PNC Financial Services Group Inc Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Erika Najarian - UBS Group AG - Analyst : Hi, good morning. Rob, if we can just unpack a little bit of the commentary you made on the swap. So I guess first part of this question is, I noticed that the receive fixed rate on your asset, on your active swaps went up quite a bit quarter-to-quarter. Implying that what's rolling off is, well, sub one. You went from 250 to 308. So I'm wondering if you could confirm that and looking forward, I think you said something in your prepared remarks about replacing expiring '25 swabs at a higher fixed rate, receive fixed rate than you thought to maybe just clarify that statement as well.

Question: Erika Najarian - UBS Group AG - Analyst : Got it. Okay. And just the second part of my question, that's the mechanical side. Now, on the strategic side, Bill, it's been such a long time since the market has seen a neutral rate of not zero. Everybody's talked about deposit beta, but as we think about what the natural deposit cost is for PNC, how should we think about what the spread is? Let's say we settle at [2.75%,3%], in terms of Fed funds. What's the spread in terms of Fed funds versus your funding costs naturally? And additionally, just as a quick follow up to Rob, as we're on the liability side of the balance sheet, is there, you know, what drove the strength in deposits and was REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 15, 2024 / 2:00PM, PNC.N - Q3 2024 PNC Financial Services Group Inc Earnings Call that mostly corporate and is that permanent balances or is that sort of some corporate balance is just parked for now, given the uncertainty in the market?

Question: John Pancari - Evercore Inc - Analyst : Good morning. On the loan side, still balances are clearly still pressured, then you flagged C&IB Utilization down a bit to 50.7% and below your historical. You maybe talk about the demand and the underlying demand trends that you are seeing and what do you think is going to be the biggest catalyst to get borrowers off the sidelines and borrowing? Is it continued rate cuts? Confidence in that front? Is it the election? If you could just maybe give us some thoughts there. And what do you think the growth rate is reasonable as you enter 2025? Thanks.

Question: John Pancari - Evercore Inc - Analyst : Okay, got it. Thanks Rob for that. And then separately, capital markets clearly has been a point of strength. Can you maybe just provide us a little bit of color on the pipeline there? And do you expect a pullback in the fourth quarter of these high levels? Just how should we think about that?

Question: Scott Siefers - Piper Sandler Companies - Analyst : Good morning, everyone. Thanks for taking the question. I guess, I wanted to follow up just a little bit on sort of the lending and deposit discussion, I guess, first just kind of qualitatively, do you have a sense for what a lending recovery might look like when it does come back? And I guess the context of that is that I recall a time when the bank loans used to grow at some multiple of GDP, but it's been quite a while since we've seen that. So maybe just some top level thoughts there. And then on the other side of the balance sheet, just maybe your sense for how deposit costs behave if lending does come back better, you all and I think a lot of the industry are great from a liquidity perspective. So curious how much competition factors into your thinking as well.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Good morning. Any updated thoughts on where you think your net interest margin normalizes? I think at one point a couple of months ago, you said it could approach 3%. I think it was by the end of next year. But updated thoughts on that given the forward curve and your outlook for the mix of the balance sheet. Thanks.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Okay. And I said maybe it was by the end of '26. I had my, -- no hard to read. And then just separately, you've always been very strong in commercial lending and some of the few businesses that come from that the consumer side has always been a little bit less of a focus, but I think you've been leaning in areas like credit card, around the edges and just any update thoughts in terms of what could be growth drivers as we think about consumer lending, consumer fees the next couple of years. Thanks.

Question: Matt O'Connor - Deutsche Bank AG - Analyst : Okay. And when do you think you'll start, we'll start seeing some of those efforts kick in. I mean, we are seeing pretty good credit card volume growth in the industry and at most peers and obviously there's a little bit of a lag. But what do you think some of those efforts will be a little bit more evident?

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Thanks. Good morning, Bill and Rob. Following up on your loan growth commentary. You've had a lot of success over the years in taking share within C&I. If we do get a re acceleration in loan growth over say the next year or so, how does that influence your ability to continue to take share and perhaps outpace industry growth, recognizing your competitors are obviously not willingly seating share.

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Thanks. That's helpful. And then separately on non-interest bearing deposits, you expect rates on your interest bearing deposits to decline starting next quarter. But how long before you'd expect to see the effect of lower rates relating to compensating balances?

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Right. But is the credit that you give customers on compensating balances, a sort of lever that you'd expect to use or be willing to use as you look to grow noninterest bearing deposits. Just trying to think through whether that's a potential something that could spur growth.

Question: Bill Carcache - Wolfe Research, LLC - Analyst : Okay, great. If I could squeeze in one last one. If the NII trajectory that you laid out for 2025 plays out as anticipated, is there any reason why the positive operating leverage commentary that you laid out is very helpful. But any reason why the efficiency ratio wouldn't get down into sort of that high 50% range. It seems like the math would suggest that could get there but would appreciate your thoughts.

Question: Mike Mayo - Wells Fargo & Company - Analyst : Hi, I think Bill, your prior comment that you expect record NII in 2025. Do you feel more, less or just as confident as before? And what sort of loan growth do you kind of assume for next year?

Question: Mike Mayo - Wells Fargo & Company - Analyst : So no long growth for next year?

Question: Mike Mayo - Wells Fargo & Company - Analyst : Okay. And then back, I think last quarter you used the word befuddled. As to why loan growth wasn't coming back. I guess number one could be the election. Number two could be private credit. Number three could be disintermediation in capital markets. Number four, companies could just REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 15, 2024 / 2:00PM, PNC.N - Q3 2024 PNC Financial Services Group Inc Earnings Call be managed differently today. Or number five, you could have a weaker economy or it could be all of the above. Just give us your best stab at why loan growth remains just so weak in the economy that's still growing?

Question: Mike Mayo - Wells Fargo & Company - Analyst : Okay. And then lastly your reserves on office CRE were taken even higher, especially multi-tenant last quarter. You said the industry is in the first inning. I think a lot of people disagree with that. I'm not saying, yeah, I'm not sure we're two years into this at least. And it's still a big question mark. I think in a lot of people's mind. So when you said the industries in the first inning and clearly your reserves are higher than others, what's -- why do you say it's only the first inning? What's your reasoning?

Question: Mike Mayo - Wells Fargo & Company - Analyst : It's taking one more last one. As far as acquisitions, I know you'd like to buy them on the cheap. I mean, National City, you go down the list. It's getting tougher for you to buy things on the cheap. Maybe if you, a bank does have an office or CRE problem that you swoop in there. But am I right in thinking it's a lot less likely you do an acquisition now that some of these stocks have come back or what you're thinking? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 15, 2024 / 2:00PM, PNC.N - Q3 2024 PNC Financial Services Group Inc Earnings Call

Question: Ebrahim Poonawala - Bank of America Merrill Lynch - Analyst : Good morning, I guess maybe just one Rob for you as a follow up on deposit pricing. I think fair amount of uncertainty around how much banks will be able to flex deposit costs lower. We got the September cut. Remind us one around your beta expectations and any early proof points on how customers and especially commercial customers have received the lower rates over the last few weeks.

Question: Ebrahim Poonawala - Bank of America Merrill Lynch - Analyst : Got it and on commercial clients. So, heard you around loan growth and all the reasons why loan growth may or may not pick up. If you don't mind just speaking to the health of the commercial customer base and whether like some of the macro data on jobs could be a bit misleading. Like when you talk to your C&I customers, are they like, are the balance sheets healthy? Like do they, if the Fed were to pause rate cuts after a cut or two, does that increase the risk for these customers? And how they might approach investing, hiring, et cetera. Would love any color you can share?

Question: Ebrahim Poonawala - Bank of America Merrill Lynch - Analyst : Got it. And if one last one just following up on Mike's question on M&A bank transactions usually stock for stock. Now what I mean, your stock has done well, why would a deal given your history and track record on deal integration? Like is it just completely ruled out at this point if there's a willing seller acquiring a good franchise? Does it no longer make sense just because of pricing.

Question: Betsy Graseck - Morgan Stanley & Co LLC - Analyst : Thanks so much. Okay, great. Just to follow up on the last question. So, right, it doesn't make sense M&A right now in this environment given. Well, whatever I won't go there. But just the underlying question is organic growth. How do you see your organic growth progressing over the medium term? Are there legs to acceleration or what we're seeing today is a good run rate?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Hi, Rob. Hi, Bill. You guys have done a very good job in managing credit over the years and it shows up again this quarter. Can we take a look at in the C&I portfolio? What are the trends that you guys might be seeing? In your the C&I portfolio or the asset back portfolio or the leverage portfolio. The trends pretty benign or what are you guys seeing there?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Got it. And I know you touched on this, on commercial loan growth about companies might be stronger. Have you seen any evidence that because of the pandemic, because of what companies went through. Your long time customers that you've talked to for years, do you actually see them better managed or stronger because of what happened during the pandemic?

Question: Gerard Cassidy - RBC Capital Markets - Analyst : Great and then just a final follow up. You gave us some good data, of course, on the commercial real estate office portfolio. What kind of impact or I guess if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 15, 2024 / 2:00PM, PNC.N - Q3 2024 PNC Financial Services Group Inc Earnings Call the values of those properties? I know each property is different, vacancy rates are critical. But is there any kind of point that you guys look at the cap rates fell 100 basis points or 150 basis points that would help the valuation process