PNC Financial Services Group Inc (PNC) — Q4 2016 Transcript

Yeah. Thank you, Nelson, and good morning. Welcome to today’s conference call for The PNC Financial Services Group. Participating on the call are PNC’s Chairman, President and Chief Executive Officer, Bill Demchak; and Rob Reilly, Executive Vice President and Chief Financial Officer. Today’s presentation contains forward-looking information. Our forward-looking statements regarding PNC performance assume a continuation of the current economic trends and do not take into account the impact of potential legal and regulatory contingencies. Actual results and future events could differ, possibly materially, from those anticipated in our statements and from historical performance due to a variety of risks and other factors. Information about such factors, as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss, is included in today’s conference call, earnings release and related presentation materials and in our 10-K, 10-Qs and various other SEC filings and investor materials. Well, these are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 13, 2017, and PNC undertakes no obligation to update them. Now, I’d like to turn the call over to Bill Demchak.

Thanks, Bryan. Good morning, everybody. As you have seen today we reported full year 2016 results with net income of $4 billion or $7.30 per diluted common share. You should have also seen our tangible book value at year end was $67.41 per common share. All-in, ’16 was a pretty solid year for PNC, we grew net interest and fee income, we kept expenses essentially flat, and we returned more than $3 billion in capital to shareholders, and importantly, we grew our customer franchise. Now, all that said, our net income finished slightly below 2015, in part due to our disciplined risk management efforts throughout the year to best position PNC in the current credit and interest rate environment. As we have learned over and over again through time, our business offers very attractive returns and growth opportunities by effectively managing through the cycles that are inherent to the banking industry. In our view for the most part of ’16 neither the credit, and certainly, not the rate markets offered us an attractive risk or reward opportunity. So we maintained higher than usual cash balances, and our loan growth trailed peers. Now as I discussed in depth at a number of investor conferences in the last few months, we continue to invest and make important progress against our strategic priorities. We are particularly pleased with the progress that we have made on modernizing our core technology infrastructure and building a leading banking franchise in the Southeast. As we look ahead, our current indicators suggest improving confidence amongst consumers and business leaders about the direction of the economy, which could bode well for our industry. There is also growing sentiment that we are entering a period of rising interest rates. In addition, we've all heard that the new administration in Washington supports tax reform, regulatory relief, and other pro-growth policies. But so far, moving interest rates is the only thing that has actually happened with the apparent likelihood of more of this to come this year, but should some or all of these things come to pass, it would certainly benefit us and the industry as a whole. Now as always, though we remain focused on the things that are actually in our power to control, and I am confident that the actions that we took in ’16 position us for further growth and to continue to create long-term value for our shareholders. But 2017 is an important year for us as we execute on a number of initiatives including the home lending transformation, the ongoing digitization of the retail capabilities, stronger growth in consumer lending, and international expansion of our middle market lending franchise. And with that, I am going to hand it over to Rob who will run you through the numbers and share with you some guidance for 2017, and then we would be happy to take your questions.

Thanks, Bill, and good morning, everyone. Overall, our full year and fourth quarter results were largely consistent with our expectations. As Bill just mentioned, our full year net income was $4 billion or $7.30 per diluted common share and fourth quarter net income was $1 billion or $1.97 per diluted common share. Our balance sheet information is on slide four and it's presented on an average basis. Total loans grew by $2 billion or 1% linked-quarter. Commercial lending was up $1.7 billion or 1% from the third quarter, primarily in our corporate banking and real estate businesses. Consumer lending increased approximately $300 million compared to the third quarter and by approximately $800 million excluding our consumer runoff portfolios. Our consumer loan growth was in auto, residential mortgage, and credit card. For the full year-over-year quarter, we had total loan growth of $4.9 billion or 2%. Commercial lending increased by $6.1 billion or 5% from growth in large corporate and commercial real estate loans and consumer lending was down $1.2 billion or 2% year-over-year, primarily due to the continued decline in our consumer runoff portfolios. Investment securities were up $4.4 billion or 6% linked-quarter, primarily in U.S. Treasuries and increased $8.2 billion or 12% compared to the same quarter a year ago, as we continue to grow balances in conjunction with higher rates. On a spot basis, investment securities decreased $2.6 billion or 3% compared to September 30th. Our securities purchased in the fourth quarter were more than offset by repayments and negative valuation adjustments due to rising rates. Importantly, about half of the securities purchased in the fourth quarter were forward settling and will be reflected in the first quarter of 2017. On the liability side, total deposits increased by $4.5 billion or 2% when compared to the third quarter, primarily driven by seasonally higher commercial deposits and continued growth in consumer savings products. Compared to the fourth quarter of last year, total deposits increased by $10.1 billion or 4% as we continue to see strong growth in demand and savings deposits. Average common shareholders’ equity decreased by approximately $100 million linked-quarter, primarily due to a decline in accumulated other comprehensive income as a result of a change in the value of our available-for-sale securities book from the rising rate environment. At December 31, 2016, AOCI was down $837 million, compared to September 30, 2016. Compared to the same quarter a year ago, average common shareholders’ equity increased $700 million, even after continued capital return to shareholders and the impact of AOCI. For full year 2016, our capital return totaled $3.1 billion, comprised of $2 billion in share repurchases and $1.1 billion in common dividends. This resulted in a payout ratio of approximately 85%. Period-end common shares outstanding were $485 million, down $19 million or 4% compared to the year end 2015. As of December 31, 2016, our pro forma Basel III common equity Tier 1 capital ratio fully phased-in and using the standardized approach was estimated to be 10%, a decline of 20 basis points from September 30, 2016, primarily due to the decline in AOCI. Our tangible book value was $67.41 per common share as of December 31st, and although this declined on a linked-quarter basis reflecting the impact of AOCI, it was up 6% compared to the same date a year ago and our return on average assets for the fourth quarter was 1.13%. As I’ve already mentioned and as you can see on slide five, net income was $4 billion for the full year and $1 billion for the fourth quarter. Highlights include the following: fourth quarter revenue was up $45 million or 1% compared to the third quarter. This was driven by higher net interest income, which increased $35 million or 2%, primarily due to higher average securities and loan balances, as well as higher loan yields. Non-interest income was up $10 million or 1%, as lower fee income was offset by higher other income. Full year revenue was stable, as higher net interest income was offset by lower non-interest income, principally due to the decline in net Visa activity. Of note, we do not sell any Visa shares in the second half of 2016. Expenses continue to be well-managed in the fourth quarter. Non-interest expense was up $47 million or 2% compared to the third quarter and included a $55 million contribution to the PNC Foundation. For full year 2016, expenses were stable compared with 2015. Provision for credit losses in the fourth quarter was $67 million, down $20 million linked-quarter as overall credit quality remained stable. Fully year provision of $433 million increased by $178 million compared to 2015, largely reflecting the impact of energy-related loans, primarily during the first half of the year. Finally, our fourth quarter effective tax rate was 23.4% and our full year effective tax rate was 24.1%, both periods were impacted by the tax favorability of the contribution to the PNC Foundation. Looking ahead, we expect our 2017 effective tax rate to be approximately 25% to 26%, which doesn’t take into account any tax reform. Now, I will discuss the key drivers of our performance in more detail. Turning to slide six, full year 2016 net interest income increased by $113 million or 1% compared to 2015, reflecting higher core NII. Core net interest income grew by $254 million or 3% in 2016, primarily driven by increased loan and securities balances, and higher loan yields. Core NII increased to $2.1 billion in the fourth quarter, which was the highest quarterly level we generated in three years. In 2016, purchase accounting accretion decreased to $141 million. In 2017, we expect PAA will be down by $75 million compared to 2016. Net interest margin stabilized in 2016 and NIM improved slightly in the fourth quarter compared to the third quarter due to higher loan yields. As you can see on slide seven, we have successfully grown fee income in each of the past five years and our diversified businesses continue to produce substantial fee income throughout 2016. Three of our business activities, asset management, corporate and consumer services each generate well in excess of $1 billion annually, and we continue to execute on our strategies to grow these fee businesses across our franchise. For the full year, asset management fees, which include our equity investment in BlackRock declined $46 million or 3% as net new business activity was more than offset by a $30 million trust settlement in 2015, and the impact of volatile equity markets in the first quarter of 2016. On a linked-quarter basis, asset management fees declined slightly as the impact of higher equity markets was offset by lower fixed income markets and lower net new business activity. Consumer services fees grew $53 million or 4% for the full year as a result of higher and increasingly broad customer activity, with growth in credit and debit card, as well as increased brokerage fees. On a linked-quarter basis, consumer services fees increased modestly reflecting slightly higher credit card activity. Corporate services fees increased by $13 million or 1% in 2016 and included higher treasury management fees partially offset by lower merger and acquisition advisory fees. Treasury management is one of our largest corporate services fees components and we see long-term growth opportunities as we continue to develop innovative solutions in the corporate payment space. On a linked-quarter basis, corporate services fees were relatively flat as lower merger and acquisition advisory fees offset a higher benefit from commercial mortgage servicing rights valuation. Residential mortgage noninterest income was stable for the full year 2016 as, I’m sorry, was stable for the full year as 2016 originations slightly exceeded 2015 levels. On a linked-quarter basis, residential mortgage fees were down $18 million or 11% as loan sales revenue declined due to higher rates and seasonally lower loan application and origination volumes in the fourth quarter. Service charges on deposits for the full year increased by $16 million or 2% driven by higher customer activity. On a linked-quarter basis, service charges on deposits declined seasonally by 1%. Lastly, full year other noninterest income decreased by $213 million or 16%, primarily due to lower asset sales compared to 2015. The largest component was net Visa sales activity, which declined by $134 million year-over-year. On a linked-quarter basis, other noninterest income increased by $36 million or 14%, primarily driven by higher gains on asset dispositions and higher revenue from private equity and other investments. In 2017, we expect the quarterly run rate for other noninterest income to be in the range of $250 million to $275 million, excluding net securities gains and net Visa activity. Turning to slide eight, as you know, expense management has been a particular focus area for us for several years. Since 2012, we have successfully reduced annual expenses by more than $1 billion, even as we made significant investments in our technology infrastructure and our retail bank transformation. These results were due in part to our continuous improvement program or CIP. During 2016, we completed actions that achieved our full year goal of $400 million in cost savings. Looking forward to 2017, we have targeted an additional $350 million in cost savings through CIP, which we again expect to fund a significant portion of our business and technology investments. Turning to slide nine, overall credit quality remained stable in the fourth quarter. Total nonperforming loans were essentially flat linked-quarter, as improvements in commercial NPLs were mostly offset by increases on the consumer side. Total delinquencies increased by $120 million or 8%, primarily in the 30-day to 59-day period, which was due to some seasonal factors that have since then resolved. Provision for credit losses of $67 million decreased by $20 million linked-quarter, the provision was slightly lower than our expectations, due in part to a reserve release related to better than expected performance of home equity lines of credit that are reaching their draw period end date. As many of you are aware and as we have expected for some time, the home equity end of draws will peak in 2017. Net charge-offs declined $48 million to $106 million in the fourth quarter, as our energy-related net charge-offs decreased. In the fourth quarter, the annualized net charge-off ratio was 20 basis points, down 9 basis points linked-quarter. In summary, PNC reported fourth quarter and full year earnings consistent with our expectations. Turning to 2017, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates twice this year, in June and December, with each increase being 25 basis points. Based on these assumptions, our full year 2017 guidance compared to 2016 results is as follows. We expect mid single-digit loan growth, we expect revenue growth in the mid-single digits and we expect a low single-digit increase in expenses. Based on this guidance, we believe we will deliver positive operating leverage in 2017 and believe we can do so absent our expectations for short-term interest rate increases. Looking ahead at the first quarter of 2017, compared to the fourth quarter of 2016 reported results, we expect modest loan growth, we expect total net interest income to remain stable, we expect fee income to be down mid-single digits due to seasonality and typically lower first quarter client activity, we expect expenses to be down low single digits and we expect provisions to be between $75 million and $125 million. And with that, Bill and I are ready to take your questions.

Operator, could you please poll for questions?

Good morning, guys.

Hi, Scott.

Can either Bill or Rob address the pace at which you anticipate deploying liquidity for the year? I understand the direction of what you’ve been doing with the earning asset base, but I’m curious about your approach to adjusting to higher interest rates as we move through 2017.

I mean, look, there is no magical answer to that. Through the course of the last bunch of years even with rates largely flat inside of kind of up and down cycles. We invest opportunistically small bets, we remain very short today, so we have a big opportunity, but we are not going to bet on red all-in sort of one rate move. So you will see us through the course of the year if rates continue their path and what we expect to deploy liquidity and reduce our asset sensitivity, but there is no perfect answer to that, it certainly isn’t programmatic.

Okay. And then maybe skipping over to the sort of the volume side of the NII equation, I think the first quarter guidance is still for more modest growth than you got the stronger growth outlook for the full year on overall loan growth. Just curious how you see things building as it relates to overall loan growth in some of the actual favorable impact of some of these new initiatives on both equity, consumer and commercial sides?

Yeah. Well, this, as it relates to the first quarter issue on NII, I mean, that’s largely a day count issue, where we had two days.

On the NII, yeah, they are stable…

Yeah. Yeah.

...so loans are...

So, back that out, I mean, loans just in terms of our guidance, we kind of assume flat across the year. But I would tell you inside of that we have kind of continued fourth quarter pace for C&I and we have kind of continued fourth quarter pace for what we had in consumer. Inside of consumers, we’ve got a number of initiatives that ought to allow us to accelerate that through time, not changing our credit back so much, it’s just improving our process. And inside of C&I, a couple of sound bites. December was the highest sales month ever for our corporate bank. The fourth quarter inside of middle markets, the first quarter and multiple quarters where we actually had growth in plain vanilla middle market loans.

Okay.

And so, maybe we’re doing a great job, but maybe some of the sentiment you’re hearing and feeling coming out of corporate America actually plays out and what we have in our forecast didn’t really build in that impact. So, there’s probably upside to that and the consumer piece, there is upside to too, but that plays out over the course of years, frankly, as we change technology, operations and some of the way we go about approving things.

And that consumer lift probably being more, just to the spirit of your question, more on the back half of 2017 than in the first quarter.

Yeah. Yeah.

Yeah. It makes sense. Okay. Perfect. Thanks guys very much.

Sure.

Hi. Good morning.

Hi, Betsy.

Good morning.

I have a couple of questions regarding expenses. I noticed the 350 CIP target. Can you clarify if there is an opportunity to impact the bottom line with that? I saw the guidance for next year indicating that expenses are expected to be in the low single digits, but I am curious if that encompasses the CIP, leading to a situation where it does not positively affect the bottom line. Am I misunderstanding this?

No, no. I think you’re doing it correctly. Our full year guidance for expenses is slightly up and includes the 350 CIP. In 2017, we plan to continue with our approach from the past couple of years, which involves a specific list of cost savings that will help fund our ongoing investments. Additionally, we anticipate some growth in certain variable expenses related to growth and fee businesses as part of this strategy.

Yeah. The other thing is that, ’17 takes the full impact of the FDIC rolling charge. So, some of it is sort of just carry forward from what we were taking through 2016 and there is a little bit of imbalance in there, as it relates to some of our longer-term initiatives. For example, the savings will get out of home lending and the savings will get out of decommissioning data centers, which will start to show up in ’17, but carry forward into later years.

Okay. That makes sense.

Yeah. So it’s all embedded in the expense guidance but...

... I think my point is a simple one which is we haven’t nor we’ll ever lose sight of the goal of holding expenses as tightly controlled as we can. And in check.

Okay. But what I’m also hearing is a little bit of backend improvement expected?

That depends on what happens to volumes and the comp side of that.

Yeah. I mean, I think, the best way to think of that, I think, that’s partially true. I mean, as you know, our goal is positive operating leverage. We’re definitively in a position where we feel we’ll deliver that and that’s what we’re going to manage to.

And then just secondly on the tax question, there’s obviously been a lot of chatter around potentially having a lower tax rate. I know there is a tremendous amount of puts and takes until we get to the end state. But could you just speak broadly to whether or not changes in tax policy would impact how you’re thinking about the stake you have in BlackRock?

Well, look, so we’ll go back and restate what we said 25 times, which is we’re rationale stewards of your capital as it relates to our holding in BlackRock, obviously, a lower tax burden on disposition changes the economics on that, without knowing tax rate...

Right.

... or any other things that may play through, it's hard to predict how that plays out. But look, it changes the economics and we’re conscious of that and we’ll take that into account if and when we get to something that’s actually made...

On that variable.

Okay. Got it. Thanks.

Yeah.

Hi. Good morning.

Good morning.

Just as I take a step back, clearly, a lot of change since we’ve talked to you last. Can you give us a sense of how much regulatory costs have increased over the past few years for PNC and what you think the natural trajectory is of those regulatory costs and how the trajectory could potentially change if we do have some regulatory relief?

You can start.

Sure. I can start. This is Rob. I don’t have a specific number to share regarding regulatory costs, but I know they are significant. We stopped trying to tally them a few years ago because they became deeply embedded in everything we did. To answer your question about whether we could reduce expenses if that situation changed, I suppose we could, although there are many sensible initiatives we would continue. When you asked that question, I thought about the opportunity cost involved. The regulatory work we do takes a lot of management's time and effort, which could theoretically be redirected to other projects. Bill, do you have anything to add?

No. The only other thing I’d say is that the regulatory burden as it relates to, if you’re thinking CCAR or heightened expectations or three lines of defense, they are certainly a lot of that, much of which by the way, we would keep and go through the exercise anyway. But there’s also a lot of regulatory costs that probably were missing from the industry historically. I’m thinking about to build an AML costs as we put bodies in operations and investment technologies as it relates to AML. I’m thinking about general compliance with consumer laws, independent of where and what happens to the CFPB, it’s clear that we all had work to do on that. We are done investing in that by and large, but I don’t think those costs go away, no matter nor should they, no matter what really happens to the regulation.

In a material way.

Yeah.

Got it. And just a follow-up to clarify the guidance on revenues, the up mid-single digit, what is the backdrop from a rate perspective Rob that you are assuming?

So, yeah, so on the revenue side, up mid-single digits, again around the loan growth that we have there. The rate backdrop, as I’ve mentioned, we have built into our plans two rate increases in 2017, one in June and one in December both 25 basis points.

That’s clearly the one in June is the only one that matters.

Right.

But what also matters is we are assuming sort of a rational forward curve off of…

Our reinvestment strategy for our securities portfolio takes into account the expectation of higher rates for five to seven years. If that portion of the curve stays flat, the impact on us would be significantly less.

Yes.

Great. Thanks so much. I appreciate it.

Yeah. Sure.

Sure.

Good morning, guys.

Hey, Gerard.

Good morning.

Rob, coming back to your comments about the technology infrastructure spending that you’ve been doing for a number of years now?

Yeah.

Is there a period, where you think that extra spending, if there is extra spending going on that ends and you start to see that kind of flat now, maybe even come down in total technology spending?

Yes. We’re looking at each other here. So the infrastructure spend most definitely falls off substantially and I would see a technology plan given to me that would suggest total tech cost would fall. Having said that, my expectation is that it’s not true, instead what happens is you’ll see a mix shift, such that we’re spending much more on the frontend towards consumers and applications and ease of doing business and automation and real-time payments, and less worrying about the infrastructure. The infrastructure we build supports our capability to do the second order effect, but I think banking both on the corporate and retail side is increasingly becoming a technology-related business, and I just don’t know that you’re going to see that drop-off a few and tend to remain competitive with what customers expect today.

Yeah. Hey, Gerard. This is Rob. I’ll answer that. That’s the key point. It’s a shift from the build-out on the infrastructure to actually using the infrastructure and we have a lot of investments planned around various customer applications.

I see. And is the infrastructure spend, does that finish up end of this year into next year or any timetable?

No. It’s pretty much done this year. We’ll have some trailing effects and we’ll obviously continuously be investing in cyber and then we’ll have a roll forward of the take down of the old data centers, which actually take some period of time, as you sort of decommission and clean old servers, so some of the expense that rolls into ’18.

Right.

But the infrastructure side, absent cyber, which will be continuous, is largely behind us now.

Very good. Bill, can you provide an update on the rollout of Zell this quarter? What are your expectations for this year and how could the PDP spending benefit your consumer business?

I want to be cautious about discussing future public analysis from Zell, but I can share that sometime early in 2017, a group of banks, including those already committed and several large institutions through third-party providers, will be operating with Zell. It will be widely available, allowing use on various mobile apps such as PNC’s, BofA’s, Citigroup’s, and Morgan’s. This initiative serves multiple purposes. First, it puts our consumers back in our control, as we prefer them not to rely on potentially insecure third-party applications. Additionally, it enhances our connection with customers, making it more robust over time. While it might not generate immediate revenue from the product itself, it adds to customer loyalty. As we implement real-time payments—whether person-to-person, business-to-consumer, or corporate—it will provide a credible alternative to ACH. I believe this will become standard, and the U.S. is currently lagging behind in this trend, which will continue to grow. Consequently, we are developing numerous product applications leveraging this core capability, which will drive revenue.

Great. Appreciate all the color.

Yeah.

Good morning.

Hi, John.

Hi, John.

Just on the BlackRock stake, just given the potential corporate tax reform, one of the, see if you can give us your updated thoughts on how you’re thinking about the stake and if you could look at a potential sale here, and if so, if you could just talk about the capital deployment opportunities, how you would view that? Thanks.

Our stance on BlackRock remains unchanged; we aim to be a thoughtful owner of our valuable position in the company, which has served us well over time and has been a strong partner. If opportunities arise to monetize that stake, we acknowledge its concentration and will consider doing so. A lower tax rate could affect the economics of a potential sale, but we currently lack any definitive information or new regulations that would inform our decisions. We will act rationally if the right circumstances present themselves.

Yeah.

Thank you, Betsy, for your question. Regarding your thoughts on mergers and acquisitions, I know you have been cautious about your outlook. Are you feeling any differently as you consider the upcoming year or this year? Thank you.

Not on the bank side, for all reasons mentioned before that, we don’t want to buy yesterday’s sort of bank model and we don’t have a need for scale. Having said that, we continue to look at I’ll call them portfolio purchases, but asset generators that would make sense inside of our franchise and would add another product or service to an existing client base, we look at those all the time, we haven’t hit on it, but it wouldn’t shock me if we did.

Okay. And if I could throw one more in there…

Yeah.

On the HELOC loans coming in better than expected in terms of their performance, is that something that you expect to continue through the year?

Premature, John, I mean, that’s going to be an issue for us in 2017, premature to conclude that. This is something, as I mentioned in the opening comments, we pointed to for some time. 2017 was the peak year. So, we’ll obviously keep a close eye on it, but premature to conclude anything yet.

Yeah.

Sure.

Hi, guys. This is Rob from Matt’s team. Just to follow-up on your full year revenue growth guidance in the mid-single digits, asked another way, any sense of what that would look like ex any rate increases through the year and then looking at the components of that, any sense of growth expectations for fee revenues and then net interest income for the year?

Rob, it’s Rob. Yeah, I mean, I think the simplest way to answer that Rob would be sort of what’s the value in terms of our revenue guidance of effectively the June rate increase that we built into our plan. There is the December too, but as we just mentioned that won’t have as big of an impact. And all else being equal, which not all else will be equal, but just for math purposes, we value that around $170 million to $200 million of revenue. So, if you wanted to put that into your model or back that out, that sort of answers your fundamental question. In terms of just sort of mid-single-digit growth, I think you just take a look in terms of what we would reasonably expect in terms of securities balances, the loans that we talked about and continued fee growth and they all sort of converge at that mid-single-digit level.

Okay. Thanks so much.

Yeah.

Thanks a lot. Good morning. Hey, Rob, can I just ask one more on the cost side?

Yeah. Sure.

You mentioned that within the 350 CIP for the year, you’re now considering some of the various ongoing initiatives. So, is it accurate to say that as we move forward, whether it's related to data center activities, tech rationalization, branches, or home equity, all of that is included in your annual CIP as we progress?

Yeah. That’s right.

Okay. Great. Thank you for that.

Yeah.

And then just on the fee side, if you’re in that mid single-digit zone, in your kind of outlook for fees. I’m wondering just what, if you could parse out, what do you think is going to lead that this year, your last year was a bit of a mixed year with asset management having the charge....

Yeah, yeah, yeah.

....and then the resi mortgage, so what do you think steps back up this year?

I believe the trends remain largely unchanged. If we look at the various sectors, I would still categorize asset management in the mid to high-single digits, consumer services in the mid to high-single digits, corporate services in the mid-single digits, and residential mortgage likely lower than that. This is a general overview, and while the numbers don’t total correctly, it reflects the trends we've been experiencing, which is why I refer to mid-single digits.

Okay. Can you provide an estimate of how much in forward purchases of the securities you completed that will settle in the first quarter?

I don’t know the answer, Rob, certainly…

I think it’s $3…

$3, yeah…

Yeah, just over $3 billion.

Okay. Thanks, guys.

Yeah. Sure.

Good morning, everyone. Thank you for taking my question. I have a couple of related questions for you, Rob. First, I apologize if I missed any comments you made earlier regarding this, but has your perspective on managing AOCI risk changed now that it seems we might see a more significant rate increase than in recent years? Also, on a related note, has your view on deposit beta shifted? I noticed there was a 1 basis point increase in your overall deposit costs in the fourth quarter.

Yeah.

…which was actually last fourth quarter, when we have the 25 basis points hike, there was a 1 basis point decline. So I just curious if there is any changes you’re thinking about deposit beta?

You answer.

Okay. So what I’ll do is the deposit beta one first. And I’m not sure, I understand the AOCI question…

Actually.

We closely monitor the deposit beta and differentiate it between commercial and consumer segments. On the consumer side, we made some adjustments in 2016 by reducing promotions, so I don't anticipate a change in the consumer beta in the near future. The commercial side is a bit more dynamic. We are still below the average trend, so there could be some changes in 2017 for commercial deposits. However, I would expect to see any changes in commercial before any in consumer, though it's uncertain.

Yeah. Commercial has been running maybe 45% and part of that is driven by the dynamics inside the changing rules and the money for the industry where the yields we’re offering are still attractive relative to a treasury-only fund. On the consumer side, there is some noise in there, because what happened was, as we get ready for LCR in ‘16, we had sort of promo rates, which were a large portion of our production, and obviously, higher than straight head-funds rates.

Right.

And we basically have weaned ourselves off of that today and we go with our base savings account.

Okay.

So, what you saw in terms of that basis point drop was getting out of promo and into something else and then...

... it’s probably random noise that you see a basis point increase because we haven’t changed and effectively haven’t passed through on the consumer side…

... which is why it’s changing rates, yeah.

Regarding the AOCI, we have used our held-to-maturity account properly this quarter. I believe the total AOCI impact on the capital was about a quarter of a point. We analyzed this internally and do not see it as a constraint moving forward. The movement we've experienced, particularly in the back end of the curve during the fourth quarter, is around 80 basis points. This effectively extends any mortgages or mortgage-backed securities in that portfolio. The negative convexity resulting from the market's movements is likely at its highest this quarter compared to what we can expect in the future. Yeah. And I would just add to that, that’s right 20 basis points, so capital ratio went from 10.2 to 10…

Okay. Guys, thanks for the color. I appreciate it.

Yeah. Sure.

Thank you, Matt.

Hi. Thank you. Sorry about that. I guess the question for Bill. At this point in the credit cycle, PNC’s loan growth would lag the industry and if you talk about that for a while now, but if we think about accelerating economic growth, are you willing to take more credit risk to show loan growth, so is this a different playbook given the backdrop that’s emerged since the elections?

I believe we're facing a different set of opportunities. If you look at our loan growth over time, we've experienced steady growth in asset-based lending and equipment finance, with significant gains in real estate. However, the trend in real estate has begun to decline, especially in multi-family sectors, while others are still expanding rapidly. We've chosen to step back from that. I'm not sure if that will change. If the economy continues to show optimism and there is increased spending on infrastructure, it could lead to growth in the middle market and sustained activity. Additionally, we've seen growth in larger corporate lending, mainly driven by mergers and acquisitions. These two areas could see acceleration if the positive sentiment materializes. If there is genuine infrastructure spending at state and local levels, and if companies regain confidence in making profitable investments in durable goods, we could see movement in these areas. However, we have not factored that into our guidance yet. Still, the optimistic side suggests that opportunities are available.

Great. And then just a follow-up question for Rob. The seasonal increase in commercial deposits in the fourth quarter, has that left the balance sheet by the end of the year or do you expect some seasonality to decline in the first quarter?

Yeah. No, it did. So, you can see on the spot, commercial deposits were down.

Perfect. Thanks so much.

Yeah.

Yeah.

Good morning. Thanks for taking my questions. I just want to follow-up on the question that was just asked about loan growth and you’re saying that C&I loan growth is going to accelerate given the backdrop that we’re seeing right now, but at the same time we have corporate leverage which is very high compared to what we saw post crisis and we have interest rates moving higher. How do you think about the balance between corporate leverage being high and rates moving higher while also seeing growth in company’s spending?

You need to consider who our primary clients are. Currently, corporate leverage in the investment-grade segment is at an unprecedented level, and as interest rates increase, the coverage ratio is likely to deteriorate, especially since some clients are not fully hedged. However, they do have the capacity to take on debt. We anticipate that our internal ratings may face downgrades, but this won't deter us from pursuing economically beneficial lending relationships, albeit with higher spreads and potentially greater cross-selling opportunities. There remains loan demand, particularly from clients rated BB+ and BBB, and we plan to lend to that segment. However, in the middle market, borrowing has been quite limited over the past two to three years, with most borrowing activity coming from large corporate transactions related to mergers and acquisitions or share repurchases that increase leverage. There is a significant opportunity for mid-sized to smaller large corporations in this country to start reinvesting in their growth. In December, we experienced a record sales month in the corporate bank, and for the first time in several quarters, we noted growth in middle market balances during the fourth quarter. We also achieved record results in our Southeast markets, especially in Chicago. There is considerable positive momentum at the moment, but I remain cautious as actual changes have yet to materialize; we’ve only seen fluctuations in interest rates, which affect sentiment. It’s critical for us to witness concrete developments regarding tax reform and infrastructure spending at both state and local levels. Only then will we see substantial growth, but for now, it’s mostly discussions without actionable outcomes.

Okay. And then on to another topic, I noticed that you marked up your MSR by about 43% this quarter. It appears that the gain was entirely offset by hedging. Could you help us understand how that changed this quarter and how it flowed to the income statement?

Well, I mean, that the markup, I’ll accept your percentage, I haven’t looked at it. But just the rise in rates, the MSR is a big IO strip. So the value of that goes up.

$30 million on residential and $20 million on commercial, yes.

Yeah.

Okay. All right. Thank you.

Sure. Next question please.

Thank you very much for joining the call and we look forward to working with you.

Thanks, everybody.

Thank you.