The PNC Financial Services Group - Earnings Call - Q4 2024
January 16, 2025
Executive Summary
- Q4 delivered solid growth: total revenue $5,567M (+2% q/q, +4% y/y), NII $3,523M (+3% q/q), and NIM expanded 11 bps to 2.75% as lower funding costs and fixed asset repricing flowed through.
- Fee income fell 4% q/q on unusually strong Q3 mortgage and capital markets activity, but “Other” noninterest income rose on less negative Visa derivative marks; noninterest expense rose 5% including $97M asset impairments, partially offset by $18M FDIC special assessment reduction (net $62M after-tax).
- Net income was $1,627M ($3.77 diluted EPS), up 8% q/q; average deposits increased $3.1B q/q, CET1 improved to an estimated 10.5% (LCR 107%).
- 2025 outlook: management guides to record NII and positive operating leverage—FY revenue +~6%, NII +6–7%, fees +~5%, opex +~1%, tax ~19%; Q1 2025: NII down 2–3% (two fewer days), fees stable, other noninterest $150–$200M (ex-Visa), opex down 2–3%, NCOs ~$300M.
- Stock reaction catalysts: accelerating NIM trajectory (“approaching 3% by end of ’25”), deposit betas trending high-40s on rate cuts, and continued CRE office reserve adequacy while balances and NPLs decline; management emphasized rate neutrality and hedging to lock reinvestment yields via forward starting swaps.
What Went Well and What Went Wrong
What Went Well
- Net interest income and margin expansion: NII +3% q/q; NIM 2.75% (+11 bps) on lower funding costs and fixed asset repricing.
- Deposit and capital strength: average deposits +$3.1B q/q; CET1 estimated 10.5%, average LCR 107% in Q4, TBV/share $95.33.
- Management confidence and momentum: “We achieved strong results…record revenue…positive operating leverage…I've never been more excited about the opportunities in front of us” — CEO Bill Demchak.
What Went Wrong
- Fee income down 4% q/q on normalization from elevated Q3 mortgage and capital markets activity; mortgage revenue -33% q/q.
- Noninterest expense +5% q/q, including $97M asset impairments (tech) and higher seasonal marketing spend (partially offset by $18M FDIC assessment reduction).
- Delinquencies +8% q/q to $1.382B (commercial-driven) and y/y net charge-offs +25% to $250M, though NPLs -10% q/q.
Transcript
Operator (participant)
Greetings and welcome to the PNC Financial Services Group Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Bryan Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.
Bryan Gill (EVP and Director of Investor Relations)
Good morning and welcome to today's conference call for the PNC Financial Services Group. I am Bryan 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 January 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, Bryan, and good morning, everyone. As you've seen, we had a solid fourth quarter and a very strong year. For the full year of 2024, we earned $6 billion, or $13.74 per share. We executed well against our priorities and continued to gain momentum across our franchise. While loan demand remained soft throughout the year, our net interest income benefited meaningfully from fixed asset repricing, and we expect to see further tailwinds from repricing over the next couple of years. We grew fee income by 6%, and we achieved record revenue. At the same time, we maintained our expense discipline, allowing us to deliver positive operating leverage, which is an aside, and you will recall that looked pretty much out of reach at the start of 2024.
Finally, we grew capital and increased our tangible book value per share by 12% compared to last year, while returning $3 billion of capital to shareholders through dividends and share buybacks. Now, Rob's going to walk through the financial results in more detail, but I wanted to take just a moment to reflect on the strength of PNC's positioning as we head into 2025. Our businesses are performing exceptionally well, and we continue to see positive momentum, particularly in our expansion markets. C&IB had record revenue in non-interest income in 2024 as new client growth continued at an accelerated rate. Our sales in our expansion markets grew 26%, with over 60% of those sales being non-credit.
In Retail Banking, consumer DDA growth in 2024 was the highest it's been in eight years, and we produced record brokerage revenue at PNC Investments, and the Asset Management Group delivered its strongest level of positive net flows in years. Going forward, we're investing in new products and an expanded footprint to further accelerate our momentum. We will soon be rolling out our new online banking platform. We are doubling our new branch builds to gain scale in some of the fastest-growing regions in the country, and on the corporate side, we recently announced our entry into the Salt Lake City market. As Rob will highlight, our forward guidance solidly points to record NII in 2025, as well as strong fee income growth across our franchise. This, combined with our ongoing expense discipline, positions us to deliver meaningful positive operating leverage this year.
While there are a lot of uncertainties regarding the outlook for the economy, interest rates, and the regulatory environment, we believe that PNC's balance sheet is well-positioned. We are adequately reserved for our credit risk, and our strong capital levels provide substantial flexibility as we enter 2025. Before wrapping up, I'd like to spend just a moment to express our sympathies to those who have been impacted by the wildfires. PNC is, of course, committed to supporting our customers, our communities, and, importantly, the more than 200 employees we have in the affected areas. I also want to thank our employees for everything they do for our company and our customers. We accomplished a significant amount in 2024, and we're entering 2025 with a lot of momentum.
I've never been more excited about the opportunities in front of us to continue to grow our franchise and to deliver for our stakeholders. And with that, I'll turn it over to Rob to take you through the numbers. Rob?
Rob Reilly (EVP and CFO)
Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average basis. For the linked quarter, loans of $319 billion were stable. Investment securities increased by $2 billion, and our cash balances at the Federal Reserve were $38 billion, a decrease of $7 billion, or 16%. Deposit balances grew $3 billion and averaged $425 billion. Borrowed funds decreased $9 billion, or 12%, primarily due to the maturity of FHLB advances. At quarter end, AOCI was negative $6.6 billion compared to negative $5.1 billion as of September 30th, reflecting the impact of higher rates. Our tangible book value was $95.33 per common share, which was a slight decline linked quarter due to the decrease in AOCI, but a 12% increase compared to the same period a year ago.
We remain well-capitalized with an estimated CET1 ratio of 10.5% as of December 31, and we estimate our revised standardized ratio, which includes AOCI, to be 9.2% at quarter end. We continue to be well-positioned with capital flexibility. We returned approximately $900 million of capital to shareholders during the quarter through both common dividends and share repurchases. Slide five shows our loans in more detail. Average loan balances of $319 billion were stable compared to the third quarter, and the yield on total loans decreased 26 basis points to 5.87% in the fourth quarter, primarily driven by lower short-term rates. Consumer loans averaged $100 billion and were essentially flat, linked quarter, as growth in auto was offset by a decline in residential real estate. Commercial loans of $219 billion were stable, as growth in C&IB and leasing balances was offset by a $1 billion decline in commercial real estate loans.
On a period-end basis, commercial loans declined roughly $5 billion, reflecting both lower CRE balances and utilization rates. Slide six details our investment security and swap portfolios. Overall, we continue to be relatively neutral to changes in interest rates in 2025, and we continue to manage our fixed and floating-rate assets to reduce interest rate sensitivity in future years. Average investment securities of $144 billion increased $2 billion, as purchases more than offset runoff and maturities. During the quarter, we continued to add floating-rate securities, and our total portfolio is now 20% floating, compared to 6% a year ago. The majority of our floating-rate securities are designated as available for sale and, as a result, comprise approximately 40% of our AFS portfolio. Also, floating-rate securities are a higher-yielding alternative to excess cash at the Federal Reserve.
The yield on our securities portfolio increased nine basis points to 3.17%, driven by higher rates on new purchases and the runoff of lower-yielding securities, and as of December 31st, the duration of our securities portfolio was approximately 3.4 years. Our received fixed-rate swaps pointed to the commercial loan book totaled $50 billion on December 31st, comprised of $37 billion of active swaps and $13 billion of forward starting swaps. The weighted average received rate on the active swaps increased 14 basis points linked quarter to 3.22%. Looking forward, we expect considerable runoff in our short-term duration securities and swap portfolios, which will allow us to continue to reinvest into higher-yielding assets. Accordingly, AOCI will accrete back with maturities, resulting in continued growth to tangible book value. A full update on the expected maturities and AOCI burn down is provided in the appendix.
Slide seven covers our deposit balances in more detail. Average deposits increased $3 billion, or 1%, reflecting continued growth in interest-bearing commercial balances, partially offset by lower consumer brokered CD balances. Regarding mix, non-interest-bearing deposits were stable at $96 billion and remained at 23% of total average deposits. Our rate paid on interest-bearing deposits declined 29 basis points during the fourth quarter to 2.43%, reflecting pricing actions commensurate with the Fed rate cuts. Our cumulative deposit beta through December was 47%, and going forward, we expect our beta to be in the high 40% range during the anticipated rate-cutting cycle. Turning to slide eight, we highlight our income statement trends and a few notable items this quarter. Fourth quarter net income was $1.6 billion, or $3.77 per share. Comparing the fourth quarter to the third quarter, total revenue of $5.6 billion increased $135 million, or 2%.
Net interest income grew by $113 million, or 3%. Our net interest margin was 2.75%, an increase of 11 basis points. Non-interest income of $2 billion increased 1%. Non-interest expense of $3.5 billion increased $179 million, or 5%. The increase included non-core items netting to $79 million pre-tax, or $62 million after-tax, which I'll provide more detail on in a few moments. Provision was $156 million, reflecting improved macroeconomic factors and portfolio activity. Our effective tax rate was 14.6%, which included $60 million of income tax benefits related to the resolution of certain tax matters. Turning to slide nine, we highlight our revenue trends. On a full-year basis, we generated record revenue of $21.6 billion, as lower net interest income was more than offset by 6% growth in non-interest income. Looking at the linked quarter comparison, revenue increased $135 million, driven by higher net interest income.
Net interest income of $3.5 billion increased $113 million, or 3%, driven by lower funding costs and the continued benefit of fixed-rate asset repricing. Fee income was $1.9 billion and decreased $84 million, or 4%, linked quarter. Looking at the detail, Asset Management and brokerage income declined $9 million, or 2%, reflecting lower annuity sales, partially offset by the benefit of higher average equity markets. Capital markets and advisory fees decreased $23 million, or 6%, reflecting elevated third-quarter activity. Card and cash management fees were stable, as higher treasury management revenue was offset by credit card origination incentives. Lending and Deposit Services revenue grew $10 million, or 3%, due to increased customer activity. Mortgage revenue declined $59 million, linked quarter, primarily due to elevated RMSR hedge gains in the third quarter, and our other non-interest income increased $106 million, reflecting a less negative impact from Visa derivative activity.
Turning to slide 10, full-year non-interest expense decreased by $488 million, or 3%. Core non-interest expense was down $152 million, or 1%, compared to 2023. As a result, we generated positive operating leverage on a reported basis, as well as adjusted for non-core expenses. Fourth quarter non-interest expense of $3.5 billion increased $179 million, or 5%. As I mentioned, the quarter included $79 million of non-core expenses, which reflected $97 million of asset impairments, partially offset by an $18 million reduction to the FDIC special assessment. The asset impairments included a number of items and were primarily related to various technology investments. Core non-interest expense increased $100 million, or 3%, linked quarter, largely due to seasonality and higher marketing spend. As you know, we had a 2024 goal of $450 million in cost savings through our Continuous Improvement Program, which we exceeded.
Looking forward to 2025, our annual CIP target is $350 million, and this program will continue to fund a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 11. Non-performing loans decreased $252 million, or 10%, linked quarter, driven by lower C&I and CRE NPLs. Total delinquencies of $1.4 billion were up $107 million, or 8%, compared with September 30. The increase was primarily driven by commercial loan delinquencies, the majority of which have already been or are in the process of being resolved. Net loan charge-offs were $250 million. The $36 million linked quarter decrease was driven by lower office CRE charge-offs and higher commercial recoveries. Our annualized net charge-offs to average loans ratio was 31 basis points. Our allowance for credit losses totaled $5.2 billion, or 1.64% of total loans on December 31st, down one basis point from September 30th.
Slide 12 provides more detail on our CRE office portfolio. Our office CRE balances declined 7%, or approximately $500 million linked quarter, as we continue to manage our exposure down. Criticized loans and non-performing balances also declined, as paydowns and charge-offs outpaced new inflows during the quarter. Net loan charge-offs within the CRE office portfolio were $62 million, down from $95 million in the third quarter. Despite this decline, we continue to see stress in the office portfolio, given the challenges inherent in this book and the lack of demand for office properties. As a result, we expect additional charge-offs, the size of which will vary quarter to quarter, given the nature of the loans. Our reserves on the office portfolio increased to 13% as of December 31st, up from 11% the prior quarter. The increases in reserves reflect the continued valuation adjustments across the portfolio.
Accordingly, we believe we are adequately reserved. In summary, PNC reported a solid fourth quarter, which contributed to an overall successful 2024 and we're well-positioned for 2025. Regarding our view of the overall economy, we're expecting continued economic growth over the course of 2025, resulting in approximately 2% real GDP growth and unemployment to remain slightly above 4% through year-end. We expect the Fed to cut rates two times in 2025, with a 25 basis point decrease in March and another in June. Looking ahead, our outlook for full-year 2025 compared to 2024 results is as follows. In regard to loan growth, while a lot of indications point to accelerated growth, we've not built that into our guidance. As a result, our guidance reflects spot loan growth of 2%-3%, which equates to stable average full-year loans. We expect total revenue to be up approximately 6%.
Inside of that, our expectation is for net interest income to be up 6% to 7% and non-interest income to be up approximately 5%. Non-interest expense to be up approximately 1%, and we expect our effective tax rate to be approximately 19%. Based on this guidance, we expect we will generate substantial positive operating leverage in 2025. Our outlook for the first quarter of 2025 compared to the fourth quarter of 2024 is as follows. We expect average loans to be down approximately 1%, net interest income to be down 2% to 3%, which includes the impact of two fewer days in the quarter, fee income to be stable, other non-interest income to be in the range of $150 million-$200 million, excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be down 1% to 2%.
We expect total non-interest expense to be down 2%-3%. And we expect first quarter net charge-offs to be approximately $300 million. And with that, Bill and I are ready to take your questions.
Operator (participant)
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of John McDonald with Truist Securities. Please proceed with your questions.
John McDonald (Senior Research Analyst)
Hi, good morning. I wanted to start off with a take on industry deposit growth and trends in 2025. What are you guys seeing for the industry this year, and then maybe some comments on PNC's ability to gain some share in retail deposits, particularly as you start densifying some of the expansion markets.
Rob Reilly (EVP and CFO)
Hey, John, good morning. It's Rob. Yeah, so on deposits, in terms of our outlook for 2025, we do see growing deposits, slightly 1%-2% over the course of the year. We do expect some seasonality, though, on commercial deposits, where they'll go down a little bit in the first quarter and then grow from there. As far as our organic efforts in the expansion markets, things are going really well, and if things continue along those lines, I'm sorry, Bill, the DDA growth that Bill talked about at the beginning bodes well for us.
John McDonald (Senior Research Analyst)
Okay, thanks, Rob. And then in terms of the NII guidance, maybe just some thoughts on the cadence and the drivers, obviously down in the first quarter. And then how do the drivers align to pick up sequentially and kind of get to that 6%-7% for the year?
Rob Reilly (EVP and CFO)
Yeah, so a couple of things on that. And, John, I'll just repeat what I said in the opening comments. Our guide for the full year and for the first quarter is very conservative in terms of loan growth. Average loans for the full year are stable, spot up 2%-3%. So we want to emphasize that in terms of how we calculate our full-year NII and for the first quarter. Inside of that, obviously, it's a continuation of the fixed-rate asset repricing that we've talked about a lot and the continued dynamics around the floating rates and the deposits. In the first quarter, we do call for NII to be down 2%-3%. 75% of that decline is fewer days. And then the balance is just some lower seasonal commercial deposits that I talked about, both interest-bearing and non-interest-bearing, which is typical.
And then, again, I emphasize no loan growth in our first quarter NII guidance.
John McDonald (Senior Research Analyst)
Okay. And does the fixed asset reprice kind of pick up as you go through the year? Is there any kind of weighting to that throughout the year?
Rob Reilly (EVP and CFO)
It's pretty balanced. It continues on the path that we're on. It'll continue through 2025 and beyond that, for that matter.
John McDonald (Senior Research Analyst)
Okay, thank you.
Rob Reilly (EVP and CFO)
Sure.
Operator (participant)
Thank you. Our next questions come from the line of Scott Siefers with Piper Sandler. Please proceed with your questions.
Scott Siefers (Managing Director and Senior Research Analyst)
Thank you. Good morning, guys. Thanks for taking the question. Let's see, Rob, so you've emphasized a couple of times not a lot of loan growth baked into the guide, which I appreciate. Just curious, now that the dust has kind of settled on the election, maybe just updated thoughts on how you might see demand developing. It's pretty clear that's not going to be a requisite to hit your numbers. But just what are your clients thinking, saying, could we evolve something into the second half of the year? How are you thinking about kind of the major touchpoints you'll be looking for?
Bill Demchak (Chairman and CEO)
We've got this question for four quarters. A lot of indications that would suggest that utilization ought to increase. And I ought to say we're growing clients. We're growing DDA. We're just, as utilization decreases, it's causing balances to fall. Under the presumption that the new administration acts pretty clearly as it relates to what they're going to do with tariffs and other things, kind of right out of the gate, so people know where they stand, presumably, you'll start seeing investment and utilization increase. But we've just, as we said before, we've kind of gotten tired of trying to pick that point in time, yeah, where things go up and just be conservative about it.
Scott Siefers (Managing Director and Senior Research Analyst)
Gotcha. Perfect. All right, thanks, Bill. And then, Rob, in the past, you've talked about the company being able to generate sort of a 3% normalized margin. I guess I'm curious. I mean, so much of the ramp in NII seems kind of programmatic through the year. Is that 3%? Is it too ambitious to think that's something that you might be able to hit this year? Or would we have to, is it just going to take a little bit longer than that to develop?
Rob Reilly (EVP and CFO)
Yeah, so we've talked about that. We don't provide NIM guidance because it's an outcome. We do expect NIM to continue to increase through the course of 2025. We've approached that 3% level in the past, and I think it's logical to assume that we get close to that.
Scott Siefers (Managing Director and Senior Research Analyst)
Okay. All right. Perfect. Thank you very much. Appreciate it.
Rob Reilly (EVP and CFO)
Sure.
Operator (participant)
Thank you. Our next questions come from the line of Erica Najarian with UBS. Please proceed with your questions.
Erica Najarian (Managing Director and Equity Research Analyst in Large-Cap Banks and Consumer Finance)
Yes, thank you so much. Rob, just to clarify, just as you can imagine, this is a big conversation that was happening with your investors this morning. In terms of your response to Scott's question, based on the mechanics, you can approach that 3% as an exit rate for the year. Again, I know you don't give a NIM guide, but it seems like from a mechanical standpoint, I just wanted to confirm that's what you're telling us. And in terms of the two cuts they have embedded in your guide, I think a few folks have maybe one cut. Does that really matter if you have one cut or two in terms of your outlook for net interest income?
Rob Reilly (EVP and CFO)
So the second question first, no, it doesn't. We're very neutral to rates. We've said that. So 2025 is sort of locked in from a rate perspective. And then on your first question, yes, confirmed, approaching 3% by the end of 2025.
Erica Najarian (Managing Director and Equity Research Analyst in Large-Cap Banks and Consumer Finance)
Great. And my follow-up question here is how, Bill, maybe you think about the demand construct for lines of credit in the rate environment that the forward curve is pricing in. So with a higher neutral rate than we expected and maybe some flatness, we don't have that now, but maybe some flatness from SOFR to the belly. How do you expect that in terms of impacting whether or not companies seek out to finance their projects through lines of credit versus going to the capital markets? And how much of that dynamic is embedded into your more conservative guide?
Bill Demchak (Chairman and CEO)
The conservative guide is simply because we don't have visibility in what would otherwise cause the change yet. The nuance of whether somebody goes to a capital market or a line of credit is a function of price. I mean, a line of credit can be swapped into fixed, and capital markets can issue fixed. So I don't know that that's a particular driver. Higher rates generally could have and have had, I imagine, an impact on the total amount of lines somebody carries just because carrying inventory and working capital is more expensive. And I'm sure that's at least part of the impact as to why utilizations are lower today than they were pre-COVID.
Erica Najarian (Managing Director and Equity Research Analyst in Large-Cap Banks and Consumer Finance)
Got it. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of John Pancari with Evercore ISI. Please proceed with your questions.
John Pancari (Senior Managing Director and Senior Research Analyst)
Good morning. Just on the fee income side, I want to see if you can unpack the 5% growth outlook a bit for 2025, maybe just looking at the most noteworthy drivers. I know you've talked about the capital markets opportunity quite a bit in the past, as well as treasury and cash management and other areas. So if you can just help us and think about what are the largest drivers of that 5% outlook? Thanks.
Rob Reilly (EVP and CFO)
Yeah, sure, John. Yeah, just in the order of how we report our fees by categories for 2025, Asset Management, we would expect to be up mid-single digits. Capital Markets and Advisory up mid to high single digits. Card and Treasury Management up mid to high single digits. Lending and deposit services up maybe low single digits. And then lastly, Mortgage,
we expect to be off approximately 10% or even more. That's a small component, but that's our best thinking at the moment.
John Pancari (Senior Managing Director and Senior Research Analyst)
Got it, Rob. Thanks for all that. That's helpful. And then separately on capital, on the buyback front, I mean, you're at the 10.5% CET1 level. You've bought back $200 million in the fourth quarter. How should we think about a reasonable pace as you look at 2025? And if the $200 million level appears reasonable, could that level be sustained if you do see that pickup in loan growth from off of your conservative expectation?
Rob Reilly (EVP and CFO)
Yeah. No, I think, yes, the answer to that second part is yes. We can sustain that. And the current plan is to continue at the levels that we've been doing. You saw $200 million in the fourth quarter. So between $100 million and $200 million is where we've been averaging. And that's what I would expect going forward.
John Pancari (Senior Managing Director and Senior Research Analyst)
Okay, great. Thanks, Rob.
Rob Reilly (EVP and CFO)
Sure.
Operator (participant)
Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
Hey, Bill. I guess I've been asking this question for the last three or four calls, so why break the streak? Loan growth. So you're giving your NII guide, assuming not much loan growth, just average of zero. And I know you're getting out of the forecasting business. And so you just say it's basically zero. And here's your NII guide. And you're guiding for 400 basis points of operating leverage. And that's that. Having said that, with all the caveats and the answers you gave before, what do you think is really happening? Is all the loan growth just going to debt capital markets or are the corporations just sluggish? Or what's going on?
Bill Demchak (Chairman and CEO)
It's not going to capital markets. I mean, there's a part of our book in the large corporate space where utilization has probably dropped more than most because of their ability to hit capital markets. But it's across all the subsegments from smaller commercial to middle market through to even our specialty businesses and asset-based finance. For whatever reason, Mike, utilization is lower. And part of that's got to just be total cost. Part of it's got to be we've been running into a lot of uncertainty, right? We've been calling for this landing for the better part of two years. And people would like to have landed and got on with it, I think, before they invest a lot of capital. I think, look, three quarters ago, if not four, we kind of said, "We're going to quit forecasting this. We don't need it. We showed you numbers.
Beat those numbers." And loan growth kind of ended up where we thought three or four quarters ago, which was not great. I don't know that it's going to be not great in 2025. I just don't know what it's going to be, so you plug in any number that you want.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
Or, importantly, when it's going to be.
Bill Demchak (Chairman and CEO)
Yeah. I mean, the important thing to remember, Mike, is that we're not going to behave differently than any other bank. We're not changing what we're doing. We're not getting out. We're not getting in. We have a giant stock of revolving credit that will move with the market. And I just don't want to promise you a number that has a big unknown to it.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
Got it. And then just as a follow-up, Bill, you've never been shy, whether you testify to Congress or with your views of your CEO letters. There's a new administration. I think they're listening. So if you were talking to them and you do indirectly through the different industry groups, what would you hope to see changed as it relates to the regulation at PNC?
Bill Demchak (Chairman and CEO)
Alright. A couple of different things. One is, I think the government has to get off of the assumption that somehow the banking industry is the piggy bank to cure the ills in the world. All of the silliness around canceling fees and rebating and all the other stuff, I think they got to get back to following the law, and I think that will be a good thing, and of course, the industry is suing on a number of those proposals, and I would expect that we'll have some success with that. I think they need to focus, and we repeatedly emphasize this notion of focus on the core risks. We spend too much energy on things that do not affect the safety and soundness of a banking institution and not enough, as we saw a year ago, on things that do.
I would hope to see that we'll see some change inside of that. There, at some point, they'll redo Basel III. My best guess is that'll be a neutral outcome. I don't think it's going to cause things to go lower. I don't think it's going to cause them to go up. There's going to be some changes to the stress test that maybe reduces volatility. Personally, I don't expect big changes in the outcome. That's kind of it. Let us do our job. The banking industry does a lot of good for this country. I think, by and large, the industry is in a really good place over the next couple of years.
Mike Mayo (Managing Director and Head of U.S. Large-Cap Bank Research)
All right. Great. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.
Betsy Graseck (Global Head of Banks and Diversified Finance Research)
Hi. Thanks so much. Good morning. So first question, just one more on the loan growth. I wonder how much of the C&I weakness is a function of paydowns, right? Because companies can go term out, pay down their C&I loan. But now, with SOFR two-year, three-year, four-year, five-year portion of the curve pretty flat, is there any changes going on there? Could you discuss how much that is impacting the overall number?
Bill Demchak (Chairman and CEO)
I don't think at all. I mean, the shape of the curve is largely irrelevant. A company figures out how long they want to borrow for and whether they want to do it fixed or floating. And they can achieve that either through a bond in the capital market swapped or a loan that's swapped the other way or whichever way they want to do it. So I think this is raw demand for capital. I think, as I said, for large corporates, the spread component in the capital markets is really attractive. So that's driven by spread and demand in public markets as opposed to some notion of expense where it's going to be.
Betsy Graseck (Global Head of Banks and Diversified Finance Research)
All right. Okay. So really, originations are really low. Okay. And got to see if you.
Bill Demchak (Chairman and CEO)
Actually, that's not right either. I was just going to say. Originations are high. Utilization is low.
Rob Reilly (EVP and CFO)
Yeah. So Betsy, our unfunded commitment growth has been strong all year, including in the fourth quarter. So those are lines that our commercial customers are establishing that they're paying for, which is probably the strongest indication of borrowing intent.
Betsy Graseck (Global Head of Banks and Diversified Finance Research)
Okay. So separate question just on liquidity. I think, Rob, you mentioned the liquidity number that you've got at the Fed. And with rate cuts anticipated coming up, and I know your LCR ratio is super high. You have a really, really strong liquidity. You're best in class on liquidity by far. I'm just wondering, are we leaving some money on the table by keeping all that there? Is there any within your outlook for NII this year, do you keep all that liquidity at the Fed this year? Or is there some redeployment that's expected at some point?
Rob Reilly (EVP and CFO)
That's actually a fair question. If we knew with certainty that there really wasn't going to be any loan growth, then we would probably deploy the cash in a different form that would have a slightly higher yield. So there is an interplay there that probably isn't in our guidance and is fair.
Betsy Graseck (Global Head of Banks and Diversified Finance Research)
Okay. Thank you.
Rob Reilly (EVP and CFO)
Reflects our optimism, even though if it's not in our guidance.
Betsy Graseck (Global Head of Banks and Diversified Finance Research)
Correct.
Rob Reilly (EVP and CFO)
Yeah. Right.
Operator (participant)
Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.
Gerard Cassidy (Managing Director)
Hi, Bill. Hi, Rob.
Rob Reilly (EVP and CFO)
Hey, Gerard.
Bill Demchak (Chairman and CEO)
Hello.
Gerard Cassidy (Managing Director)
Can you guys share with me? I understand the competition from the capital markets. You guys have been dealing with this for 40 years. The private credit area seems to have obviously gained a lot of attention these last couple of years. And I kind of wonder, when Basel III endgame originally came out in July of 2023, a lot of banks had to kind of reassess their risk-weighted assets. We heard about risk-weighted asset diets and stuff. And I'm wondering if the private credit guys took advantage of that. Do you bump into them much? Maybe in the large corporate you might build, but do you guys see them in the middle markets at all? Or no, it's really just the large stuff that they tend to swim in that ocean?
Bill Demchak (Chairman and CEO)
No. So you're hitting on two different things. The risk-weighted asset diet that many people went on was structured credit sales, effectively using a credit derivative to ensure some bottom tranche on autos or middle market.
Rob Reilly (EVP and CFO)
No yielding assets.
Bill Demchak (Chairman and CEO)
Whatever. So that was much more of selling the riskiest tranche of some pool of credit I already hold to get regulatory capital arbitrage. The private capital movement of capital basically moving into credit as the next investment vehicle. It's interesting. We had this conversation with a bunch of bank CEOs at a conference meeting we had where none of us kind of said we ever we haven't seen a deal we've lost that we wanted. However, we have seen we have been competed away at levels that we just wouldn't match. So at the margin, it matters. It's one of the reasons at PNC, we formed this partnership with TCW so that in some of those instances, instead of losing the client in that case, we keep the client, fund them through a different vehicle, and keep all the TM and fee-related.
Rob Reilly (EVP and CFO)
All the operating business.
Bill Demchak (Chairman and CEO)
Yeah, today. But it's not none of that. Whatever's happening in private credit for all the headlines, that has nothing to do with why our loan growth is lower than it's been historically.
Gerard Cassidy (Managing Director)
You guys have been very strong in the asset-backed lending area. Do you see other competitors in that arena? Or no, it's just the traditional asset-backed lenders that you've competed against for years?
Bill Demchak (Chairman and CEO)
We're pretty much. It's the traditional people. I mean, when you talk about asset-backed lending, asset-based, it's a big operational business. It's hundreds of people.
Rob Reilly (EVP and CFO)
Market finance.
Bill Demchak (Chairman and CEO)
Yeah. It's hundreds of field auditors across the country. It's very difficult for a fund to say, "Okay. I'm going to enter that business," because it's a giant operating business that goes along with it.
Gerard Cassidy (Managing Director)
And then just as a follow-up on the rollout of you talked about building out the new branches and the plans for doing this. Where do you head first? Is it the Southwest? It's the West Coast? Or what's the layout that we should expect as you build that out over the next number of years?
Rob Reilly (EVP and CFO)
Hey, Gerard, it's Rob. Yeah. I would say it's in all the places that you would expect. The recent sort of step-up has a focus on South Florida, the Miami area. But of course, in our expansion markets in Texas, Arizona, Colorado, those are the places.
Gerard Cassidy (Managing Director)
Got it. Nothing here in Portland, Maine then, huh?
Rob Reilly (EVP and CFO)
No, no. Yeah. We're going to get back to you on that one.
Gerard Cassidy (Managing Director)
Okay. Thank you, guys.
Operator (participant)
Thank you. Our next questions come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.
Bill Carcache (Senior Equity Research Analyst of Financials)
Thanks. Good morning, Bill and Rob. Following up on the one you mentioned, Bill, that you're close to rolling out your online banking platform. Is that in relation to your expansion markets? I was hoping you could maybe just speak to how that complements your existing physical and digital channels.
Bill Demchak (Chairman and CEO)
It's one of the pieces of the puzzle of basically making everything we do cloud-native and microservice-based. So it'll be a better experience for our customers in the sense that it's more easily navigable. There's more self-service. But the biggest thing that it does for us is it allows us to change and introduce products on the fly. So we can pull what used to be a six-month process to update something on online banking, we can literally do overnight with a new system. Highly complex, a big investment that we've been at for a couple of years. And ultimately, it will raise our scores with consumers on online. One of the things just to go on a little bit here. When we do customer surveys and get feedback on experience with PNC, we score off the charts on our branch experience.
And we're no better than average with our online and mobile. And we need to do better than average, which is why we're pursuing this.
Bill Carcache (Senior Equity Research Analyst of Financials)
That's helpful. Rob, I wanted to ask if you could discuss what drove the valuation adjustments that led to an increase in reserves for the office portfolio. How are you thinking about the risk of similar adjustments leading to incremental reserve building from here, particularly if we don't get any more cuts?
Rob Reilly (EVP and CFO)
Yeah. So as I had mentioned, we're adequately reserved in terms of how we look at things. Credit looks good. Commercial, non-CRE in particular, improved during the quarter. Our outlook improved. Consumers pretty good. Within the CRE office space, we've got some moving parts there. The good news is that the outstandings are coming down. We're managing it. There's some idiosyncratic pieces there where the reserves moved a little bit in percentage. But really, not a big change there. We just continue to work through it.
Bill Demchak (Chairman and CEO)
I think every quarter we have the same discussion around the reserve in the sense that we have a high percentage relative to many of our peers in terms of what we reserve, and we do that largely because there really isn't a market established yet, like a clearing market where properties trade. There just hasn't been that much that has moved. There's been extensions. There's been paydowns. There's been a variety of different things, but there's not a stabilized market, which is why we remain concerned and remain well reserved.
Rob Reilly (EVP and CFO)
The good news for us, as you know, Bill, it's a small percentage of our overall loans. So there's some lumpiness in there from quarter to quarter. So, actually, our charge-offs on office went down in the fourth quarter from the third quarter. We didn't expect that. We do expect more. So we just need to work through it.
Bill Carcache (Senior Equity Research Analyst of Financials)
That's helpful. Thanks. If I could squeeze in one more on your hedging strategy, can you discuss the uptick in forward-starting swaps that we saw this quarter and how you're thinking about potentially putting on new forward starters as we look ahead from here?
Bill Demchak (Chairman and CEO)
Yeah. I mean, it's actually pretty straightforward. So our roll-off of fixed-rate assets, and we've put that out publicly before on how much securities or loans. When we look at the forward curve available at any given point in time, we can choose to lock in that rate on that replacement yield. So if it's a Treasury that's going to mature in a year and a half with a 2% coupon, I can effectively choose to buy that Treasury forward at a 4.5% coupon. And so we've been gradually biting off. That's why we say we're really comfortable with where we are in 2025 because we've used swaps like that to effectively lock in these maturing fixed-rate assets. And we continue to look at and will start biting off pieces of 2026 and 2027 because it continues.
What we see through 2025 ought to continue through the next couple of years if rates follow the forward curve. So there's big opportunity there. And you'll see us using that tool to lock some of that in over time.
Bill Carcache (Senior Equity Research Analyst of Financials)
Throughout the balance of 2025 as we lock in the future years.
Bill Demchak (Chairman and CEO)
Yes.
Bill Carcache (Senior Equity Research Analyst of Financials)
That's helpful. Thank you for taking my questions.
Bill Demchak (Chairman and CEO)
All right.
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of Matt O'Connor with Deutsche Bank. Please proceed with your questions.
Matt O'Connor (Managing Director of U.S. Banks Equity Research)
Good morning. Can you guys remind us, do you have any targeted capital level either on a stated CET1 or adjusted for AOCI?
Rob Reilly (EVP and CFO)
We don't. Hey, Matt. It's Rob, but we don't have a stated target, but obviously, we continue to build levels. We're at 10.5 CET1, 9.2 on the revised. Our minimum requirement's seven, so we've got a lot of flexibility, but we don't have an explicit target, and part of that is because the rules are still in flux.
Matt O'Connor (Managing Director of U.S. Banks Equity Research)
Okay. Yeah. I mean, it seems like I know it's been kind of covered, but it was impressive that the adjusted capital was stable despite the moving rates. So you have a lot of disclosure on the securities book. The duration didn't really extend. So it feels like with sluggish loan growth and your buyback assumptions, the capital ratios will continue to build off already high levels.
Bill Demchak (Chairman and CEO)
Yes.
Rob Reilly (EVP and CFO)
Yeah.
Matt O'Connor (Managing Director of U.S. Banks Equity Research)
And then separately on the expenses, I mean, obviously, the operating leverage is strong. But the kind of 1% growth includes some of the lumpies, in the base. And I guess the punchline is, on a core basis, the expenses are going up 3%. And obviously, you're leaning into some areas on investment. Is that kind of a good medium-term run rate? Or is it just maybe a step up for a short period of time as you fully load those expansion efforts?
Rob Reilly (EVP and CFO)
No. I think you've got a handle on it. We got it up to the 1% off the reported numbers just because it's easier that way as we talk about it through the balance of 2025. But expenses up in that 3% range is typical for us and obviously reflects on a core basis a lot of investment.
Bill Demchak (Chairman and CEO)
Yeah. Importantly, the investment that we are making is not at all catch-up to something we should have done. This is new branches. It's new technology. It's larger data centers that are more resilient. It's everything positioning us to accelerate our organic growth. So these are all dollars spent to make money.
Matt O'Connor (Managing Director of U.S. Banks Equity Research)
Got it. Makes sense. Okay. Thank you.
Operator (participant)
Thank you. Our next questions come from the line of Ebrahim Poonawala with Bank of America. Please proceed with your questions.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Hey, good morning. I guess.
Rob Reilly (EVP and CFO)
Morning.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Maybe, Bill, remind us of your thoughts around we talked about regulations earlier. Absent significant pickup in loan demand, it doesn't seem like the operating backdrop on a revenue side is going to be that great for the banks. How does that inform your view in terms of the window of opportunity from a regulatory political backdrop to do a transformational M&A? You've talked about it in the past in terms of competing with the big banks, having sort of a national presence. What are the odds where those opportunities come up and you actually tap into that? Understanding will be discipline. You know the math. So I appreciate all of that.
Bill Demchak (Chairman and CEO)
Yeah. I think, look, at the margin, my guess is it's gotten easier to get a deal approved, although I think we could have been approved with the old administration. The challenge is, and you're going to hear this on every earnings call, everybody's an acquirer. Nobody's a seller. There's wind at the back on bank earnings. It's a function of the rate turnover. Credit's not bad. So I think the mindset you run into is, "Hey, we'll hang out. We'll make more money next year. And we'll worry about whether we have a long-term franchise somewhere later. It's not our problem today." And that's an environment where, as an honest buyer that's growing, it's tough to force an outcome. And we don't intend to try to do that.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Got it. All right. So your response is short-termism overtakes shareholder value creation in terms of.
Bill Demchak (Chairman and CEO)
I think, look, yes. So I think the structural issues in the banking industry are just violently apparent when you look. The deposit shifts to the largest banks, the growth in DDA accounts. By the way, we grew DDAs this year at a pace we haven't maybe ever. But we're one of a handful of banks across the whole industry that was actually able to do that. And so when you just look at the fundamentals underlying the amount of the cost of funding, the increased balances of brokered deposits, the lack of fee income and products to sell that some of the smaller banks run into, you ought to see consolidation. Yet we're in a period where everybody thinks they're going to be the consolidators. So I don't know what's going to happen.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Good point. I agree. And I guess maybe just a quick one, following up on credit quality. If we don't get any Fed rate cuts, employment holds up okay, is it your sense that credit quality is generally okay? There are no real stress points in that backdrop?
Bill Demchak (Chairman and CEO)
Yeah. I think that's right. Our expectation, at least my expectation for a while, is kind of playing out. I don't think even if they get a couple of cuts, we're going to be there for a while. And I think the back end's under pressure. So what happens through time is a lot of the locked-in low interest rates that corporate America has done will roll off. And you'll see their debt coverage ratios decline a bit down the road. But not their solvency, not actual loss content because of the strength of the economy. So I think we're absolutely fine. Bluntly, I think the Fed has landed this and we're in a good place.
Ebrahim Poonawala (Managing Director and Head of North American Banks Research)
Excellent. Thank you.
Bill Demchak (Chairman and CEO)
Yep.
Operator (participant)
Thank you. There are no further questions at this time. I would now like to hand the call back over to Bryan Gill for closing comments.
Bryan Gill (EVP and Director of Investor Relations)
Thank you, Daryl. Thank you all for joining our call today and your interest in PNC. Please feel free to reach out to the IR team if you have any follow-up questions.
Bill Demchak (Chairman and CEO)
Thanks, everybody.
Rob Reilly (EVP and CFO)
Thank you.
Operator (participant)
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.