 2018 | Q3 2018 | Q4 2018 | FY 2018 | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | FY 2019 | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | FY 2020 | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | FY 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | FY 2022 | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | FY 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
Net outstanding standby letters of credit ($ million) | 11,017 | 10,157 | 10,326 | 10,913 | - | 10,651 | 10,680 | 10,826 | ||||||||||||||||||||||||||||||||||||||||||||||
Standby bond purchase agreements ($ million) | 1,193 | 1,184 | 1,088 | 1,078 | - | 1,194 | 1,167 | 1,055 | ||||||||||||||||||||||||||||||||||||||||||||||
Commitments to extend credit ($ million) | 259,828 | 261,905 | 275,372 | 268,391 | - | 268,087 | 268,862 | 273,664 | ||||||||||||||||||||||||||||||||||||||||||||||
Serviced portfolio balance ($ billion) | 188 | 191 | 213 | 209 | - | 207 | 204 | 200 | ||||||||||||||||||||||||||||||||||||||||||||||
MSR asset value ($ billion) | 2.2 | 2.3 | 2.8 | 2.7 | - | 2.7 | 2.7 | 2.5 | ||||||||||||||||||||||||||||||||||||||||||||||
Fair value of commercial mortgage servicing rights ($ million) | 1,061 | 1,106 | 1,169 | 1,032 | - | 1,075 | 1,082 | 975 | ||||||||||||||||||||||||||||||||||||||||||||||
Fair value of residential mortgage servicing rights ($ million) | 2,232 | 2,349 | 2,837 | 2,654 | - | 2,687 | 2,657 | 2,528 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average life of commercial mortgage servicing rights (years) | 3.9 | 3.9 | 4.0 | 3.9 | - | 3.9 | 3.9 | 3.8 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average life of residential mortgage servicing rights (years) | 7.7 | 7.8 | 8.4 | 8.1 | - | 8.1 | 8.1 | 7.8 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average constant prepayment rate for commercial mortgage servicing rights (%) | 4.39 | 4.38 | 5.42 | 5.51 | - | 5.24 | 5.30 | 4.41 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average constant prepayment rate for residential mortgage servicing rights (%) | 7.22 | 6.91 | 5.77 | 6.42 | - | 6.29 | 6.25 | 7.21 | ||||||||||||||||||||||||||||||||||||||||||||||
Effective discount rate for commercial mortgage servicing rights (%) | 9.54 | 9.89 | 10.22 | 9.64 | - | 9.94 | 9.98 | 10.69 | ||||||||||||||||||||||||||||||||||||||||||||||
Weighted-average option adjusted spread for residential mortgage servicing rights (bps) | 768 | 767 | 765 | 765 | - | 766 | 764 | 755 |
Executive Team
Questions to Ask Management
- Given the continued stress in your CRE office portfolio, with nonperforming loans increasing due to the migration of criticized loans and expectations of additional charge-offs, how confident are you that your current reserves of 11.3% on the overall office portfolio and 16% on the multi-tenant portfolio are sufficient to cover future losses, and what strategies are you implementing to mitigate these risks?
- With noninterest expenses expected to rise by 2% to 3% in the fourth quarter and fee income projected to decline by 5% to 7%, what specific measures are you taking to manage expenses and drive revenue growth to achieve positive operating leverage for the full year?
- You've mentioned plans to invest in your retail distribution by building high-volume branches, particularly in the Southwest markets. In an era where digital banking is becoming more prevalent, how do you justify this strategy, and what returns on investment do you anticipate from these branch expansions?
- Historically, you've been underpenetrated in consumer lending, especially in credit cards. Despite recent investments and new product introductions, when do you expect to see significant growth and a measurable impact on your consumer lending revenues?
- Considering your expectation that the Fed will cut rates twice in 2024 and your projections of achieving record net interest income in 2025 without relying on loan growth, what gives you confidence in these projections amid economic uncertainties, and what key factors are driving this confidence?
Past Guidance
Q3 2024 Earnings Call
- Issued Period: Q3 2024
- Guided Period: Q4 2024
- Guidance:
- Economic Outlook:
- Real GDP growth of approximately 2% in 2024.
- Unemployment slightly above 4% through year-end.
- Federal Reserve rate cuts: 25 basis point decrease in November and December.
- Financial Metrics:
- Average Loans: Stable.
- Net Interest Income: Up approximately 1%.
- Fee Income: Down 5% to 7%.
- Other Noninterest Income: $150 million to $200 million, excluding Visa activity.
- Total Revenue: Stable.
- Total Noninterest Expense: Up 2% to 3%.
- Net Charge-Offs: Approximately $300 million.
- Operating Leverage: On track for full-year positive operating leverage.
- Capital Markets and Fee Guidance: Fee income decline driven by elevated MSR levels and capital markets activity .
- Economic Outlook:
Q2 2024 Earnings Call
- Issued Period: Q2 2024
- Guided Period: Q3 2024 and FY 2024
- Guidance:
- Overall Economy:
- Real GDP growth of approximately 2% in 2024.
- Unemployment slightly above 4% by year-end.
- Federal Reserve rate cuts: 25 basis point decrease in September and December.
- Third Quarter 2024:
- Average Loans: Stable.
- Net Interest Income: Up 1% to 2%.
- Fee Income: Up 1% to 2%.
- Other Noninterest Income: $150 million to $200 million, excluding Visa and securities activity.
- Core Noninterest Expense: Up 3% to 4%.
- Net Charge-Offs: $250 million to $300 million.
- Full Year 2024:
- Average Loans: Down less than 1% compared to 2023.
- Net Interest Income: Down approximately 4%.
- Noninterest Income: Up 3% to 5%.
- Total Revenue: Down 1% to 2%.
- Core Noninterest Expense: Down approximately 1%.
- Effective Tax Rate: Approximately 18.5% .
- Overall Economy:
Q1 2024 Earnings Call
- Issued Period: Q1 2024
- Guided Period: FY 2024
- Guidance:
- Full Year 2024:
- Average Loan Growth: Approximately 1%.
- Total Revenue: Stable to down 2%.
- Net Interest Income: Down 4% to 5%.
- Noninterest Income: Up 4% to 6%.
- Core Noninterest Expense: Stable, excluding FDIC assessment.
- Effective Tax Rate: Approximately 18.5%.
- Second Quarter 2024:
- Average Loans: Stable.
- Net Interest Income: Down approximately 1%.
- Fee Income: Up 1% to 2%.
- Other Noninterest Income: $150 million to $200 million, excluding Visa activity.
- Total Revenue: Stable.
- Total Core Noninterest Expense: Up 2% to 4%.
- Net Charge-offs: $225 million to $275 million.
- Economic Outlook:
- Real GDP growth of approximately 2%.
- Unemployment rate increase to 4% by year-end.
- Federal Reserve rate cuts: 25 basis point decrease in July and November .
- Full Year 2024:
Q4 2023 Earnings Call
- Issued Period: Q4 2023
- Guided Period: Q1 2024 and FY 2024
- Guidance:
- Spot Loan Growth: 3% to 4%, equating to average loan growth of approximately 1%.
- Operating Leverage: About 100 basis points negative.
- Net Interest Income: Down 4% to 5%.
- Noninterest Income: Up 4% to 6%.
- Total Revenue: Stable to down 2%.
- Core Noninterest Expense: Stable, excluding FDIC assessment.
- Effective Tax Rate: Approximately 18.5%.
- Credit Metrics: Stress in CRE office portfolio, reserves at 8.7% of total office loans and 12.9% on multi-tenant portfolio.
- Federal Funds Rate: Unchanged between 5.25% and 5.5% through mid-2024, with a 75 basis points reduction expected.
- Economic Outlook: Mild recession expected in mid-2024 with GDP contraction of less than 1% .