The PNC Financial Services Group - Q1 2023
April 14, 2023
Transcript
Brian Gill (EVP and Director of Investor Relations)
Well, good morning, and welcome to today's conference call for The PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and CEO, Bill Demchak, and Rob Reilly Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures are included in today's earnings release materials, as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 14th, 2023, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.
Bill Demchak (Chairman and CEO)
Thank you, Brian, and good morning, everybody. As you can see on the slide, our quarterly results were strong, and we reported $1.7 billion in net income, or $3.98 per share. Inside of this, we grew deposits and loans, increased our capital and liquidity positions, generated positive operating leverage, and maintained strong credit quality. Now, for the past month, we've seen market volatility across the broader industry. While we take this situation seriously and are closely monitoring the environment, it's important to note that these events have taken place within a few banks with very unique business models. Inside of our company, we really haven't seen any meaningful impacts from the events of the past month. Our balance sheet remains strong and stable, and we're operating the company in the same way we were at the beginning of March.
Ultimately, over time, we expect the dynamics playing out in the banking system today to contribute to changes in the competitive landscape. While it's still early innings, we believe that PNC will be a beneficiary from this process. That said, in the near term, we're not immune to the competitive environment and the deposit dynamics that will ultimately impact our NII in the near term. Rob's going to cover that in more detail in a second. We remain focused on growing relationships across our lines of business, and we continue to execute on key priorities, including the expansion in the BBVA legacy markets. Rob will provide more details on our financial performance in a moment.
For this particular call, he'll review our first quarter earnings in a slightly condensed manner to allow time to also cover key balance sheet focus points that have been top of mind for our investors in the last couple of weeks. Of course, following that, we'll be able to discuss your specific questions in the Q&A segment. Finally, I'd like to thank our 61,000 employees for helping deliver a strong quarter and everything they do to support our customers. With that, I'll turn it over to Rob.
Rob Reilly (EVP and CFO)
Thanks, Bill, and good morning, everyone. Our balance sheet is on slide 4 and is presented on an average basis. Loans for the first quarter were $326 billion, an increase of $3.6 billion or 1% linked quarter. Investment securities were relatively stable at $143 billion. Cash balances at the Federal Reserve averaged $34 billion and increased $4 billion during the quarter. Deposits of $436 billion grew on both a spot and average basis linked quarter. Average borrowed funds increased $4 billion, which reflected fourth quarter 2022 activity, as well as senior note issuances in January of this year. At quarter end, our tangible book value was $76.90 per common share, an increase of 7% linked quarter.
We remain well capitalized with an estimated CET1 ratio of 9.2% as of March 31, 2023. During the quarter, we returned up $1 billion of capital to shareholders, which included $600 million of common dividends and approximately $370 million of share repurchases or 2.4 million shares. Due to market conditions and increased economic uncertainty, we expect to reduce our share repurchase activity in the second quarter. Of course, we'll continue to monitor this and may adjust share repurchase activity as appropriate. Slide 5 shows our loans and deposits in more detail. During the first quarter, loan balances averaged $326 billion, an increase of $4 billion or 1%, largely reflecting the full quarter impact of growth in the fourth quarter of 2022.
Deposits averaged $436 billion in the first quarter, increasing $1.3 billion. We continue to see a mix shift from non-interest bearing to interest bearing, I will cover that in more detail in a few minutes. Our rate paid on interest bearing deposits increased to 1.66% during the first quarter from 1.07% in the fourth quarter of 2022. As of March 31st, our cumulative deposit beta was 35%. Turning to the income statement on slide 6. As you can see, first quarter 2023 reported net income was $1.7 billion or $3.98 per share. Total revenues of $5.6 billion decreased $160 million compared to the fourth quarter of 2022.
Net interest income decreased $99 million or 3%, primarily driven by two fewer days in the quarter and higher funding costs, partially offset by higher yields on interest earning assets. Our net interest margin of 2.84% declined 8 basis points, reflecting the increased funding costs I just mentioned. Non-interest income also declined 3% or $61 million, as growth in asset management and brokerage was more than offset by a general slowdown in capital markets activity, as well as seasonally lower consumer transaction volumes. First quarter expenses declined $153 million or 4% linked quarter, even after accounting for the increase to the FDIC's deposit assessment rate, which equated to $25 million.
Provision was $235 million in the first quarter and included the impact of updated economic assumptions as well as changes in portfolio composition and quality. Our effective tax rate was 17.2%. Turning to slide 7, we highlight our revenue and expense trends. As a result of our diversified revenue streams and expense management efforts, we generated positive operating leverage of 2% linked quarter and 15% compared to the same period a year ago. As we previously stated, we have a goal to reduce costs by $400 million in 2023 through our continuous improvement program, and we're confident we will achieve our full year target. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 8.
Non-performing loans remain stable at $2 billion and continue to represent less than 1% of total loans. Total delinquencies of $1.3 billion declined $164 million or 11% linked quarter. Notably, the delinquency rate of 41 basis points is our lowest level in over a decade. Net charge-offs were $195 million, a decrease of $29 million linked quarter. Our annualized net charge-offs to average loans ratio was 24 basis points in the first quarter, and our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on March 31st, essentially stable with year-end 2022.
Before I provide an update on our forward guidance, as Bill mentioned, we want to take a deeper dive into some of the key balance sheet items that are top of mind in the current environment related to deposits, securities and swaps, capital and liquidity, and the impact of potential regulatory changes, and finally, office exposure within our commercial real estate portfolio. In our view, we believe we are well-positioned across all these key areas of focus. Turning to slide 10. Our $437 billion deposit base is broken down between consumer and commercial categories to give you a view of the composition and granularity of the portfolio. At the end of the first quarter, our deposits were 53% consumer and 47% commercial. Inside of our $230 billion of consumer deposits, approximately 90% are FDIC insured.
The portfolio is very granular, with an average account balance of approximately $11,500 across nearly 20 million accounts throughout our coast to coast franchise. Our $207 billion of commercial deposits are 20% insured. Importantly, approximately 95% of the total balances are held in operating and relationship accounts. These include deposits held as compensating balances to pay for treasury management fees, escrow deposits at Midland Loan Services, and broader relationship accounts, all of which tend to provide more stability than deposit-only accounts. Importantly, we have approximately 1.4 million commercial deposit accounts representing a diverse set of industries and geographies. Turning to slide 11, we highlight our mix of non-interest bearing and interest-bearing deposits. Our consumer deposits non-interest bearing mix has been stable, remaining at 10% compared to the same period a year ago.
The commercial side is where we expected to see a continued shift from non-interest bearing into interest-bearing deposits as rates have risen, and that has played out, albeit at a somewhat faster pace than we had expected. The commercial non-interest bearing portion of total deposits was 45% as of March 31st, down from 58% a year ago. Importantly, commercial non-interest bearing deposits include the compensating balances and mid-loan escrow deposits I mentioned previously, which provide support to this mix through time. On a consolidated basis, our level of non-interest bearing deposits was 27% at the end of the first quarter of 2023, down from 33% a year ago. PNC has historically operated with a higher percentage of non-interest bearing deposits relative to the banking industry due in part to the strength of our treasury management business and granular deposit base.
As a result, we expect our non-interest bearing portion of deposits to continue to exceed industry averages and approach the mid 20% range by year-end 2023. In addition to our mix shift, we have seen a faster increase in our deposit cost this year as the Federal Reserve has continued to raise short-term interest rates. Slide 12 shows our recent trends and our current expectations for deposit betas through the end of 2023. The increase in our current deposit beta expectations are largely driven by recent events that have increased the intensity and focus on rates paid and ultimately has added incremental pricing pressure sooner than we previously expected. We expect the Federal Reserve to raise the benchmark rate by 25 basis points in May.
This, coupled with heightened competition for deposits, has accelerated our expectations for the level and pace of beta increase, and we now expect to reach a terminal beta of 42% by year end. Slide 13 details our investment securities and swap portfolios. Our securities balance averaged $143 billion in the first quarter and were relatively stable linked quarter. The yield on our securities portfolio increased 13 basis points to 2.49% as we continue to replace runoff at higher reinvestment rates. Yield on new purchases during the quarter exceeded 4.75%. Our portfolio is high quality and positioned with a short duration of 4.3 years, meaningfully shorter than many of our peers. Approximately 2/3 of our securities are recorded as held to maturity, and 1/3 is available for sale.
Average security balances represent approximately 28% of interest earning assets. Our received fixed swaps pointed to the commercial loan book remain largely stable at $42 billion notional value and 2.25 year duration. At the end of the first quarter, our accumulated other comprehensive loss improved by $1.1 billion or 10% to $9.1 billion, driven by the impact of lower interest rates during the quarter and normal accretion as the securities and swaps pulled apart. Slide 14 highlights the pace of expected security and swap maturities, as well as the related AOCI runoff. By the end of 2024, we expect about 26% of our securities and swaps to roll off.
This will drive increases in our securities and commercial loan yields, as well as meaningful tangible book value improvement, as we expect approximately 40% AOCI accretion by the end of year 2024. Slide 15 highlights our strong liquidity position. Our strong liquidity coverage ratios continued to improve in the first quarter and exceeded regulatory requirements throughout the quarter. Our cash balances at the Federal Reserve totaled $34 billion, and we maintained substantial unused borrowing capacity and flexibility through other funding sources. PNC has a robust liquidity management process, which includes a required statutory daily liquidity coverage ratio assessment, as well as a monthly net stable funding ratio calculation. In addition, we perform monthly internal liquidity stress testing that covers a range of time horizons, as well as systemic and idiosyncratic stress scenarios.
Our mix of borrowed funds to total liabilities has historically averaged approximately 17% and reached an unprecedented low level of 6% in 2021. On March 31st, our mix was 12%, and we expect to move closer to the historical average over time. In light of the current environment, we anticipate that we will be subject to a total loss absorbing capacity requirement in some form and at some point with a reasonable phase-in period. Importantly, as our borrowed funds continue to return to a more normalized level, we would expect to be compliant through our current issuance plans under existing TLAC requirements. Slide 16 shows our solid capital position with an estimated CET1 ratio of 9.2% at quarter end.
As a Category III institution, we don't include AOCI in our CET1 ratio, but understand why there is focus on this ratio with the inclusion of AOCI. As of March 31st, 2023, our CET1 ratio, including AOCI, was estimated to be 7.5%, which remains above our 7.4% required level, taking into account our current stress capital buffer. We also believe it's important to take a look at the balance sheet positioning of a bank from a market value of equity perspective, similar to our understanding of Basel IRRBB rules. Market value of equity doesn't truly get reflected on the balance sheet today due to generally accepted accounting principles, which results in a skewed approach of valuing certain items primarily on the asset side.
While AOCI takes into account the current valuation of the securities and certain portions of our swap portfolios, it does not account for the valuation of the deposit book, which can be a meaningful offset in a rising interest rate environment. In fact, looking at PNC's change in market value of equity over the past year, the increase in the market value of our deposits in a rapidly rising interest rate environment has significantly outpaced all unrealized losses on the asset side of the balance sheet, including securities and fixed rate loans. Total market value of equity increased substantially in the rising rate environment, and further, our duration of equity is now essentially zero and well-positioned in the current environment. Importantly, our models use conservative assumptions regarding estimates for betas, mix, balances, and deposit lives.
We also recognized early on that large inflows of deposits during the pandemic were driven by a combination of QE and fiscal stimulus, which were likely to be short-lived. Recall our Fed balances peaked in the first quarter of 2021 around $86 billion. We modeled an economic value associated with those deposits at a fraction of the value of core deposits. Turning to slide 17, I wanted to spend a few minutes talking about our commercial real estate portfolio. While credit quality is strong across the majority of our CRE book, office is the segment receiving a lot of attention in this environment due to the shift to remote work and higher interest rates. We thought it would be worthwhile to highlight our exposure and our position with this portfolio.
At the end of the first quarter, we had $8.9 billion or 2.7% of our total loans in our office portfolio. Turning to slide 18, you can see the composition of this portfolio, which is well diversified across geography, tenant type, and property classification. Reserves against these loans, which we have built over several quarters, now total 7.1%, a level that we believe adequately covers expected losses. In regard to our underwriting approach, we adhere to conservative standards, focus on attractive markets, and work with experienced, well-capitalized sponsors. The office portfolio was originated with an approximate loan to value of 55%-60%, and a significant majority of those properties are defined as Class A. We have a highly experienced team that is reviewing each asset in the portfolio to set appropriate action plans and test reserve adequacy.
We don't solely rely on third-party appraisals, which will naturally be slow to adjust to the rapidly shifting market conditions. Rather, we are stress testing property performance to set realistic expectations. To appropriately sensitize our portfolio, we've significantly discounted net operating income levels and property values across the entire office book. Additionally, tenant retention, build-out costs, and concession levels are all updated to accurately reflect market conditions. Credit quality in our office portfolio remains strong today, with only 0.2% of loans delinquent, 3.5% non-performing, and a net charge-off rate of 47 basis points over the last 12 months. Along those lines, we continue to see solid performance within the single-tenant medical and government loans, which represent 40% of our total office portfolio. These have occupancy levels above 90% and watchlist levels of 3% or less.
Where we do see increasing stress and a rising level of criticized assets is in our multi-tenant loans, which represents 58% of our office portfolio. Multi-tenant loans are currently running in the mid 70% occupancy range. Watch list levels are greater than 30%, and 60% of the portfolio is scheduled to mature by the end of 2024. In the near term, this is our primary concern area as it relates to expected losses and by extension comprises the largest portion of our office reserves. Multi-tenant reserves on a standalone basis are 9.4%. Obviously, we'll continue to monitor and review our assumptions to ensure they reflect real-time market conditions. For each of the key areas of focus I just discussed, we believe we are well positioned, and slide 19 summarizes our balance sheet strength during this volatile time.
Our deposits are up, our capital and liquidity positions are strong, and our overall credit quality is solid. In summary, PNC reported a strong first quarter 2023. In regard to our view of the overall economy, we are expecting a recession starting in the second half of 2023, resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in the Fed funds rate in May. Following that, we expect the Fed to pause rate actions until early 2024, when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows. We expect spot loan growth of 1%-3%, which equates to average loan growth of 5%-7%. Total revenue growth to be up 4%-5%.
Inside of that, our expectation is for net interest income to be up 6%-8%. At this point, visibility remains challenging and our full year NII guidance assumes the continuation of the recent intensity on deposit pricing, which is being driven by recent events. We expect non-interest income to be stable, expenses to be up 2%-3%, and we expect our effective tax rate to be approximately 18%. Based on this guidance, we expect we will generate positive operating leverage in 2023. Looking at the second quarter of 2023 compared to the first quarter of 2023, we expect average loans to be stable, net interest income to be down 2%-4%, fee income to be stable to down 1%.
Other non-interest income to be between $200 million and $250 million, excluding net securities and Visa activity. Taking all the component pieces, we expect total revenue to decline approximately 3%. We expect total non-interest expense to be up 1%-2%, we expect second quarter net charge-offs to be between $200 million and $250 million. Further, given our strong credit metrics, our credit quality is trending better than our expectations. With that, Bill and I are ready to take your questions.
Operator (participant)
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a 3-tone prompt acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press one three. One moment please for the first question. First question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Betsy Graseck (Managing Director and Head of Banks and Diversified Finance Research)
Hi. Good morning.
Rob Reilly (EVP and CFO)
Hey, good morning, Betsy.
Betsy Graseck (Managing Director and Head of Banks and Diversified Finance Research)
First off, I just want to say your slide deck is phenomenal. I just, you answered so many of the questions that I had coming into this. I felt like you were reading my mind ahead of this call.
Rob Reilly (EVP and CFO)
Could have been. Could have been, yeah.
Bill Demchak (Chairman and CEO)
Thank you. The team did a nice job putting that together. Thank you for recognizing that.
Betsy Graseck (Managing Director and Head of Banks and Diversified Finance Research)
No, it was great. You guys did a great job. I have two questions. One is on the beta, the deposit beta. When, you know, you're talking about the 42%. Obviously, that is aligned with, you know, the outlook that you just expressed for interest rate movements. I guess I wanted to just understand how you're thinking about the flex between deposit beta and deposit growth. Part of me says, "Hey, I could have expected even more deposit growth than you gave me QQ." Is there, you know, a rate paid element to that maybe you're holding back on, and that's why the deposits weren't maybe as high as what some folks like me had hoped?
Bill Demchak (Chairman and CEO)
We're sitting here puzzled. We grow deposits average in spot, you know, against a backdrop of, you know, absent the volatility in the market, deposits still overall leaving the system, you know, particularly in the government money funds and then just the shrinkage of the total on the back-
Rob Reilly (EVP and CFO)
QT.
Bill Demchak (Chairman and CEO)
QT. You know, our rate paid, you know, if you look year-over-year, I think our total deposits are down 3% or something, which is, you know, less than most anybody we'd compare to. We have purposefully been protecting the franchise in the course of doing that. I recognize some other people don't do that, and that's you know, we'll see how that plays out through time. I, you know, I we kind of feel we outperformed on deposits, so I'm a little bit-
Rob Reilly (EVP and CFO)
In the first quarter.
Bill Demchak (Chairman and CEO)
... by your question. Yeah.
Betsy Graseck (Managing Director and Head of Banks and Diversified Finance Research)
Yeah, no. Q2, definitely. I would expect after, you know, all of the banks, you know, finish reporting, we can have a better conversation on this. I was just wondering if you felt that, you know, if you had a slightly higher rate paid, would you have pulled in more? I suppose the way you answer that question is you don't feel the need to. That's great. Just separately, you know, as a fallout of what has happened with, you know, SVB, Signature, et cetera, do you feel like there's any need at all to reassess the duration of the, you know, commercial operating account deposit liability life? Is that something that, you know, having seen what happened at SVB, you would wanna take a closer look at?
Do you feel like it's just such a different animal given, you know, what you outlined on slide 10 with the granularity you've got? Thanks.
Bill Demchak (Chairman and CEO)
First of all, we look at that all the time. As Rob put into his comments, a large portion of the deposit growth that we saw through COVID, you know, so stimulus and the growth in the Fed's balance sheet, we just assumed had a life of a day, a zero. You know, because we're in an abnormal period of time. The core operating deposits that we have, you know, particularly as you go in the middle market, are basically the monies, you know, the working capital monies that companies use to run their companies. We truncate and always have truncated the modeled lives of those deposits well below what the practical experience would show us. Yeah, it's conservative.
Rob Reilly (EVP and CFO)
Deposits that are spread out over diverse industries and diverse geographies.
Bill Demchak (Chairman and CEO)
You know, accounts. You know, you almost can't compare what happened at, you know, Silicon Valley and Signature Bank to any other bank I've ever seen in terms of the concentration of you know, the deposit accounts.
Rob Reilly (EVP and CFO)
The nature of the clients.
Bill Demchak (Chairman and CEO)
Just the nature of them. I mean, a lot of that money was, you know, it was capital raise money that was sitting there.
Betsy Graseck (Managing Director and Head of Banks and Diversified Finance Research)
Right. Okay, that's super. Thank you so much. Appreciate it.
Bill Demchak (Chairman and CEO)
Yep.
Operator (participant)
Our next question from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
Hi. I guess this question goes in the category of no good deed goes unpunished. Your operating leverage in the first quarter year-over-year was over 10%. You've guided for positive operating leverage this year of 1%-3%. Your cycle to date beta, I estimate that being below 40%. All that looks really good. On the other hand, you did, I guess, lower your guidance for how much positive operating leverage this year. You mentioned NII, you mentioned the intensity on deposit pricing. Just can you help talk about the trade-offs of pursuing growth with more deposits versus maybe, you know, scaling back if that deposit pricing is really that much more intense? Or do you see that not being so at some point?
Bill Demchak (Chairman and CEO)
I think, Mike, the part of the issue that we face here is, you have an interest rate forward curve that's suggesting cuts out there. If you believe that, you know, betas would be less. We kind of think the Fed's gonna hold through the year and cut next year. Personally, I think they might hold longer than that. Everybody's NII guide is gonna be all over the place depending on what they actually think the Fed's doing as we go into this, you know, the back end of this year. Separately, you know, we have seen just this heightened awareness of interest rates and what you do with deposits on the back of the banks that failed. You've seen the growth in the government money funds on the back of the Fed's reverse repo facility, which is a real thing.
As long as they allow that to keep growing, you know, the they're at the market deposits, but they're basically getting drained from the banking system, you know, and making liquidity more expensive. That's. You know, we took all that into account and said, look, if rates are higher for longer, if the Fed keeps draining deposits through its reverse repo facility, the smaller banks really need to pay up at super high rates to fund their balance sheets, it's gonna be painful for us, and that's what we put in our guide. That may or may not happen.
Rob Reilly (EVP and CFO)
I would just add, we've got to focus on our core franchise and our clients. On the commercial side, it's really the effect of commercial clients choosing to switch to interest-bearing from non-interest-bearing.
Bill Demchak (Chairman and CEO)
Yeah.
Rob Reilly (EVP and CFO)
Their relationship's fully intact. Then on the consumer side, as Bill just mentioned, the interest-bearing deposits and the pressure around rates paid there.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
The one other point you guys have made is that, you know, either NII will be better or you might get to release some of your credit reserves. Have you seen any improvement in that loan pricing, you know, commensurate with some of the, you know, the standards in the capital markets? You know, you're pricing for risk a lot more. In the lending markets, you have not been pricing for risk, and you brought that up before.
Bill Demchak (Chairman and CEO)
Yeah.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
Are you seeing that at all or still not yet?
Bill Demchak (Chairman and CEO)
You know, our new production is a little bit better than it was. You know, in fairness, you know, at the moment, credit looks much better than we otherwise would have assumed. It's a trade off. Now it's gonna be interesting, Mike, because, you know, the marginal cost of funds for the U.S. banking system has just gone up a lot, you know, as a result of this flurry. All else equal, you would expect credit spreads to widen here simply because the cost of funds for all banks has gone up. Haven't seen that play out yet, but it continues to be at least my expectation that it will.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
All right. Thank you.
Operator (participant)
Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead.
Gerard Cassidy (Managing Director)
Hi, guys. How are you?
Bill Demchak (Chairman and CEO)
Hey, morning, Gerard.
Gerard Cassidy (Managing Director)
Bill, can you give us. You guys pointed out about Rob Reilly, the expectations on TLAC in your prepared remarks. Can you guys give us some color on what changes may come as a result of the Signature Bank and Silicon Valley Bank failures? The regulators look like they're going to reassess the situation. We'll get the postmortem on May first, of course. What do you guys think may happen in terms of additional requirements for regional banks like yours? I know TLAC, you're already planning on that, but outside of TLAC.
Bill Demchak (Chairman and CEO)
I don't know what it is they might do. You know, there's a lot of talk around should they eliminate the available for sale, opt-in or opt-out.
Rob Reilly (EVP and CFO)
AOCI.
Bill Demchak (Chairman and CEO)
Yeah. Yeah, AOCI for banks our size. You know, they may well do that. Part of me, though, you know, the reason we put economic value of equity in our presentation is, as soon as you start isolating specific fixed rate assets and ignore others, so, you know, what do you do with fixed rate whole loan mortgages? What do you do with held? You know, it's all the same stuff. It's an accounting entry. I would hope that they would have a more holistic look as they do in Europe on measuring, you know, balance sheet risk to interest rates. I don't know where that's gonna end up. Whatever it is they do is gonna take a period of time. You know, TLAC, I think, is a certainty at this point.
It's a function of how much it'll be and whether it's, you know, varied as a function of size and complexity of bank.
Rob Reilly (EVP and CFO)
If there's some tailoring.
Bill Demchak (Chairman and CEO)
Yeah. Yeah.
Gerard Cassidy (Managing Director)
No, and Bill and Rob.
Bill Demchak (Chairman and CEO)
Sorry.
Gerard Cassidy (Managing Director)
Go ahead, Rob. Go ahead.
Rob Reilly (EVP and CFO)
I was just gonna say, those are the two prominent subjects, TLAC and AOCI inclusion.
Bill Demchak (Chairman and CEO)
By the way, the issue, it's just it's worth mentioning, you know, basic interest rate risk management and the test around liquidity that banks go through. I mean, we do this. We run this stuff every single day with all sorts of different scenarios, and the regulators require us to, and we get measured on it. We do even more than that. Report on it.
Gerard Cassidy (Managing Director)
Yeah.
Bill Demchak (Chairman and CEO)
Like, I don't even know who was looking at these other banks. It's. You know, to come in and say we ought to do more, we're already doing it, is I guess my point.
Gerard Cassidy (Managing Director)
Very, very clear. And I'm glad you guys put the whole balance sheet, the equity evaluation, because that message has to get out, and I'm glad you guys did that. Thank you. Moving on to commercial and industrial loans. You guys have seen really good growth over the past year. Can you give us a little more color on do you see a, you know, re intermediation coming into the banking system because the capital markets are still disrupted? Or is it just you guys have, you know, had success with BBVA, and that's working for you? Can you give us some color of that growth that you're seeing?
Bill Demchak (Chairman and CEO)
A couple of comments. If you look back through our history when we enter new markets, this is, you know, particularly true back to RBC and then what we've seen with the BBVA. We tend to grow loans at a pace in the new markets that would be above what you would expect at a long-term trend. Over time, we cross-sell into those, you know, new relationships. I almost think of it as, you know, it's kinda advertising dollars. You otherwise participate in a deal on the hope that you're gonna get TM revenue and other things. What we'll see going forward is the cross-sell into the new relationships we've established. The ability to continue to grow loans at that pace, should we choose to, is probably still there.
Do you get paid for it today, the way you did when rates were much lower?
Rob Reilly (EVP and CFO)
Not as much.
Bill Demchak (Chairman and CEO)
That's a tougher question. Now the whole reintermediation in the banks from capital markets, I've heard some of that buzz. By the way, I've heard the buzz the other way. you know, all else equal, I suspect the long-term trend will be less in the banking system and more out of the banking system, you know, over a long, long period of time, notwithstanding what happens in the near future.
Gerard Cassidy (Managing Director)
Got it. Very helpful. Thank you. To really reiterate what Betsy said, great deck. Thank you very much.
Rob Reilly (EVP and CFO)
Thanks, Gerard.
Operator (participant)
Next question from the line of John Pancari with Evercore. Please go ahead.
John Pancari (Senior Managing Director and Senior Analyst)
Good morning.
Rob Reilly (EVP and CFO)
Hey, John.
John Pancari (Senior Managing Director and Senior Analyst)
I agree on the slide deck. Very, very helpful detail. Thanks for giving it. On the deposit front, just a couple additional bit of detail. The beta expectation, the terminal beta of 42% looks a little bit more conservative than the group and probably appropriately so. It's good to see it. Can you maybe give us how that breaks down by way of commercial deposit beta expectation at this point versus-
Bill Demchak (Chairman and CEO)
Yeah, sure.
John Pancari (Senior Managing Director and Senior Analyst)
Consumer?
Bill Demchak (Chairman and CEO)
Yeah, sure.
Rob Reilly (EVP and CFO)
Yeah, sure. Hey, John. good morning. It's Rob. The, you know, the way that we look at it, in terms of determining where we're going to end up, and again, it's an expectation, we'll see how it, how it plays out ultimately. You're on the right track. If you take a look at our total deposits of $437 billion, and you take commercial and the high net worth, the consumer portion of which is high net worth, which is around $230 billion, those betas have moved. They're already at terminal. It's done. You know, that leaves roughly, you know, $200 billion or so in consumer deposits. As I mentioned in my comments, 10% of those are non-interest-bearing, which are transactional accounts that we don't expect to change.
You know, you're at $170 billion, the minority of our total deposits of interest-bearing consumer deposits that are sort of in play and that we expect to pay higher rates on. That's how, that's how we get to, you know, maybe a more conservative number than what you're seeing on peers that don't have the same mix.
John Pancari (Senior Managing Director and Senior Analyst)
Okay. No, that's helpful. On the deposit front, if I could also deliver detail on the amount of inflows that you may have seen, you know, during the March time period around the failures. Can you maybe quantify the amount and if you expect any outflow of those inflows that you saw?
Rob Reilly (EVP and CFO)
We did see in mid-March. We saw some inflows during that week that, you know, at the height of the disruption. A lot of that settled out. We don't expect to see that be a factor for us positively or negatively as we move into the second quarter.
Bill Demchak (Chairman and CEO)
The only thing I'd say, we actually opened in March twice the number of accounts, you know, in our C&I franchise that we would otherwise open in a month. Away from the deposits that came in, we actually got a bunch of clients.
John Pancari (Senior Managing Director and Senior Analyst)
Yeah.
Bill Demchak (Chairman and CEO)
You know, the deposits will stay and get mixed, some will go, we grew our account portfolio pretty substantially in one month.
John Pancari (Senior Managing Director and Senior Analyst)
Okay, great. If I could put one more in there. Just on the office front, do you happen to have, perhaps, you know, the refreshed LTVs, that you're starting to see in that portfolio?
Bill Demchak (Chairman and CEO)
That's a good question, and I haven't seen them. It's worth, you know, I don't know if we put in the deck or not, but, you know, we underwrite to, what, 55-60?
Rob Reilly (EVP and CFO)
55 to 60.
Bill Demchak (Chairman and CEO)
All of that stuff is stale, and all the appraisals that you get are stale. In effect, what we end up doing is you assume that less leases renew than you otherwise would in a normal cash flow analysis. You drop that pretty materially. You assume that lease rates, all else equal, are gonna go down, and then you have to put in the rehab costs you know, to re-lease it. Then you discount it at lower rates. We've done all that building by building.
John Pancari (Senior Managing Director and Senior Analyst)
Yeah.
Bill Demchak (Chairman and CEO)
Then taken reserves against it. I guess the final point I'd make, if you think about Rob's number, it was at 9.6% we have.
Rob Reilly (EVP and CFO)
The multi-tenant.
Bill Demchak (Chairman and CEO)
Isn't it?
Rob Reilly (EVP and CFO)
Right.
Bill Demchak (Chairman and CEO)
You know, effectively you're saying, all right, I can have 20% of Class A office default and lose $0.50 on the dollar on a portfolio that was originally underwritten at 60%. That's a pretty severe outcome.
Rob Reilly (EVP and CFO)
Yeah. I, and I would just add to that, John.
John Pancari (Senior Managing Director and Senior Analyst)
All right.
Rob Reilly (EVP and CFO)
Bill mentioned it, you know, we have a relatively small portfolio. So we're able to go asset by asset rather than just broad strokes across-.
Bill Demchak (Chairman and CEO)
Yeah.
Rob Reilly (EVP and CFO)
You know, a general portfolio.
Bill Demchak (Chairman and CEO)
Yeah. You know, look, we, you know, we know how to do this, right? We've been in the business for a long time. We have all the resources and have seen the activity in Midland. You know, we know all the borrowers we're with and, you know, we think we've laid it out pretty clearly. We, you know, we're gonna have charge-offs, but we've, you know-
Rob Reilly (EVP and CFO)
That's why we've built the reserves.
Bill Demchak (Chairman and CEO)
... recognized where they're coming from, and we've built the reserves.
John Pancari (Senior Managing Director and Senior Analyst)
Got it. Very helpful. Thank you.
Operator (participant)
Next question from the line of Bill Carcache with Wolfe Research. Please go ahead.
Bill Carcache (Senior Equity Research Analyst)
Thanks. Good morning, Bill and Rob. I wanted to follow up on the deposit beta commentary. Rob, you mentioned that mid-20% non-interest-bearing deposit mix that's implicit, I believe, in your 42% terminal beta assumption.
Rob Reilly (EVP and CFO)
Yeah.
Bill Carcache (Senior Equity Research Analyst)
It looks like that would get you back to pre-COVID levels on slide 11, I think. How are you thinking about the risk that that non-interest-bearing mix will continue to fall, you know, not just to pre-COVID levels, but potentially, you know, even lower? Perhaps, you know, some have talked about, you know.
Rob Reilly (EVP and CFO)
Yeah. Yeah. It's a good question.
Bill Carcache (Senior Equity Research Analyst)
pre-GFC levels.
Rob Reilly (EVP and CFO)
Yeah, we can see, you know, we take a look at the nature of the accounts. Mid-twenties is our estimate. It could go lower. Our expectations are, though, that it would be in the mid-twenties, that's really on the basis of the nature of the operating accounts that we have, that as we just were mentioning, we know really well and we know the nature of their activities. It's really knowledge of our operating book that gives us that indication.
Bill Carcache (Senior Equity Research Analyst)
Understood. Separately following up on your commentary around, you know, potential regulatory uncertainty. In light of Barr's, you know, recent senate testimony, I was hoping you could address broadly how you're all thinking about the levers at your disposal, to the extent that the regulatory environment grows more challenging. Certainly, you're. Seems like you're well positioned. You know, in terms of levers, whether it's RWA growth, buyback dividend, if you could just frame, you know, how you think about those to the extent that it does get more challenging.
Bill Demchak (Chairman and CEO)
I'm not sure. I thought, you know, if you put AOCI in, we're already kind of over the threshold. All else equal, I think we're well positioned and fine. As Rob mentioned, we're, you know, at least at the moment, being conservative on our thoughts on share repurchase. Most of that is to kind of wait out the current environment, get through our earnings, and see where we are. I don't, you know, I don't see any issue coming out of regulation that we won't be able to handle in the due course.
Rob Reilly (EVP and CFO)
They would largely be in the, you know, obvious areas of capital and liquidity where we're strong.
Brian Gill (EVP and Director of Investor Relations)
Next question, please.
Operator (participant)
Next question from the line of Scott Siefers with Piper Sandler. Please go ahead.
Scott Siefers (Managing Director and Senior Research Analyst)
Morning, everyone. Thank you for taking the question. You reduced the full year 23 loan growth expectation a bit. I was wondering if you could comment for a second on, you know, how much of that is sort of lower, either existing or anticipated demand, and how much is you guys just sort of being more conservative about where you'd hope to kind of direct your capital and liquidity?
Bill Demchak (Chairman and CEO)
It's a great question. It's probably 50/50. Demand has softened a little bit, and then, you know, the marginal cost of syncing new clients has gone up, we're a little more picky than we were. It's probably 50/50.
Rob Reilly (EVP and CFO)
That spread issue that we talked about that we, you know, we think that we should be paid more for the risk.
Scott Siefers (Managing Director and Senior Research Analyst)
Okay. Perfect. Thank you. Bill, I was hoping you could expand just a bit on that, commercial account opening comment you made a couple questions ago. Maybe as you sort of think of how the, sort of the world might, look going forward for commercial customers. Do you think they'll just maybe diversify their relationships to protect themselves a little, you know, how will an operational account work? You know, will people just keep less in their operational accounts and sprinkle it elsewhere? Any thoughts on how things might evolve?
Bill Demchak (Chairman and CEO)
You know, I'm not sure. We haven't seen anything with our legacy clients in terms of behavior. Now we've seen money go into sweep accounts, you know, government funds from corporates and individuals largely as a function of rate. I don't know that it has anything to do with diversification. Now, as you go, you know, for smaller banks, I suppose that that could become an issue, you know, depending on how much visibility there is in, into, you know, that particular bank's balance sheet. We just haven't seen any of that.
Scott Siefers (Managing Director and Senior Research Analyst)
Yeah. Okay. All right. Perfect. Thank you very much.
Bill Demchak (Chairman and CEO)
Yeah.
Operator (participant)
Next question from the line of Ken Usdin with Jefferies. Please go ahead.
Ken Usdin (Managing Director and Equity Research Analyst)
Thanks. Good morning, everyone. Hey, guys, you know, I just wanna dig on the guidance a little bit. You know the second quarter guidance is clear for the revenue step down, and kind of that implies in the full year guide that second half revenue is pretty equal to first half revenue. I'm just wondering if you kind of maybe give us some NII versus fees and are you expecting any, you know, just better stability or increase as you go through the year perhaps in fees versus what might happen in NII? Thanks.
Rob Reilly (EVP and CFO)
Okay. I think you're asking in terms of the full year. You know, we've given you the new guidance around our NII, and we've been through that. As far as fees go, you know, we're calling it to be stable, you know, year-over-year. There's some moving parts in there. Some of the fee categories are doing a little better than we expected, some are doing a little bit worse. Altogether, it's still stable.
Ken Usdin (Managing Director and Equity Research Analyst)
Okay. Within that, can I just ask you a question? You know, your Harris Williams business has just been a great one over the years. In this environment, you know, obviously M&A is slower. Is there also-
Rob Reilly (EVP and CFO)
Yeah.
Ken Usdin (Managing Director and Equity Research Analyst)
... Is there any sense or chance that also, like, mid-size companies have to do a rethink here? I'm just kind of wondering just where you think the pipelines and outlook are for that business specifically. Thanks.
Rob Reilly (EVP and CFO)
Harris Williams, you're accurate in terms of that's our biggest driver of our capital markets advisory businesses. They had a slower than usual quarter in the first quarter, obviously reflecting a lot of the disruption. The pipelines are still pretty good. We're not expecting a big rebound in the second quarter, but potentially in the second half. To your point, you know, a lot of that depends on the psychology at the time and, you know, the ability and the support for both buyers and sellers to do deals.
Ken Usdin (Managing Director and Equity Research Analyst)
Okay. Hey, Rob, one more quick one. I know your footnote on your beta slide says that you don't include time deposits in your beta calc. Are we generally to assume that the beta on time deposits is pretty obviously very high just given what we know-
Rob Reilly (EVP and CFO)
Yeah.
Ken Usdin (Managing Director and Equity Research Analyst)
to the earlier point that Bill made about industry funding costs?
Rob Reilly (EVP and CFO)
Yeah. That's right. Again, that's a conventional measure, so that's not our own personal PNC measure. That's how the industry calculates it.
Ken Usdin (Managing Director and Equity Research Analyst)
Okay. Understood. Thank you.
Rob Reilly (EVP and CFO)
Sure.
Operator (participant)
Once again, please press one four to queue up for a question over the phone lines. Next question from the line of Stefan Shed with Point72. Please go ahead.
Stefan Shed (Analyst)
Yes, thank you. Quick question, if I may, on the commercial real estate. Follow-up, [one], on criticized loans on slide 18, you said 20%, twice as much as the rest of your commercial real estate book. I would just like to understand what was this number before and why how you would expect this number to evolve from here?Thank you.
Rob Reilly (EVP and CFO)
I'm sorry, I'm sorry, I didn't follow all of that.
Stefan Shed (Analyst)
Yeah, yeah, sorry.
Rob Reilly (EVP and CFO)
David.
Stefan Shed (Analyst)
On slide 18, you mentioned that our office credit as loan, ratio is 20%. I just would like to know what was this number before for previous quarters, and how you expect this number to evolve from here?
Rob Reilly (EVP and CFO)
Oh, I see. 2.7%. No, it's been pretty steady. it's been a small percentage of our total commercial real estate. hasn't changed, nor do we expect it certainly not to go up.
Stefan Shed (Analyst)
This is thank you.
Rob Reilly (EVP and CFO)
Sure.
Bill Demchak (Chairman and CEO)
Next question from the line of Alan Davies, NatWest Markets. Please go ahead.
Alan Davies (Equity Research Analyst)
Hi. Thank you very much. Yeah, Alan Davies here from NatWest Markets. Just a very quick question, and to echo what everybody said, the disclosure information here is fantastic. With all the market noise that went on after SVB, and I totally get the difference and I totally agree with what you're saying about the accounting standards and so on. Nevertheless, there's a lot of keen interest in the unrealized losses on the hold-to-maturity portfolio. Are you able to provide any color or guidance there? I don't think all of that would be in AOCI. Is there anything that you can help guide me with in that regard?
Bill Demchak (Chairman and CEO)
The add on held to maturity. Inside of AOCI today is one number, and then we have another smaller loss in held to maturity.
Rob Reilly (EVP and CFO)
Which was-
Bill Demchak (Chairman and CEO)
which we disclosed.
Rob Reilly (EVP and CFO)
Three and a half billion. Yeah.
Bill Demchak (Chairman and CEO)
Yeah.
Rob Reilly (EVP and CFO)
Yeah.
Alan Davies (Equity Research Analyst)
Oh, you did. Well, I apologize. I did not see that.
Rob Reilly (EVP and CFO)
Yeah.
Alan Davies (Equity Research Analyst)
Fantastic.
Bill Demchak (Chairman and CEO)
Yeah.
Alan Davies (Equity Research Analyst)
Sorry. Didn't mean to waste your time. Thank you.
Bill Demchak (Chairman and CEO)
No problem. No waste.
Alan Davies (Equity Research Analyst)
Okay. Bye.
Operator (participant)
We have no further questions on the phone line.
Brian Gill (EVP and Director of Investor Relations)
Okay. Well, thank you, for joining our call and your interest in PNC. If, you have any other additional questions or need follow-up, please feel free to reach out to the IR team. Thank you. Bye.
Bill Demchak (Chairman and CEO)
Thanks, everybody.
Rob Reilly (EVP and CFO)
Thank you.
Operator (participant)
That concludes today's call. We thank you for your participation and ask you to please disconnect your lines.