PNC Financial Services Group Inc (PNC) — Q4 2017 Transcript

Well, thank you and good morning, everyone. Welcome to today’s conference call for The PNC Financial Services Group. Participating on this 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 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 in various other SEC filings and investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. Throughout this presentation, we refer to adjusted fourth quarter income statement amounts, which reflect the impact of federal tax legislation and significant items, with additional details provided in the earnings release and appendix to our slides. We have not factored into our forward-looking guidance the impact of any changes in customer behavior due to the newly enacted federal tax legislation. These statements speak only as of January 12, 2018, and PNC undertakes no obligation to update them. Now, I’d like to turn the call over to Bill Demchak.

Thanks, Bryan, and good morning, everybody. As you have seen today, we reported full-year 2017 results with net income of $5.4 billion or $10.36 per diluted common share. Clearly, our results benefited from new federal tax legislation that was signed into law in December. And the good news is that tax reform has produced both current and future benefits for our shareholders, including a significant increase in tangible book value per share this quarter and higher ongoing cash flow. Tax reform has also given us the flexibility to invest more in our businesses, our communities, and our employees, which helps drive our Main Street banking model. The bad news for this quarter, if you can call it that, is that it was really a noisy quarter for us, and I am going to leave it to Rob to walk you through all the various adjustments there. Excluding the impacts of tax legislation and the other significant items, our full-year 2017 net income was $4.5 billion or $8.50 per diluted common share. 2017 was a successful year for PNC, and I do want to thank all of our employees for their continued hard work, as well as our clients for their trust in us. We grew loans and deposits and added customers across our businesses. Importantly, we grew consumer loan balances, albeit somewhat modestly, for the first time in four years. This has been a key focus for us going into the year and I am pleased that we are making progress here. We generated record fee income for the year and in the fourth quarter, and we continued our focus on expense management, and this isn't going to change as we go into 2018. We executed on our strategic priorities, including the expansion of our middle market franchise into new markets, made important progress on our technology agenda, which is also driving the ongoing reinvention of our retail bank. We were particularly proud this year to earn the number one ranking in J.D. Power’s National Bank Satisfaction Survey. After years of work to modernize and fortify our information infrastructure, we are now investing more in our customer-facing digital products and services, and in turn, those investments are enabling us to deliver a higher quality, more convenient, and more secure banking experience. You will see that we announced several smaller but strategic acquisitions with Vendor Finance, Trout Investor Relations, and Fortis Advisors, all of this work is, of course, aimed at creating long-term value for our shareholders. In 2017, PNC returned $3.6 billion of capital to shareholders. 2018 is going to be an important year for us as we continue to execute on a number of initiatives, including the ongoing build-out of our digital products and services, the home lending transformation, and the further expansion of our middle market lending franchise. And with that, I’ll let Rob walk you through the results in more detail and share with you our guidance for 2018, and then we will be happy to take questions.

Good morning, and thanks Bill. As Bill just mentioned, our full-year net income was $5.4 billion or $10.36 per diluted common share, and fourth quarter net income was $2.1 billion or $4.18 per diluted common share. Both periods benefited from the new tax legislation, partially offset by significant items that I'll talk about in a moment. Our balance sheet information is on Slide 4 and it is presented on an average basis. Loans grew $1.9 billion or 1% to $221.1 billion in the fourth quarter compared with the third quarter. Commercial lending balances increased by $1.6 billion, and growth was broad-based across our C&IB businesses. Consumer lending balances were up $300 million, as growth in residential mortgage, auto, and credit card, more than offset lower home equity and education loans. For the year-over-year quarter comparison, total loans grew $10.2 billion or 5%. Commercial lending increased by $9.9 billion or 7%, again broad-based, and consumer lending was up $300 million. Investment securities decreased by $200 million to $74.2 billion in the fourth quarter, compared with the third quarter on an average basis, but increased by $1.1 billion or 2% on a spot basis. Average investment securities declined by $1.8 billion compared to the same quarter a year-ago as we faced a challenging reinvestment environment throughout most of 2017. Our average balances at the Federal Reserve were $25.3 billion for the fourth quarter, up $1.9 billion from the third quarter driven by an increase in liquidity from higher deposits and borrowings. Compared to the fourth quarter of last year, Fed balances increased by $600 million. On the liability side, total deposits increased by $2.1 billion or 1% to $261.5 billion in the fourth quarter compared with the third quarter due to seasonal growth in commercial deposits. Compared to the fourth quarter of last year, total deposits increased by $4.4 billion or 2%, reflecting growth in both our consumer and commercial businesses. Average common shareholders' equity increased by approximately $300 million linked quarter and by $600 million year-over-year, driven by strong earnings, even as we continue to return substantial capital to our shareholders. For the full-year 2017, we returned $3.6 billion of capital to shareholders. This represented a 17% increase over the prior year and was comprised of $2.3 billion in share repurchases and $1.3 billion in common dividends. Period end common shares outstanding were $473 million down $12 million or 2% compared to year-end 2016. As of December 31, 2017, our pro forma Basel III common equity Tier 1 capital ratio was estimated to be 9.8% inclusive of the impact of tax legislation, and tangible book value was $72.28 per common share as of December 31, up 7% compared to the same date a year-ago. As you can see on Slide 5, net income was $5.4 billion for the full-year and $2.1 billion in the fourth quarter. Clearly these results were impacted by tax legislation and significant items that occurred in the fourth quarter. However, our underlying business performance remains strong. On a reported basis, total revenue for the fourth quarter was $4.3 billion, up $135 million or 3% compared to the third quarter. This was driven by higher non-interest income and stable net interest income. Full-year revenue was $16.3 billion, up $1.2 billion or 8%. Net interest income increased by $717 million or 9% primarily due to commercial loan growth and favorable loan yields. Total non-interest income grew by $450 million or 7% reflecting overall business growth. Expenses continue to be well managed and remain a focus for us. The fourth quarter and full-year 2017 reported numbers as shown on this slide include the impact of approximately $500 million related to the significant items in the fourth quarter. Provision for credit losses in the fourth quarter was $125 million, down $5 million linked quarter. Full-year provision of $441 million increased by $8 million compared to 2016. Overall credit quality remained stable. Finally, as you can see, our income tax line benefited from the recent tax legislation. Turning to Slide 6, highlighted here are the significant items that impacted the fourth quarter. As a result of the federal tax legislation, we recognized a $1.2 billion net income tax benefit primarily due to the revaluation of our deferred tax liabilities, the majority of which are related to our equity stake in BlackRock. In addition, we had significant items that occurred in the fourth quarter and they are as follows. As previously announced, a $200 million contribution to the PNC Foundation, which supports our communities in early childhood education. This amount was funded through a contribution of shares of BlackRock stock. And second, $105 million expense related to benefits for our employees, which includes a $1,500 credit to employee cash balance pension accounts and a $1,000 cash payment to approximately 90% of our employees. Other significant items, not previously announced but reported today, are a $254 million non-interest income from the flow-through of BlackRock’s tax legislation benefit as a result of our equity investment. A $197 million charge related to real estate dispositions and exits, including our data center strategy. As a result of the completed 2017 build-out of new data centers, we are now less reliant on some of our legacy sites. In total, these real estate dispositions will reduce PNC’s managed square footage by approximately 10%. Lastly, there was $319 million for two negative fair value adjustments; one of which is $248 million related to our Visa Class B derivative agreements. This is primarily due to an extension of the expected timing of litigation resolution, and the second $71 million for our residential mortgage servicing rights fair value assumption updates. Slide 7 shows the financial impact of tax legislation and significant items on our fourth quarter and full-year financial results. We believe these adjusted results better represent our underlying business performance and will be used as the basis for our first quarter and full-year 2018 guidance. As you can see, our adjusted full-year net income was $4.5 billion or $8.50 per diluted common share. And for the fourth quarter, our adjusted net income was $1.2 billion or $2.29 per share. Turning to Slide 8, full-year 2017 revenue was $16.3 billion. Reported net interest income for 2017 increased by $717 million or 9% compared with 2016 driven by higher interest rates and loan growth, partially offset by higher borrowing and deposit costs. Our net interest margin increased in 2017 to 2.87%, up 14 basis points. The full-year improvement was primarily driven by higher loan yields, partially offset by higher borrowing costs. Compared to the third quarter, net interest income was stable and net interest margin declined by three basis points to 2.88%. These results included the impact of tax legislation related to leveraged leases, which reduced the fourth quarter NII by $26 million and NIM by three basis points. Full-year non-interest income was up $450 million or 7%. Fourth quarter non-interest income was up $135 million or 8%. Both periods included broad-based growth in the majority of our fee businesses. Slide 9 provides more detail on our non-interest income. We continue to execute on our strategies to grow our fee businesses across our franchise, and those efforts help to drive record fee income in 2017, even excluding the impact of tax legislation and other significant items. On both the reported and adjusted basis, non-interest income represented 44% of our 2017 revenue. For the full-year, asset management revenue increased by $421 million or 28%. This included the $254 million flow-through of tax legislation benefit as a result of our equity investment in BlackRock. In addition, higher average equity markets and assets under management, which grew from $137 billion at year-end 2016 to $151 billion as of December 31, 2017 contributed to the increase on a full-year and quarterly basis. Consumer services fees grew $27 million or 2% for the full-year driven by higher debit card activity, brokerage fees, and credit card activity net of rewards. On a linked-quarter basis, consumer services fees increased by $9 million or 3%. Corporate services fees increased by $117 million or 8% in 2017. On a linked-quarter basis, corporate services fees increased $52 million or 14%, in both periods results reflect stronger merger and acquisition advisory fees as well as higher treasury management and loans syndication fees. Residential mortgage non-interest income declined both on a full-year and linked-quarter basis and included a negative $71 million impact related to updated fair value assumptions for residential mortgage servicing rights. Beyond that, lower production and lower sales revenue contributed to the decline. Service charges on deposits for the full-year increased by $28 million or 4% driven by client growth and activity. Lastly, full-year other non-interest income increased by $74 million or 7%. On a linked-quarter basis, other non-interest income was down $152 million and included a net $129 million negative impact related to significant items. Turning to Slide 10, expense management continues to be a focus for us, and we remain disciplined in our overall approach. As you know, we had a 2017 goal of $350 million in cost savings through our continuous improvement program, and we successfully completed actions to achieve that goal. Our full-year 2017 expenses were $10.4 billion compared to $9.5 billion in 2016, reflecting approximately $500 million of significant items in the fourth quarter. These include the contribution to the PNC Foundation, real estate disposition and exit charges, along with employee cash payments and pension account credit. Importantly, on an adjusted basis, our efficiency ratio was 61% in 2017. Looking forward to 2018, we have targeted an additional $250 million in cost savings through our continuous improvement program, which we again expect to partially fund our continuing business and technology investments. Turning to Slide 11, overall credit quality remains stable in the fourth quarter compared to the third quarter. Total non-performing loans were essentially flat linked-quarter and continue to represent less than 1% of total loans. Total delinquencies were up $101 million or 7%, compared to the prior period, reflecting increases in residential mortgage, auto, and credit card in part due to seasonality and the residual impact of the hurricane. Provision for credit losses of $125 million decreased by $5 million linked-quarter. The provision for the consumer lending portfolio increased due to loan growth, the auto and credit card delinquencies I just mentioned and the impact of the home equity loan reserve release in the third quarter. These increases were more than offset by lower provisions for commercial lending reflecting stable credit quality and the reversal of hurricane related qualitative reserves. Net charge-offs were essentially flat compared to the third quarter results and the annualized net charge-off ratio was 22 basis points. In summary, PNC reported a very successful 2017 and we are well positioned for 2018. Looking ahead to the rest of the year, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates, with three additional hikes this year—June, September, and December—with each increase being 25 basis points. Based on these assumptions, our full-year 2018 guidance compared to adjusted 2017 results as outlined is as follows: we expect mid single-digit loan growth, mid single-digit revenue growth, a low single-digit increase in expenses, and PNC’s effective tax rate to be approximately 17%. Based on this guidance, we believe we will deliver positive operating leverage in 2018. Looking ahead at the first quarter of 2018 compared to adjusted fourth quarter 2017 results, we expect modest loan growth, total net interest income to remain stable, fee income to be down in low mid single digits due to typically lower first quarter client activity and elevated fourth quarter fees in certain categories, other non-interest income to be in the $250 million to $300 million range, expenses to be down in low single digits, and the provision to be between $100 million and $150 million. And with that, Bill and I are ready to take your questions.

Jennifer, could you please poll for questions?

Good morning.

Good morning, John.

Hey John.

The 17% expected tax rate appears to assume that not much of that really gets competed away, but listening to some of the banks talk about the competitive environment, it seems like there is going to be a longer-term risk that some of that benefit does erode over time. So I was just wondering if you can comment on your expectation there or do you think that you see some of that benefit find its way out of the numbers? Thanks.

I think in Rob’s— that the tax rate is a tax rate, whether or not that above-the-line numbers get reduced as a function of lowering spreads and/or higher deposit costs I think remains to be seen. So it’s not really in our tax rate. It’s kind of in heavy competition. Yes, because our after-tax return on equity is going to—in theory and in practice, you’ll see some of that through time given to customers.

John, this is Rob. Just to broaden that question a little bit, it's early, obviously, we would expect based on historical sort of activity that banks will compete some of that away, but it's too early to tell in terms of the extent of that.

Yes. The other thing to keep in mind when you—and this kind of jumps into theory, but our cost of capital actually increases because of the lower value of the tax shield from our funding. So you can actually give it all away, and then there’s just pure risk return that you get on the loan book that is sort of independent of, in some ways, what the tax rate is. So there’s mitigating factors to some notion that you could just drop it off to clients.

Right. Got it. Okay. And then on that note separately, I wanted to ask about loan growth at least on your outlook. I know loans at least for the quarter were somewhat sluggish on an end-of-period basis and it sounds like some of that may have been in the mortgage finance or anything. So I want a little bit more color there, but separately on the outlook, your mid single-digit outlook for 2018 I would have expected maybe would have been a little bit higher than the 2017 expectation, but it's in line, it's somewhat stable. So why not see a real strengthening in loan growth in 2018?

We didn’t assume a change in loan demand in effect, right? So if your question kind of comes along the lines, do we expect as a function of tax change and economic pickup that there might be more borrowings? We don’t have that built into that number per se. Interestingly in the fourth quarter number, you’re right in that we had a warehouse mortgage line for multifamily sort of runoff mid-quarter, which on a spot basis caused numbers to decline. But what was interesting is our originations in the fourth quarter in C&I were really healthy; what changed versus the third quarter were the paydowns on loans that were kind of taken up by capital markets. In the real estate market, real estate loans were taken out by permanent finance in pretty aggressive terms. So our ability to win deals and fund deals continues to be healthy.

Okay, great. Thank you.

Thanks, John.

Good morning, guys. I appreciate the color on the sort of adjusted numbers and everything like that. Rob, question on the tax rate, so the 17% effective rate? Can you walk through what you would anticipate that implying for an FTE tax rate? I think there's typically been maybe call 250 basis point gap between your effective and FTE tax rate, so how does that change?

Yes. Not a big swing there, Scott. You just would reduce that by the compression of the lower tax rate, so not a big number to start with and roughly what 30% off of that.

Yes. Okay. And then any impact on the – like should we expect any visible step down in the FTE margin as a result of tax changes or anything or is that…

Yes. We gauge it around 3 basis points.

Okay, great. Thank you. And then maybe more broadly now that tax change is official, any thoughts on how if at all the new role changes your capital return targets or aspirations?

Well, that’s a popular question. Obviously, the answer to that is what you’re going to expect, which is premature. We haven’t received the Fed scenarios for this year’s stress test. So that’s a key component in determining what the capital return will be, but all else being equal because we have a lower tax rate in theory, if everything else stays equal, we’ll have more to return.

And our bias inside of that as we’ve talked about before would be on the dividend side, but we’ll finish out this or do we have two quarters Rob on the remaining CCAR and then see what they have in store for us on the next set. We have higher cash flow and we’ll be biasing that cash flow subject to our Board of Directors’ approval, but towards the dividend, I think.

As far as the mix between dividend and share repurchases.

Yes. Okay. All right, terrific. Thank you guys very much.

Sure, Scott.

Hi, good morning.

Hi, good morning.

Hi, good morning, Erika.

So in context of the progress on consumer loan growth, Bill, one of your peers said at an earlier conference call this morning mentioned that underwriting standards still remain a bit tight for residential mortgage, and clearly everybody's waiting for potential rule changes from the agencies. And I'm wondering this is sort of a two-part question. If you could give us an update on the home lending transformation in terms of the origination prospects for this year, and also sort of whether or not the expense base is now right-sized. Do you agree with the view that there is still some embedded conservatism in terms of underwriting standards for residential mortgage?

Just on the underwriting standards, yes, I would say that everybody just, given past history, has been more conservative than you otherwise might be given broad-based litigation risk and put-back risk. I’ll let Rob comment a bit on the home lending transformation, but lead off by saying that we are not where we will be on expenses as we're still kind of running the implementation program and in some places doing systems.

Yes, I can add to that, Erika. We're on track in terms of what our plans are. We did move mortgage originations this quarter to our new platform. We have plans to follow that up with home equity and mortgage here in the spring and then some more work in the later part of 2018. So the expense savings portion of that will most likely be in 2019, but we feel good about executing on the plan, which as you know is a very complex work set.

Got it. And just as a follow-up, Bill and Rob. So there are two dueling bipartisan bills; the House clearly doesn't have an asset threshold and the Senate version still has an asset threshold of $250 billion. Should a dollar asset threshold prevail at $250 billion in terms of the definition, does that at all change how you're thinking about capital management or just strategy generally speaking from here?

Well, I mean that bill wouldn’t change anything for us, so it doesn’t change the way we’re thinking. And as a practical matter, our binding constraints or in effect that the thing that we’re most concerned about in terms of leveling the playing field is the LCR, which is not mentioned in that bill with that $250 billion threshold. But it is mentioned in the other bill. So we’d like to see, and we think we will through time either through regulatory relief because it doesn’t have to be through change or law or through change in law, some less hard-lined approach to the way you said LCR exposure, and we keep pushing on that. We’ll see where it goes. But that is kind of the single thing that impacts us.

That may or may not be determined by the threshold.

Got it. I will follow-up offline for the potential benefits. Thank you.

Sure.

Have a nice outlook, Rob, for operating leverage in 2018. I was wondering, when we look at the revenue drivers in the mid-single digit, if you could give us a broad sense of what you're thinking about for revenue drivers and whether it's kind of roughly driven equally by fees and NII that would be helpful? Thanks.

Yes, sure, John. Yes, so mid-single digits both NII and fees going up mid-single digits, and NII maybe at the higher end of mid-single digits and non-interest income or the fee income sort of in the middle there, so both mid-single digits, a little more in NII than the fees in terms of growth percentage.

Okay. And where are you feeling good about the kind of the fee drivers as you enter the size of the year?

Yes, so when we take a look at the year just to breakdown the components of the fees, we would say up mid-single digits overall in terms of the components asset management up high single digits, consumer services up mid-single digits, corporate services up low single digits, and the reason for that is just because of the elevated performance in the fourth quarter, corporate services fees were record as you can see. And then the mortgage and service charges on deposits up low single digits. All to get you to mid-single digits for the whole fees.

Got it. Okay, very helpful. Thanks very much.

Yes, sure.

Yes. Hi, good morning. This is Rob for Matt. Just questions on your excess liquidity. I was just curious if we can get an update on your thinking now that loan rates have backed up some here?

Yes. Just quickly, I mean it's elevated this quarter because we accelerated a little bit some borrowings that we did. Obviously, we’ve seen a backup in rates over the last handful of weeks with a 10-year push crossing 2%. And you would just see that the margin start deploying more cash. Having said that, you’ve got to remember that the carry, even with the higher backend rates, is now reduced because it curves flat, but it is likely you’ll see us put that money to work. We’d like to put it to work in floating rate assets, but as a practical matter, we remain short on duration and have an opportunity to redeploy into Level 1 securities if we choose to.

Okay. And then just separately as it relates to your branch footprint, you continue to reduce branch count this quarter. First, I was curious if you could give a target number for branch consolidation this year. And then second, I noticed that your universal branch count has been trending lower in the last couple of quarters. I was wondering if you could speak to that.

Yes, sure. So a couple of things there. We’ve been running in terms of branch consolidations that you see in the last couple of years on or around 100 branches a year and we would expect to be somewhere in that neighborhood in 2018. In regard to the universal branches themselves, in some cases, we've actually closed some universal branches because even though they're universal, they’re measured the same way as our other branches and if they’re not performing to expectations, we’ll close those. I think the bigger conversation around universal branches though is universal branch has a set definition in terms of the configuration and the approach, but what we’ve learned is that the psychology and the method of interacting with our customers can be just as effective in our traditional branch format. So it’s sort of an alternative format approach which can include our universal branches and also some of our legacy branches.

So in effect, we change the role and mix of employees to have more people customer-facing and fewer tellers, but we don’t spend 50 to 100 grand to redo the branch.

That’s right.

Got it. Thanks.

Sure.

Hi, thanks. Good morning. First question, CRE was flat to down a bit in 2017. Could you just talk about any pay down activity in the fourth quarter? And then just your overall appetite and opportunities for growth in 2019?

You mean 2018, right?

2018, yes, sorry.

On the CRE, in 2017, much of what Bill is saying. The originations actually were pretty strong. It was more sort of the takeouts that were elevated, particularly in the second half of the year. I think going into 2018, we still see some growth, but not at the rate that we've seen in the last couple of years.

Thanks. Sorry about that.

Good morning, guys.

Hey Gerard.

I have to jump over the call for a minute, so I apologize if you addressed this. On capital return, obviously your stock has done very well in the last 18 months. And with the new regulators, I know in the past there seemed to be some hesitancy by the regulators to allow banks to do special dividends as part of their capital return. But Bill, what’s your thinking if you kind of get the sign from the regulators that they would be supportive of that? How do you wrestle with that versus buying back your stock at elevated prices or amount of valuation basis relative to a special dividend?

Well, rather than talk about special or non-special, I think the simple answer is, given the price-to-book ratios for us in the industry at this point, our bias would be towards dividends versus buyback, but we still have a pretty healthy buyback. We did get the question; I sort of said the margin given the increased cash flow because of the lower tax rate, our bias would be to push that towards dividend as opposed to increase buyback. And all of that is kind of common sense, given where valuations are.

Very good. And I know over the years that you guys have been an asset-sensitive bank, of course. And if we assume that this tax reform leads to stronger economic growth in 2018 and 2019, which would probably imply higher interest rates, how are you guys thinking about the balance sheet? Are you keeping it the way it is or maybe making it more asset-sensitive, less asset-sensitive?

Well, look, the theory isn't—and the theory is simple, the practice is hard, right. You get limit long in effect just prior to going into our recession, and we’ve been asset sensitive or very short as the economy has been recovering with the rates going up with the added fuel of the fiscal stimulus in effect coming from the tax program. You will see us leg in and close some of our negative duration over time. One of the things I mentioned, the windfall in carry terms as opposed to value terms from that is less than it once was simply because the yield curve is flattened. But we will close that gap as—beyond an earnings measure—as a pure risk management measure once as we sort of approach the—I’ll call it the maturity of this economic run.

We’ve done some of that already.

Great. Thank you, guys.

Yes, thanks, Gerard.

Hey, thanks so much. Bill just wanted to follow-up on your comments around the cost of equity moving up a bit because the tax shield is going down. Could you just give a little color there and how you think about adjusting the cost of equity from what to what?

Well, I mean without putting numbers on it, it's a mathematical calculation, right. So our tax shield on our percentage of debt as a part of our mix funding bases is now less. By the way, that’s theory and practice often differs from theory. We look at it. The reason I bring it up is we measure our client relationships on our own performance as a function of total capital used to pursue a relationship and capital committed through credit and operating risk capital and so forth. So my only point in sort of bringing that up is there are offsetting costs and effect to simply saying that we could take the entire tax benefit and competed away without effective in business through our cost of capital.

Okay. I wasn't sure if you were also suggesting that the credit risk that you're taking in your core business is also a little bit risky because there's less tax shield associated with that as well.

No, I wasn't implying that, although if you really wanted to get into the math, the actual economic capital and credit increases in a lower tax environment, but I won’t bore you with what that is.

Okay. Maybe offline you can bore me; I’d be happy if you bore me with that conversation. The second question was just on the CIP target. I know it's lower than last year, so should we be interpreting that as hey, there is where—as we do more there's less to harvest or is there also an implication there of—there isn't a ramp up in other areas of investment spend?

No, I think it's the former just by definition in each year we get more and more efficient by definition, there's less in total to get. But that's still a significant number; it’s baked into our guidance in terms of total expense guidance, and it's a tool we've used to keep expenses in check for what? The last five years.

Yes, we don't mix that with our investment. We used to fund our investment, but that’s sort of a number that we focus on internally in terms of costs we’re just taking out. Part of what’s happening is we’ve hit most of the easy things, and the longer-term opportunity we have, and we’ve talked about this is kind of through automation in our back offices and some of the work we’re doing in the home lending transformation. There will be more work in retail, and then all the work we’re doing in AI and RPA. But that’s sort of a longer-term opportunity that’s going to probably play out over a number of years as opposed to something we could quantify this year.

Right. Okay. And does the tax law change help you with ramping that investment spend up a little bit maybe?

Our guidance for 2018 is our guidance for 2018. In theory, we could invest more, but as you’ve heard us say, we haven’t been shy about it—the future of our company, and oftentimes our decision to invest and take on new opportunities is driven by as much by our ability to execute efficiently as it is having dollars to spend.

And some of the sequencing that’s necessary for that.

Got it. Okay. Thanks a lot.

Thanks. Hey, good morning, guys. Also thanks again for that Slide 7, really helpful. Just a couple of cleanup things just on the full-year outlook. Rob, if I presume that your total revenue is on a non-FTE basis and it's all-inclusive, can you help us understand—are you baking in that $250 to $300 for other, not just for the first quarter, but all the way through the year?

Yes, we are.

Okay. Got it.

We can provide that guidance in that line, but that guidance hasn’t changed for quarter-to-quarter for a long time.

Even though last year it was largely above it for most of the year.

Yes. It was largely above it last year, and most of that was, as I had mentioned in previous calls, Ken, we've spoken about it, how it performs really in our private equity business.

Understood. Which could continue good markets.

Which could continue, but we normalize that a bit in our outlook.

Understood. Okay, got it. And then secondly just on credit, you're kind of keeping to this $150—$100 to $150, just wonder if you could just talk about just your outlook for credit within your outlook for the year, but also especially given that we might get some additional help on the tax stuff on corporate America and consumer America, just your overall views of credit quality and how you’d be thinking of that?

I think it’s pretty stable, as I mentioned in the opening comments there, Ken, so we feel good about the book on the consumer side. We're largely in the prime space and the consumer is pretty healthy. Then on the corporate space, credit has been pretty good, as you can see particularly in this quarter, and as you say with a lower tax rate, that results in these corporate even going up in credit quality that will be better, but that remains to be seen.

Okay. Last little one, in the fees comment you mentioned high single digits for asset management, does that also presume that double benefit you’ll get from the BlackRock pulling through off of their expected higher gap income as well?

Yes, it does. Yes, it does.

Okay, understood. All right, thanks guys. Appreciate it.

Yes, you bet, Ken.

Thank you.

Thank you. Within your guidance, you mentioned that you have three rate hikes combined with a slightly flattening yield curve given the outlook? Could you just give us a little bit of color around assume that yield curve stays where it is? Where the spread is just over 50 basis points, or are you saying further flattening from where we are right now?

In terms of our…

I think it is a practical matter. I think the flattening trade at least as it relates to two tens is probably over the carry trade with the very front end. With three rate increases as we have in our forecast, it's going to affect, drop the carry that I think we will get from a typical investment portfolio. So we would see a flattening trend from Fed funds to 10 years probably continue.

By definition…

Well not by definition, but practically, yes.

Right, and given the shorter duration of your balance sheet and the outside amount of liquidity compared to peers, we should benefit from the shorter and moving higher rate?

So the shorter and going higher increases yield on what is by majority floating rate loan book. Value ultimately we remain short on a duration basis, so we will invest in the fixed-rate securities and swaps, the carry from that at least on initiation of the transaction will be less than what it once was as the curve flattens from our cost of funding to whatever maturity we put on the loan book.

Okay, and then a follow-up on your comment regarding the system implementations and acceleration of consumer loan growth. You mentioned as you got the mortgage piece finalized on the new platform today and that the home equity and a few other products will follow up in 2018? It seems these are a couple quarters later than normal. Was there a little bit of delay in the implementation of that and would that be a little bit of a headwind in your projections for consumer loan growth in 2018?

I mean it’s a practical matter that the entirety of the project to redo home lending was harder than we thought, took longer than we thought, and cost more money than we thought. So yes, yes and yes. Having said that, it's all in what we've given you as guidance and we remain pretty bullish on what we can do inside of the home lending platform, home equity, and mortgage on the same originations system with the strong digital front end, which has been a lot of work to get there.

And the timeframe it’s all built into our guidance from the timeframe at the end of 2018 as what we've been talking about for some time.

Okay. Thank you.

Hi, Bill.

Hi, Mike.

I would like to challenge you on one point that you made, and that is that you would bore us with the cost of capital discussion.

Not the cost of capital that—we had a debate internally on what the lower tax rates actually do to the economic capital units that you prescribe to a given loan, and the reason that the capital goes up is because you in effect, in a fat-tail distribution, lose the downside tax shield. That's the boring nature of it. If you take it offline, but in effect, if I had 10 units of capital for 100 units of loan at yield tax rate, I have 10.5 or 11 today.

Conceptually kind of makes sense. Again, where it's not boring to—we're a bunch of bank analysts, it's interesting, Bill.

Right. Right.

But let's take that further as far as the impact of the lower taxes on corporate credit, and it seems like you could be guiding for a faster loan growth than you are. Do you expect this change to increase corporate loan growth? Do you expect the CapEx cycle to change because of the tax change? Are you budgeting more people or resources for that demand? Or do you think it's going to be kind of beyond?

I don't know that we would need to budget more resources if that happens. That’s terrific. I think at the margin, if you just play this out, if I’m a corporate manager, I'm going to have more projects that meet my hurdle in terms of investments than I did before at the margin. In practice, you need to fund those. Now they have more cash flow to fund those than they had before. But there's probably a willingness and a desire and a need to borrow as well. The other thing that we have that we don't really have our arms around yet is of course the cash repatriation coming back out of Europe. Now as a practical matter, most of those people aren't the people who have been borrowing anyway. So I don't know that that has a material impact on dampening credit. So I guess long-winded answer, all else equal, stronger economy, tax code change audit, increased loan demand. We haven't built that into our guidance. I think at the same time we see sort of record type in active corporate bond markets, which would be some of an offset to what we see on the loan side.

And that’s just what we know today.

And you alluded to this before. Do you think credit gets better than you thought it would be otherwise without the tax cut?

There’s more cash flow, so all else equal. If people don’t lever up as a function of it, there are trade-offs, but all else equal, notwithstanding the fact that we’re kind of at all-time high leverage for particularly investment-grade corporate America. This is going to generate cash flow that the margin ought to help them.

And then last question just on the boring part, what is your cost to capital? What do you think about it and how has that changed over the past few years?

I'm not going to get into that. We measure it—as a practical matter. We look at it every quarter out for a number of different things. I don't actually know what it is this quarter.

We can get that to you on that Mike. We haven’t calculated it down.

It sounds good. All right, thanks a lot.

Yes. End of Q&A.

Okay. Well listen, thank you, everybody. Look forward to talking to you again in the first quarter and for a strong 2018.

Thank you.