The PNC Financial Services Group - Earnings Call - Q2 2025
July 16, 2025
Executive Summary
- PNC delivered a clean beat with EPS of $3.85 vs S&P Global consensus $3.56* and total revenue of $5.661B vs $5.603B*, driven by 2% average loan growth, 2 bps NIM expansion to 2.80%, and disciplined expenses (efficiency 60%). Bold positive operating leverage of 4% and 10% PPNR growth underscored the quality of the print.
- Management nudged full‑year guidance: average loans raised to ~+1% (from stable), NII to ~+7% (from +6‑7%), while noninterest income trimmed to ~+4‑5% (from +5%) given heightened macro/tariff uncertainty; total revenue ~+6% and expense ~+1% maintained.
- Credit quality stayed solid: NCOs $198MM (0.25%), NPLs down 8% QoQ; allowance at 1.62% of loans. Q3 guidance calls for higher NCOs ($275–$300MM) as fully‑reserved CRE office losses flow through.
- Capital and returns remain strong: CET1 10.5%, AOCI improved by ~$0.6B; $1.0B capital returned (dividends + buybacks) and common dividend raised 6% to $1.70 per share, with $300–$400MM repurchases planned in Q3.
- Stock reaction catalysts: raised dividend and NII outlook, accelerating C&I growth with share gains in new markets, visible NIM path to ~2.90% by year‑end, and CCAR/SCB stability—all likely to support multiple resilience despite fee guidance caution and anticipated CRE charge‑off timing.
What Went Well and What Went Wrong
What Went Well
- Positive operating leverage and PPNR growth: Revenue +4% QoQ with flat opex drove 4% positive operating leverage and 10% PPNR growth.
- Commercial momentum and share gains: Average loans +2% QoQ on C&I +4% (highest new production in 10 quarters), with management attributing growth to both higher utilization (tariff‑related) and new production in expansion markets; “It’s largely share gain” in newer MSAs.
- NIM/NII trajectory and guidance: NIM up to 2.80% (+2 bps), FY NII guide raised to ~+7%; management reaffirmed a path to ~2.90% margin by year‑end and sees momentum into 2026.
- Quote: “We did up our guidance…to up 7% for NII and the momentum will continue into 2026.” – CFO Robert Reilly.
What Went Wrong
- Fee guidance trimmed: FY noninterest income revised to ~+4‑5% (from +5%) citing heightened uncertainty, soft spots in corporate spending, and PE valuation headwinds, even as capital markets and asset management trends remain solid.
- Charge‑offs expected to rise in Q3: Guidance for Q3 NCOs of $275–$300MM reflecting the pipeline of fully‑reserved CRE office losses timing through results (economic impact already reserved).
- Loan yield/spreads: Loan yields were flat; some mix‑driven spread pressure (tilt to higher credit quality) amid rational but competitive markets limits spread expansion near term.
Transcript
Operator (participant)
Greetings. Welcome to the PNC Financial Services Group second quarter 2025 earnings conference call. At this time all participants are in listen only mode. A question and answer session will follow today's formal presentation. If anyone should require operator assistance during the conference, please press Star zero from your telephone keypad. Please note that today's conference is being recorded at this time. It is now my pleasure to turn the conference over to Brian Gill, Executive Vice President and Director of Investor Relations. Mr. Gill, you may now begin.
Bryan Gill (EVP and Director of Investor Relations)
Good morning. Welcome to today's conference call for The PNC Financial Services Group. I am Brian Gill, the Director of Investor Relations for PNC, and participating on this call are PNC's Chairman 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 July 16, 2025, 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, everyone. As you've seen, we had a very strong second quarter fueled by our continued focus on driving growth. We accelerated new customer acquisition while deepening relationships with existing customers across our businesses. Loan growth increased even through an uncertain macro environment, and we delivered on what we said we would. Our approach to growing our businesses remains consistent. The disciplined way we go to market, bringing the best of PNC's people, products, and services to customers across our expanded franchise, has continued to produce results. We reported net income of $1.6 billion, or $3.85 per diluted share. During the quarter, loans grew 2%, reflecting strong commercial loan growth fueled by the highest level of new production in 10 quarters.
At the same time, we increased revenue 4% while holding non-interest expenses stable, which resulted in another quarter of positive operating leverage and 10% PPNR growth. By now you've seen our stress test results. We maintained our regulatory minimum stress capital buffer of 2.5%, and our start to trough capital depletion of 80 basis points was the lowest in our peer group. As announced on July 3, our board increased our common dividend by 10 cents or 6% earlier this month. Rob is going to go through our performance in more detail, but first I'd like to share some of our business highlights from the quarter. As I mentioned, we continue to see strong results from the execution of our national growth strategy. In C&IB, we saw strong growth in loans and commitments, and our credit trends continue to be very good. Looking at fees.
Our capital markets and advisory trends remain solid and as expected, treasury management continues to produce strong results. In retail banking, we are accelerating customer growth. Our consumer checking accounts grew by 2% year over year, including 6% growth in the Southwest. We also saw record debit and credit card activity this quarter and we remain on track with our $1.5 billion branch investment in which we plan to open more than 200 branches in our expansion markets. Within our asset management business, we had positive net flows and new client acquisition increased 16% linked quarter. Inside of that, growth in our expansion markets accelerated as discretionary assets under management grew nearly three times that of legacy markets, albeit off a small base. In closing, we continue to demonstrate the strength of our national franchise and deliver on our objectives.
We are poised to further capitalize on our growth potential and I remain very optimistic about our future. Finally, I just want to take a minute to thank our talented employees for their efforts which are vital to all of our success and growth. With that, Rob will take you through the quarter. Rob,
Robert Reilly (EVP and CFO)
thanks, Bill, and good morning everyone. Our balance sheet is on slide 4 and is presented on an average basis for the linked quarter. Loans of $323 billion increased $6 billion or 2%. Investment securities of $142 billion were stable and our cash balance at the Federal Reserve was $31 billion, a decrease of $3 billion. Deposit balances increased $2 billion and averaged $423 billion. Our borrowings remain stable at $65 billion. At quarter end, AOCI was negative $4.7 billion, an improvement of $555 million or 11% compared with March 31. Our tangible book value increased to approximately $104 per common share, which was a 4% increase linked quarter and a 17% increase compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 10.5% and an estimated CET1 ratio inclusive of AOCI to be 9.4% at quarter end.
We continue to be well positioned with capital flexibility. During the quarter, we returned approximately $1 billion of capital to shareholders, which included $640 million in common dividends and $335 million of share repurchases. As Bill just mentioned, our board recently approved a 10 cent increase to our quarterly cash dividend on common stock, raising the dividend to $1.70 per share and we expect repurchases in the third quarter to be between $300 million and $400 million. Our recent CCAR results underscore the strength of our balance sheet and as previously announced, our current stressed capital buffer remains at the regulatory minimum of 2.5%. Slide 5 shows our loans in more detail. During the second quarter we delivered solid loan growth. Loan balances averaged $323 billion, an increase of $6 billion or 2% compared to the first quarter.
The growth was driven by CNI which increased $7 billion or 4% reflecting strong new production and higher utilization. Commercial real estate loans declined $1 billion or 4% as we continue to reduce certain exposures and during the second quarter our CRE office balances declined $500 million. Consumer loans were stable as growth in auto balances was offset by a decline in residential real estate loans and our total loan yield of 5.7% was stable with the first quarter. Slide 6 details our investment securities and swap portfolios. Average investment securities remained stable at $142 billion during the second quarter. Our securities yield was 3.26%, an increase of 9 basis points, and as of June 30th our duration was estimated to be 3.4 years.
Our period end securities balances increased $5 billion or 3% reflecting net purchases, the majority of which were residential mortgage-backed securities with an average yield of 5.4%. Regarding our swaps, active received fixed rate swaps totaled $40 billion on June 30 with a receive rate of 3.62% which increased 13 basis points linked quarter forward. Starting swaps were $16 billion with a receive rate of 4.07% and approximately 40% of these swaps will become active in 2025. Slide 7 covers our deposit balances in more detail. Average deposits increased $2 billion driven by growth in CDs both brokered and direct, with the balance of consumer and commercial deposits remaining stable during the quarter. Non-interest-bearing balances increased $1 billion and remained at 22% of total deposits and our rate paid on interest-bearing deposits stayed essentially flat at 2.24%, up just 1 basis point.
Turning to Slide 8, we highlight our income statement trends comparing the second quarter to the first quarter. Total revenue was up $209 million or 4% and non-interest expense was stable, which allowed us to deliver 4% positive operating leverage and 10% growth in PPNR. Provision was $254 million, reflecting the impact of changes in macroeconomic scenarios, tariff considerations, and portfolio activity including loan growth. Our effective tax rate was 18.8% and second quarter net income was $1.6 billion or $3.85 per share. In the first half of the year, compared to the same time last year, we've demonstrated strong momentum across our franchise. Total revenue increased $557 million or 5%, driven by higher net interest income and fee income growth.
Non interest expense increased $79 million or 1% reflecting increased business activity, technology investments and higher marketing spend, and net income grew $321 million resulting in EPS growth of 14%. Turning to Slide 9, we detail our revenue trends. Second quarter revenue of $5.7 billion increased $209 million or 4% linked quarter. Net interest income of $3.6 billion increased $79 million or 2%. The growth was driven by higher loan balances, the continued benefit of fixed rate asset repricing and one additional day in the quarter, and our net interest margin was 2.8%, an increase of 2 basis points. Non interest income increased $130 million or 7%. Inside of that, fee income increased $55 million or 3% linked quarter to $1.9 billion. Looking at the details, capital markets and advisory revenue increased $15 million reflecting broad based increase in capital markets activity, much of which occurred late in the quarter.
Card and cash management revenue grew $45 million or 7% driven by seasonally higher consumer spending and growth in treasury management. Mortgage revenue decreased $6 million or 4% primarily due to lower residential mortgage servicing activity and other non-interest income of $212 million increased $75 million primarily reflecting Visa related activity and other valuation adjustments. Turning to Slide 10, our expenses remain well controlled and were stable linked quarter. Seasonally higher marketing spend and continued technology investments were more than offset by our disciplined expense management. As we previously stated, we have a goal to reduce costs by $350 million in 2025 through our continuous improvement program. As you know, this program funds a significant portion of our ongoing business and technology investments and we're on track to achieve our full year target. Our credit metrics are presented on Slide 11.
Overall credit quality remains strong with improvements in non-performing loans, delinquencies, and charge-offs. Non-performing loans of $2.1 billion were down $184 million or 8%, driven by declines in both C&I and commercial real estate non-performing loans. Total delinquencies of $1.3 billion declined $128 million or 9% compared with March 31, reflecting both lower consumer and commercial delinquencies. Net loan charge-offs were $198 million, down $7 million, and represent a net charge-off ratio of 25 basis points. Our allowance for credit losses totaled $5.3 billion, or 1.62% of total loans at the end of the second quarter, which included tariff considerations. In summary, PNC reported a solid second quarter and we're well positioned for the second half of 2025.
Regarding our view of the overall economy, we're expecting continued economic growth in the second half of the year, resulting in real GDP growth of approximately 1.5% in 2025 and unemployment to increase to around 4.5% over the next 12 months. We expect the Fed to cut rates once in 2025 with a 25 basis point decrease in December. Considering our reported first half operating results, third quarter expectations and current economic forecasts, our full year 2025 guidance is as follows. For the full year 2025 compared to the full year 2024, we expect average loans to be up approximately 1% versus our prior guidance of stable. We expect full year net interest income to increase approximately 7%, up from our previous guidance of up 6-7%.
We now expect non interest income to be up approximately 4-5%, down slightly from our previous guidance of up 5%, primarily reflecting the continued level of heightened economic uncertainty. Taking the component pieces of revenue together, we continue to expect total revenue to be up approximately 6%, we continue to expect non interest expenses to be up approximately 1% and we expect our effective tax rate to be approximately 19%.
For The third quarter of 2025 compared to the second quarter of 2025. We expect average loans to be up approximately 1%, net interest income to be approximately up 3%, fee income to be up between 3% and 4%, other non interest income to be in the range of $150-$200 million. Taking the component pieces of revenue together, we expect total revenue to be up between 2% and 3%, we expect non interest expense to be up approximately 2%, and we expect third quarter net charge offs to be in the range of $275-$300 million. With that, Bill and I are ready to take your questions. Thank you.
Operator (participant)
We'll now be conducting a question and answer session. If you'd like to ask a question at this time, you may press star one from your telephone keypad and the confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to withdraw your question from the queue. For participants that are using speaker equipment today, it may be necessary to pick up your handset before pressing the star keys. One moment please. Poll for questions.
Bryan Gill (EVP and Director of Investor Relations)
Thank you.
Operator (participant)
Thank you. Our first question today will be coming from the line of David George with Baird. Please receive your questions.
David George (Senior Research Analyst)
Hey guys, good morning. Question on the pickup you had in loan growth in the quarter. A lot of it looks like it's coming from commercial. There is a pickup in line of credit utilization but would like to get some color or context around that growth and how sustainable you think it might be. I have a quick follow up as well.
Robert Reilly (EVP and CFO)
Yeah, sure.
Good morning David, it's Rob.
Yeah, so loan growth was strong in the second quarter and it really was the combination of an uptick in utilization, you know, in part due to obviously some tariff related considerations. Importantly for us, on top of that was also new production in large part from our growth markets which is, you know, simply the fruition of years of working toward that. It really was a combination that drove those higher levels.
When we look to the balance of the year, the balance of 2025, we do not have quite the same loan growth repeating. We do have some more loan growth than what we thought. So we raised, as you saw in our full year guidance, average loans from stable to up 1%.
David George (Senior Research Analyst)
Okay.To that end, it's staying on NII between the pickup in loan growth. Rob, and you added, as you mentioned, added to securities portfolio towards the end of the quarter and your inherent positioning with asset repricing and swaps coming off. Presumably, you continue to be in a pretty favorable NII position going into the back half and into next year. Just want to get a sense as to how you're thinking about the trajectory of NII in the back half and into 2026.
Robert Reilly (EVP and CFO)
Yeah, sure. Because of the items that you.
Mentioned, we did up our guidance for the full year from up 6-7% to up 7% for NII and the momentum will continue into 2026. You know, we won't get into specific guidance but you know we expect a similar and sustained trajectory.
David George (Senior Research Analyst)
Sounds good, thanks. Sure.
Operator (participant)
The next question is from the line of Chris McGrady with KBW. Please proceed with your questions.
Chris McGratty (Managing Director)
Oh, great morning. Thank you. Bill. Kind of a big picture question for you. It feels like we're at a really important spot for the industry given what's. Happening in Washington, the political environment and the deregulatory environment. I'm interested how are your updated views of how this may play out for PNC. You've talked about the benefits, but also the frustration with scale over the years.
Also balancing with what is seemingly. A little bit better organic growth outlook. Thank you.
Bill Demchak (Chairman and CEO)
Look, ignoring what's happening in D.C. we're on a good path that, you know, new markets and new clients are giving us an organic growth opportunity that we haven't seen in years at the margin, you know, Washington comes in and out and regulations get easier and harder and we succeed in all of those environments. We are in an environment today where regulation gives us a bit of a tailwind, which is a good thing. You know, you'll see that not just in some of the, you know, capital ratios and adjustments and Basel III endgame and so on and so forth, but also I think through time and the amount of money we actually spend on.
You know, what, I'm just going.
To call busy work. Yeah. Responding to regulatory things that do not necessarily have a lot to do with core risk in the bank. All of that helps at the margin. Against a backdrop of a company that is actually growing clients and growing business at a pretty healthy clip, we feel pretty good about where we are.
Chris McGratty (Managing Director)
Thank you.
Operator (participant)
The next question is from the line of John Pancari with Evercore ISI. Please proceed with your questions.
John Pancari (Senior Managing Director)
Morning.
Robert Reilly (EVP and CFO)
Morning.
John Pancari (Senior Managing Director)
Just wanted to get some additional color on your fee income outlook for the full year. Your fee trends came in pretty solidly in the second quarter. You cited the upside to capital markets and a little bit of upside in other. You nudged your fee guidance lower. It looks like the street was already there. You nudged it lower. You said the economic uncertainty. If you could maybe just elaborate what's keeping you from getting a little bit more confident there? I know you cited that you're seeing record pipelines in your capital markets business. Maybe you just talk about the puts and takes there and the rationale in nudging that lower.
Robert Reilly (EVP and CFO)
Yeah, sure, John. So, you know, if we go back to our January expectations relative to total non-interest income growth, you know, we set up 5%, we've got a small revision to that downward. You know, we're now saying 4-5%. That's a 1% decline on an $8.4 billion-plus number. You know, pretty small.
We chalk that up to sort.
Of the heightened uncertainty that emerged after January that we're all well aware of. We have seen some soft spots in the first quarter with corporate spending activity, and mortgage is a touch less, and then as we discussed in a recent conference, private equity valuations, which is another non-interest income, you know, have some headwinds relative to our expectations in January, but it's pretty small. To your point, you know, the major categories, asset management's ahead of where we expected in January. Capital markets is right on what we expected in January.
You know, we think it's fees.
Are pretty good and they're obviously pretty resilient given, you know, everything that we've been through with the turbulence.
Bill Demchak (Chairman and CEO)
Got it.
John Pancari (Senior Managing Director)
Okay, thanks for that. Just separately, we're hearing some of the banks citing somewhat higher or intensifying competitive pressure around loan pricing. A couple of the banks are citing tighter spreads. That's impacting some of their fixed asset loan pricing benefit. Can you maybe talk about what you're seeing out there in terms of loan pricing, particularly as loan growth is accelerating and I know your loan yields were flat this quarter. Is competition at all impacting that or is that really just the swap dynamics?
Robert Reilly (EVP and CFO)
No, I think.
When you look at our spreads, our spreads are pretty consistent. You know, there's always competition. There's certainly no spread expansion, but we haven't seen a lot of contraction. If anything, we might have a little bit of spread pressure just because our asset mix, our loan mix tends recently to be sort of on the higher credit quality. Nothing that's thrown us off our yields. When rates are fairly steady, spreads are fairly steady, the yields are pretty steady.
Bill Demchak (Chairman and CEO)
Competition seems pretty rational. Yeah, not much change.
John Pancari (Senior Managing Director)
Okay, great, thank you.
Operator (participant)
Next question is from the line of Scott Siefers with Piper Sandler. Please review your questions.
Scott Siefers (Managing Director)
Morning guys. Thanks for taking the question.
Let's see. Rob, just wanted to ask a little on the margin dynamics. Excuse me. I think in the past you all have talked about the margin potentially expanding up toward like 290 by the end of the year. That's something you're still sort of pointing towards or hoping to achieve. I guess as I think of things, the asset repricing story is pretty, it's pretty much become self evident at this point. It's terrific. I would imagine deposit benefits just get tougher if the Fed isn't cutting as aggressively. I think you said you only have the 1 rate cut in December in your model, so maybe how you're thinking about that trajectory would be great. Please.
Robert Reilly (EVP and CFO)
Sure. I think you summed it up well, that nothing's changed. You know, we're still tracking to that $290 range by the end of the year that I said on the first quarter earnings call.
Scott Siefers (Managing Director)
Okay, perfect. Thank you. I guess a small one. Any rationale behind the thought that third quarter charge-offs would increase? I guess it feels like there's been a couple quarters in a row where the expectation has turned out to be worse than the reality, which is a good thing. Just curious if there's anything behind the thinking there.
Robert Reilly (EVP and CFO)
Yeah, lower charge-offs are definitely a better thing, Scott.
Yeah, charge offs have come in.
Favorably year to date relative to our expectations. We did lower our guide, meaning improved. We had been running at estimating $300 million a quarter. We've been doing closer to $200 million. We lowered our guide to $275 million-$300 million because there is still this sort of pipeline of charge-offs related to commercial real estate office that we know is going to pull through. All fully reserved. Not an economic impact, but at some point they will flow through and we expect that to occur over the next several quarters.
Scott Siefers (Managing Director)
Gotcha.
Robert Reilly (EVP and CFO)
Other than that, the credit quality is very good.
Scott Siefers (Managing Director)
Yeah, no, it seems that way.
So.Appreciate the color.
Thanks a lot, Rob.
Operator (participant)
The next questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.
Ebrahim Poonawala (Managing Director)
Hey, good morning. I guess. Sorry if I missed this. Rob, just talk to us how you're thinking about capital levels. Means, yes, a bunch of like regulatory changes sort of on the calm. But as we think about the right target CET1 capital for PNC in a world where banks triple your size are seeing requirements coming lower. How do you think about it? Like I was going back. There have been times when you operated with a 9.5 CET1. Just what the thought process is. Even if you're not willing to sort of commit to a certain target today, would love to hear how you think about your capital relative to larger peers, just as we think about just the relative competitive advantage versus disadvantage. Thanks.
Robert Reilly (EVP and CFO)
All right. Sure.
Yeah. Hi, Ebrahim, it's Rob. Yeah, you saw we print.
CET1 10.5. AOCI included 9.4 in our recent stress tests that require 7%. So we're in a healthy excess capital position. You know, the short answer is, you know, we think at the levels that we are right now with the rules still yet to be finalized. Feels about right. We did up our share repurchases as a result in the, in the second quarter and said that we're going to sustain that $300 million-$400 million of repurchases into the third quarter.
You know, obviously the highest and best.Use of our capital is for loans. You know, we're pointed to and hopeful that we'll be able to use that capital towards that loan growth.
You know, generally speaking, in terms.
Of our capital levels, we feel like.
We're in the right place right now.
We've got some flexibility. We've upped the share repurchases, we increased the dividend. I think we're in a good spot.
Bill Demchak (Chairman and CEO)
The only thing I'd add, you might have seen a comment letter that BPI put out about one of the rating agencies, which is the binding constraint for the industry right now. We're all, you know, even in today's environment, higher than we need to be vis a vis regulatory rules. We're not necessarily there vis a vis rating agency rules. There's some pushback on that. That applies to all of us, not just, you know, our size or smaller or the giant banks. It's one of the things we're all dealing with and we need to work our way through.
Bryan Gill (EVP and Director of Investor Relations)
We've heard that. Thanks for mentioning that. I guess just one follow-up, like on loan growth and capital markets, is momentum picking up as we think about just conversation with clients on all of these? I'm just trying to get a sense of is there upside to growth outlook for the back half into 2026. Should we be excited about that, or is it still early days yet? We are still watching tariffs closely. Where do you kind of shake out between those two views?
Bill Demchak (Chairman and CEO)
The one thing I will say on loan growth because we've been terrible predicting it as an industry. As an industry, which is where our prediction out there. But as I've said before, if there is loan growth in the industry, we will participate in it and likely do better just given our, you know, efforts in the newer markets. The momentum is really good at the moment, but as we've seen that can be disrupted pretty easily by, you know, the political environment and tariffs.
Ebrahim Poonawala (Managing Director)
Got it. Thank you.
Bill Demchak (Chairman and CEO)
Thank you.
Operator (participant)
The next question comes from the line of Steve Alexopoulos with TD Cowen. Please proceed with your questions.
Steve Alexopoulos (Analyst)
Hey, good morning everyone. I want to start maybe following up on what you just said in response to Ebrahim's question.
The commercial loan growth is coming from the newer markets. The higher growth MSAs, is this really.A function of new bankers and share gains? Are you guys seeing broad-based improvement. Optimism across those faster growing MSAs?
Bill Demchak (Chairman and CEO)
It's largely share gain.
Steve Alexopoulos (Analyst)
Got it. Okay. Some more specific to PNC.
Okay. Bill, this is my first time. On your call and I wanted to. Take a minute and revisit the scale argument. We just had the big four banks report. When I look at your results compared to them, you guys are very efficient, right?
Bill Demchak (Chairman and CEO)
You look at the retail bank, really. Solid, good organic growth, grow in checking accounts, but you don't have the complexity. Of a trillion plus bank. To me you seem to be in the sweet spot. I know you've talked quite a. Bit about needing more scale. What's the benefit to doing a larger deal, moving much above your current size? Because you seem to be in a great spot right now.
You did not hear us talk about doing a large deal. You said bigger is better and left to our own devices and organic growth, we will get there. The argument for scale largely is around the very visible concentration, consolidation of retail share in the U.S. and to succeed long term, as you watch the very big banks grow, we need to be in all markets and have really good products and low cost to serve those clients because that feeds the rest of our engineers. Right. I am 100% convinced we can grow our CNI franchise organically. There is a race on retail deposits and that is why we have this big focus on the investment in building branches. You know, we are refurbishing.
I do not remember the number, Rob, but the majority of our old branches rolling out, we are probably halfway through now the roll out of a new online banking. We are going to put out new mobile, you know, a GenTech AI and client service. All of the things you need to do to win in this space. You know, with that comes the ability to spread marketing dollars, the ability to spread technology dollars, you know, and everything else that is kind of self evident.
Robert Reilly (EVP and CFO)
At scale itself and particularly the technology dollars, which are increasing.
Steve Alexopoulos (Analyst)
Okay, thanks for the color.
Operator (participant)
Our next questions are from the line of Betsy Grasek with Morgan Stanley. Please receive your questions.
Betsy Graseck (Analyst)
Hi, good morning.
Robert Reilly (EVP and CFO)
Good morning.
Betsy Graseck (Analyst)
4% positive operating leverage. Very impressive. I just wanted to get, and. I know you've always got continuous improvement. Every year, wash and repeat helping drive that bus. How does AI impact the degree to which you can get even more efficient from here? Is it just starting and we have. To wait five years or is it? Heavily embedded already in the results. It's here today or some other answer. I'm just wondering. Thank you.
Bill Demchak (Chairman and CEO)
That's actually a really good way to state the question. I can give you a million ways we're using AI and thinking about AI, but the more interesting question is how's it going to make, how's it going to help you make more money or save costs and you know, in the what's in use today that is saving us a lot of money, you know, principally in, you know, fraud related areas. You see charges go way down in document sort that helps our employees get answers faster in data lake creation and burst through capacity to clouds that help us deliver more accurate models faster. The basic, you know, how do you save money through time, Betsy, is this continuation of automation that we've had largely in our back office for the last 10 years.
This may accelerate it, but continuous improvement for years has been figuring out how to do the same workload with less, and AI is going to be a big part of that, and we're looking at it in everything we do.
Betsy Graseck (Analyst)
Okay, thanks. It's early days.
Bill Demchak (Chairman and CEO)
I just don't think there's going to.
Be this gigantic change in the cost base. I think you're just going to see at least in our instance our ability to keep expenses on the low end as it relates to people even as we invest in the technology. It'll be the same trend go through our employee cost line versus our tech line for the last 10 years. I just think it continues and AI is the next leg of that. In effect, more interesting longer term is away from, you know, the cool stuff we all talk about in AI. You know, the you can be faster, you can solve models for all that stuff is the how might it change the overall delivery of financial services? That occupies a lot of our time.
We keep talking about the tools, we do not actually talk about the clients and how you end up delivering financial services in a world where, you know, advice can be computer generated, you know, through and mobile. That is where we are spending all our time.
Betsy Graseck (Analyst)
Got it. Thanks so much. Appreciate it, Bill.
Operator (participant)
Our next questions are from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.
Good morning.
Matt O'Connor (Managing Director)
I just wanted to get any thoughts you have on deposit pricing and how you're thinking about growth. Slide 7 shows just a very modest tick up in the rate paid I think as you grew the brokered and just thoughts going forward. You've got plenty of deposits to grow loans given that loan to deposit ratio so low. My guess is you want to grow deposits still.
Robert Reilly (EVP and CFO)
Yeah.
Hey Matt, it's Rob. You're right on it. Rate paid in the quarter was pretty stable. Up just one basis point over the.
First quarter for the balance of the.
Year, we do project more deposit growth and the rate pay could actually go up a little bit. Not huge, barring any rate cuts in addition to what we already expect at the end of the year. That'll probably be more just sort of mix oriented rather than anything step change wise.
Bill Demchak (Chairman and CEO)
Just as an aside, we are at least in the conversation as it relates to our new builds in the newer markets as to whether we should purposefully be more competitive in those markets to gain share faster. We're much more interested in actually just growing DBA households. Some of the optics, at least in some of the research pieces in investors' minds, are how fast are you actually growing deposits? You know, thus far through this whole cycle we've had one of the lowest cost deposit bases out there that have not had to chase rates at all. It is at least part of our conversation internally right now as to whether or not we might change strategy on that particular part of the markets. We're trying to grow and we do.
Robert Reilly (EVP and CFO)
That all the time, it's deliberate and we'll pick our spot but generally speaking pretty stable. It might drift up a bit, but nothing of big magnitude.
Matt O'Connor (Managing Director)
Okay, that makes sense.Just on the DDI accounts.Sorry if you disclosed this, but do you give the level of the DDA accounts and any split between kind of the growth markets and the legacy markets in terms of growth rates? Thanks.
Robert Reilly (EVP and CFO)
Yeah, so we've grown, you know.
Year to date we've grown DDA's 2% and within that 6% growth in the Southwest market. You see that dynamic playing out there.
Bill Demchak (Chairman and CEO)
This is another, just as an aside, this is an example of this issue for scale and needing to be in all markets. So we're going down into the Southwest, Southeast and gaining share at a rapid pace. At the same time our growth rate in our legacy markets, because we have the big banks building branches next to us here in Pittsburgh, is slowing down.
Right.
We're a player who can maintain market leading, you know, can grow and maintain market leading share in each market. Over time that's going to happen. That means you need to be in the markets which is why we're going so heavy into the build that we're doing.
Matt O'Connor (Managing Director)
Okay. Thank you. Makes sense.
Operator (participant)
The next questions are from the line of Ken Houston with Autonomous Research. Please proceed with your questions.
Ken Houston (Research Analyst)
Hey, thanks guys. Good morning. Just a question, Rob, you've mentioned and it's on one of the slides about starting to lock in higher yields and repricing risk and it just, you know, it looks like there wasn't a lot of new activity with, you know, with the swaps book and the securities book was flat. I'm just wondering if you can kind of help us understand what you might be able to do as you look further out and start to think about protecting, you know, NII as you, as you look, as you look ahead.
Bill Demchak (Chairman and CEO)
Yeah, sure.
Robert Reilly (EVP and CFO)
Yeah, sure can. Yeah, we spoke about that on the first call.
You know, from our perspective in.
Terms of 2025, NII is largely bait. As we look into additional years out and that relates to the earlier question, we see ourselves sustaining, sustaining that trajectory. You know, most of what we're doing and we've done a lot is.
Bill Demchak (Chairman and CEO)
Sort of sustaining that growth rate.
Robert Reilly (EVP and CFO)
Sustaining that growth rate. Most of, you know, what we've done is sort of largely in place. Not a lot of activity relative to that in the last 90 days. You know, we're well positioned and feel good about the NII trajectory.
Ken Houston (Research Analyst)
Okay, great. Got it. And then just one follow up on the fees. I know you covered the fee categories and such, but just like within that capital markets business, you've got Harris Williams and you've got kind of the other related capital market stuff. I think you said in the past that Harris Williams has kind of been fairly steady, but just wondering what you're seeing across the two sides of those businesses and what activity feels like underneath the surface. Thanks.
Robert Reilly (EVP and CFO)
Yeah, capital markets, we feel good about it. Like I said, we are tracking to what we expected back in January. Harris Williams, which is our largest component of the capital markets segment, is about 30-40% of it. And they're tracking right onto what we expected, which is above last year. And last year was a pretty good year.
Bill Demchak (Chairman and CEO)
What we saw at the end of the first quarter was just a pickup on our bread and butter FX and derivative based business volumes. Harris Williams is kind of a headline item. Remember, we have trading businesses and foreign exchange and derivatives and straight fixed income. We have new issue business we have syndicated. There is a lot of stuff in there.
Robert Reilly (EVP and CFO)
Yeah, no, that's right.
To Bill's point, that was a little bit soft in the first quarter. That has come back in the second quarter and we expect to continue into the third quarter.
Ken Houston (Research Analyst)
Okay, got it. All right, thanks guys.
Operator (participant)
The next question is on the line of Bill Karcashi with Wolfe Research. Please receive us your questions.
Bill Karcashi (Equity Researh Analyst)
Thanks.
Good morning, Bill and Rob, following up on the acceleration in loan production. Comments. Are you hearing anything from clients on whether bonus depreciation in the tax bill? Could serve as a potential catalyst for incremental loan growth.From your commercial clients?
Bill Demchak (Chairman and CEO)
Not directly. I mean intuitively it should, but I don't know that I've heard of anybody running out ready to spend something as the bill passed.
Robert Reilly (EVP and CFO)
Right.
Bill Demchak (Chairman and CEO)
Got it. Then on the topic of charging.
Bill Karcashi (Equity Researh Analyst)
Fintechs for consumer bank data, can you discuss how you're thinking about fintech data access fees?
Bill Demchak (Chairman and CEO)
We're in discussions on it. I applaud what JPMorgan Chase did. I think they're exactly right. I think there's a big cost to keeping this data secure and producing it in a form that's readable for our clients. So we're, you know, we're thinking about it. Okay.
Bill Karcashi (Equity Researh Analyst)
Bill, following up on your. Scale comments, does seeing some of your. Competitors enter into M&A transaction.Make you feel a greater sense of urgency in any way?
Bill Demchak (Chairman and CEO)
Do you worry about falling behind certain peers by perhaps not taking advantage of a favorable regulatory environment under the current administration at a time where others are more active?
Bill Karcashi (Equity Researh Analyst)
Okay. Okay, fair enough.That's all I had.Thank you.
Robert Reilly (EVP and CFO)
Yeah, thanks Bill.
Operator (participant)
Our next question comes from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.
Mike Mayo (Bank Analyst and Managing Director)
Hey. Could you share some light on the loan growth and how much you would consider from your traditional middle market relationship based sources? If you, by the way, if you mentioned utilization already I might have missed it, but how the utilization did compared to more capital markets oriented type loan growth. By the way, I thought you. Said you weren't going to have any.
Loan growth or you're assuming no loan growth this year. I guess that's a bit more than expected. I guess what I'm getting at is you said the loan growth might not all repeat and you had a disproportionate amount from your CIB. It sounds like more of your loan growth is that capital markets variety as opposed to that kind of bread and butter middle market loan. Is that a correct conclusion? If not, if you could educate me.
Bill Demchak (Chairman and CEO)
No, that isn't what happened. Mike.
Two things. One was we saw continuation of utilization increase largely in sort of our asset-backed areas in some middle market. Then secondly, we just grew a lot of clients. You know, the new markets are coming online. The pre-screen activity and deal activity coming out of our new markets is multiples of what it is out at the legacy and it's, you know, starting to bear fruit. And it's, you know, our traditional bread and butter clients of middle market to small or large corporate together with TM relationships and everything else we do is part of delivering all of PNC to new clients.
Robert Reilly (EVP and CFO)
Across all industries it was broad based across all our assets.
Bill Demchak (Chairman and CEO)
It's just us executing, you know, the issue. I didn't say we weren't going to grow loans. I said we would, you know, if there was loan growth out there, we'd get more than our fair share. You know, as you've seen, other than this quarter, it's been somewhat flatlined for a while. Our share gains, utilization increase, you know, paid dividends this year or this quarter.
Mike Mayo (Bank Analyst and Managing Director)
All right, so is loan growth back to the industry or is it back for PNC? I mean you're implying market share gains more than it's coming back to the industry or is the appetite of your clients increasing?
Bill Demchak (Chairman and CEO)
My guess is you're going to the utilization increase. You'll see broad based just on the back of people, you know, front running tariff impact in their inventory levels. You know, a big chunk of our growth is just organic growth. New clients in new markets and I suspect will stand out on that.
Mike Mayo (Bank Analyst and Managing Director)
The two words where you said not repeating, what did you mean by that?
Robert Reilly (EVP and CFO)
Sorry, say that again.
Mike Mayo (Bank Analyst and Managing Director)
I thought you, in reference to loan growth, you said not repeat something, not repeating or maybe I miscarried that.
Robert Reilly (EVP and CFO)
Maybe I can jump in. I'd just say in terms of loan.
Growth, you know, the tariff-driven increase in utilization across broad assets is probably in some form present at all banks. Where different are these growth markets that are adding to that loan growth that are independent of sort of the reaction to the current environment.
Bill Demchak (Chairman and CEO)
The utilization number, does it go up or down from here is really a punt on tariffs. You know, if tariffs went completely away and people would drop their inventories to all levels, you'd see and you'd see utilization across the industry decline again. So I, you know, which is one of the reasons we to forecast aggressive loan growth.
Mike Mayo (Bank Analyst and Managing Director)
Yeah. All right, so the market share you're saying is more a permanent driver of loan growth, the tariff driven part of that loan growth, ways to be seen.
Bill Demchak (Chairman and CEO)
Correct.
Robert Reilly (EVP and CFO)
Got it.
Mike Mayo (Bank Analyst and Managing Director)
All right, thank you.
Operator (participant)
The next questions are from the line of Gerard Cassidy with RBC Capital Markets. Please receive your questions.
Gerard Cassidy (Managing Director)
Hi Bill. Hi Rob. Bill, your comments about the BPI making. You know, the letter to the rating agencies about capital requirements may turn out to be the binding constraint rather than the regulatory requirements in your guys' estimation based upon your working experience with both the regulators and the credit agencies. Rating agencies, do they kind of work together or is this kind of a divide that is something new, or do they ignore one another in the past? How is this going to maybe play out is what I'm trying to get at.
Bill Demchak (Chairman and CEO)
Rob may have different comments. I don't think they talk to each other, okay. On methodologies, on anything. It's, it's, you know, it's frustrating.
Robert Reilly (EVP and CFO)
There's an opportunity to reconcile the two views. To the extent that they do that, you know, it's obviously up to them.
Bill Demchak (Chairman and CEO)
Right. Possibly the Capital Framework Conference next week in Washington might shed some light on that. Possibly.
Gerard Cassidy (Managing Director)
Bill and Rob, your guys' thoughts on this one? It's more of a macro question. Obviously there's been a lot of talk about stablecoin. You've got the COIN Act down in Washington that's likely to be passed very soon. What are your guys' view on stablecoins and how it may impact the payments business for PNC as well as deposits? Any thoughts there?
Bill Demchak (Chairman and CEO)
Yes. Let me take a bit of a broader angle on the whole thing and let's talk about crypto and payments and stablecoin. How we may or may not play, I should say how we will play. First off, you should expect to see from us announcements with respect to using our payment technology to help crypto companies. So, you know, now we are allowed to bank people in that business and just given our raw capabilities you would expect that, you know, we'll get some meaningful clients there. Secondly, we will enable our clients in the very near term to be able to use crypto to see if they're, you know, to have a wallet and to trade it. Thirdly, you would expect my expectation is an industry solution with respect to an industry led stablecoin and we would clearly be part of that.
Now what does all that necessarily mean in terms of payments and stablecoin and does it massively change the ecosystem today? I think despite, you know, a lot of the hype, there isn't really a cost advantage or a driving need to use stablecoin, at least in domestic commerce. There's use cases in terms of external transfers out of the country. There's use cases of just storing dollars out of the country, some of which will be stopped by the stablecoin bill simply because they know your customer rules. You know, whether it takes off in cross border commerce I'm probably less bullish than some.
If it does, we will have it enabled inside of our Pinnacle platform such that somebody gives us a payment file and our job is to optimize the cost of executing those payments. We will be fully capable of using stablecoin in that payment stream, you know, the same way we use wire or we use ACH or we use PNC.
Robert Reilly (EVP and CFO)
Another tool.
Bill Demchak (Chairman and CEO)
Yeah, it's just another thing as it relates to deposits. You know, am I worried that it's somehow going to drain deposits from the system? I am not. It's a good fear factor if you want to, you know, if we want to rile people up. But you know, practically there's trillions of dollars in money funds today that you could move in and out of using ACH link. We're competitive on rates. You know, if there's a bank scare and where does it run to? You know, we saw that 2023, it all ran to the money funds. Maybe some will run to stablecoin at some point in the future, but ultimately it comes back into our accounts, as we've seen. I, you know, this is going to be another payment tool. We're going to add it to the quiver of tools that we have.
We're going to empower our clients that they want to use it because we do what our clients want. I think the revenue opportunities for us beyond just serving clients day to day are likely to be seen in our payment business, in our treasury management business, as we enable both new clients and then blockchain technology for existing clients.
Gerard Cassidy (Managing Director)
Very helpful, thank you.
Bill Demchak (Chairman and CEO)
Yep.
Operator (participant)
Thank you. As a reminder, if you'd like to ask a question at this time, you may press Star one from your telephone keypad. The next question is from the line of Sol Martinez with HSBC. Please proceed with your questions.
Sol Martinez (Global Compliance Assurance and Tax Expert)
Hey, good morning. Just a real quick one on your retail lending strategy. Auto book has grown a bit. Cards are sort of flattish, you know, to down. Can you just give us an update on what your, what the strategy is here, what you're doing? Do you expect these businesses to grow? Is it important to grow and do you need to or does it make sense to look at inorganic growth for this to be, for these businesses to become relevant as a part of your business mix.
Bill Demchak (Chairman and CEO)
I'll answer the back part first. It is extremely unlikely that we would look at inorganic growth in the retail credit space simply because in most instances the thing that's available to buy is broken. We are not experts at fixing a broken franchise. We are building that expertise. We have heavy investment card, we would love to grow card balances and we think we can do that simply through deeper penetration with our existing client base. Our auto book has been growing largely because we did not run for the hills, you know, in the slight bobble of economy earlier last year, I guess.
Robert Reilly (EVP and CFO)
The RWA diets that others are on.
Bill Demchak (Chairman and CEO)
Yeah, you know, so we're going to keep investing organically on product capability, credit underwriting, marketing offers, convenience for clients as it relates to the ability to open accounts online and so on and so forth, and hopefully deepen cross sell penetration of our existing clients. But you won't see us buy somebody.
Sol Martinez (Global Compliance Assurance and Tax Expert)
Thanks, that's helpful.
Operator (participant)
The next question is a follow-up from the line of Gerard Cassidy with RBC. Please proceed with your questions.
Gerard Cassidy (Managing Director)
Thank you. Bill and Rob, can you guys comment? Obviously they had the big meeting up at Carnegie Mellon, I think it was yesterday with the AI investments. What could that mean for the Pennsylvania or the Pittsburgh area in terms of economic activity? Obviously I assume you guys will benefit from that as well. Yeah, no, thanks for the question.
Bill Demchak (Chairman and CEO)
I spent the better part of Monday and Tuesday as part of that conference. It's pretty exciting. There's, you know, we announced $92 billion of investment into Pennsylvania largely around building the energy and data infrastructure to support AI. You know, we have, you know, as a state, sort of all of the core resources, we're in the right FEMA zone. We have, you know, lots of natural gas, we have analytic and.
Gerard Cassidy (Managing Director)
You know.
Bill Demchak (Chairman and CEO)
College resources and talented people and you know, people are kind of coming together to cause it to happen. It is pretty exciting. The place is bustling, you know that one of the things independent of my PNC job is I sit on the Allegheny Conference which looks at the 10 county zone here and the take up of available build spaces. Think land and large mega project sites, some of which have been there for years, they are disappearing fast and it is pretty exciting.
Very good. I appreciate it.
Gerard Cassidy (Managing Director)
Thank you.
Operator (participant)
Thank you. At this time we've reached the end of our question and answer session and I'll hand the call back to Bryan Gill for closing comments.
Bryan Gill (EVP and Director of Investor Relations)
Thank you all for joining our call today and your interest in and support of PNC. Please feel free to reach out to the IR team if you have any follow up questions.
Bill Demchak (Chairman and CEO)
Thank you.
Operator (participant)
Thank you ladies and gentlemen. Thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.