PNC Financial Services Group Inc (PNC) — Q4 2023 Transcript

Good morning. And welcome to today's conference call for The PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC. And participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today's presentation contains forward-looking information. Cautionary statements about this information, as well as reconciliations of non-GAAP measures, are included in today's earnings release materials as well as our SEC filings and other investor materials. These are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 16, 2023 and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Thank you, Bryan, and good morning, everyone. During a challenging and volatile operating environment for the banking industry, PNC performed well during 2023 and delivered a solid finish in the fourth quarter. For the full year 2023, adjusting for the fourth quarter impact of the FDIC special assessment and expenses related to a staff reduction initiative that we completed in the fourth quarter, we earned $14.10 per diluted share compared to $13.85 per diluted share in 2022. Throughout the year and amidst all the disruption, we continued to grow our customer base and deepen relationships across our coast-to-coast franchise. Importantly, we generated record revenue and controlled core expenses, which allowed us to deliver a modest amount of positive adjusted operating leverage. For the fourth quarter, we reported $883 million in net income or $1.85 diluted per share and $3.16 per share on an adjusted basis. Rob is going to take you through the financials in a moment, but I'd like to highlight a few points. First, as we announced in early October, we closed on the acquisition of the capital commitment loans from Signature, which is immediately accretive to earnings. Secondly, as we expected, we saw meaningful growth from non-interest income during the fourth quarter, driven primarily by a rebound in capital markets and advisory fees. Third, we completed the actions to reduce our workforce and we are positioned to realize $325 million of expense savings in 2024. This is in addition to our CIP savings target for 2024 that Rob will discuss in a few minutes. Expense discipline remains a top priority for us and accordingly we are targeting stable expenses for 2024 even as we continue to invest in key growth initiatives. Fourth, our credit quality remained strong during the quarter, reflecting our thoughtful approach to growing our balance sheet. While we continue to expect credit charge offs to increase over time, particularly in the CRE office segment, we’re adequately reserved. Finally, during the fourth quarter, we increased our capital position, saw solid improvement in our AOCI intangible book value and repurchased a modest amount of shares. In summary, we run our company with a focus on delivering through-the-cycle performance and feel very good about our strategy, our capabilities and the strength of our balance sheet as we enter 2024. And we believe we are well positioned to drive growth and deliver shareholder value in the coming year and beyond. As always, I want to thank our employees for everything they do to meet the needs of our customers and make our success possible. And with that, I'll turn it over to Rob.

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis and compared to the third quarter. Loans were up 2% and averaged $325 billion, which includes the acquired Signature capital commitment loans. Investment securities declined $2 billion or 2%. Cash balances at the Federal Reserve increased $4 billion to $42 billion and deposits increased $1.4 billion and averaged $424 billion. Borrowed funds increased $5 billion to $73 billion, driven by higher FHLB borrowings and parent company senior debt issuances. At year end, PNC was fully compliant with the proposed holding company long-term debt requirements. And we expect to reach compliance with the bank-level metrics through our normal course of funding well in advance of the phase-in period. AOCI improved $2.6 billion to negative $7.7 billion at quarter end, primarily reflecting the impact of favorable interest rate movements during the quarter. Accordingly, tangible book value increased to $85.08 per common share, up 9% linked quarter and 18% compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.9% as of December 31st, which increased 10 basis points linked quarter. Our estimated fully phased-in expanded risk-based CET1 ratio based on the new proposed capital rules would be approximately 8.2% at year end, which is well above our current requirement of 7%. We continue to be well-positioned with capital flexibility. During the quarter, we resumed modest share repurchase activity of approximately $100 million or roughly 0.5 million. And when combined with $600 million of common dividends, we returned a total of $700 million of capital to shareholders. Slide 4 shows our loans in more detail. Compared to the third quarter, average loan balances increased 2%, driven by higher commercial loan balances and modest growth in consumer. Commercial loans were $223 billion, an increase of $5 billion, driven by the acquisition of the Signature capital commitment portfolio. Excluding the $8 billion full quarter average impact from the Signature loan portfolio, commercial loans declined $3 billion or 1%, driven by lower utilization and soft loan demand. Consumer loans grew approximately $130 million driven by higher residential mortgage balances, partially offset by lower home equity and credit card balances. And loan yields increased 19 basis points to 5.94% in the fourth quarter. Slide 5 covers our deposits in more detail. Average deposits grew $1.4 billion to $424 billion during the quarter as seasonal growth in commercial deposits was partially offset by a decline in consumer deposits. In regard to mix, consolidated non-interest bearing deposits were 25% in the fourth quarter, down slightly from 26% in the third quarter and consistent with our expectations. We continue to expect the non-interest bearing portion of our deposits to stabilize near current levels. Our current rate paid on interest-bearing deposits increased to 2.48% during the fourth quarter, up from 2.26% in the prior quarter. As of December 31st, our cumulative deposit beta was 44% and in line with our expectation for the quarter. As we stated previously, we expect betas to drift modestly higher, while interest rates remain at current levels. And our current forecast calls for the first rate cut to occur in mid-2024, at which point, we believe the rate paid on deposits will begin to decline. Slide 6 details our investment security and swap portfolios. Average investment securities of $137 billion decreased 2% as curtailed purchase activity was more than offset by portfolio pay downs and maturities. The securities portfolio yield increased two basis points to 2.59%, reflecting the runoff of lower yielding securities. As of December 31st, the duration of the investment securities portfolio was 4.1 years. Our received fixed swaps pointing to the commercial loan book totaled $33 billion on December 31st. The weighted-average received fixed rate of our swap portfolio increased three basis points to 2.1% and the duration of the portfolio was 2.3 years. AOCI improved by $2.6 billion in the fourth quarter, reflecting lower interest rates. Importantly, as lower rate securities and swaps roll-off, we expect a continued meaningful improvement to tangible book value from AOCI accretion. Turning to the income statement on Slide 7. Fourth quarter net income was $883 million or $1.85 per share, which included pre-tax non-core expenses of $665 million or $525 million after tax related to the FDIC special assessment and the workforce reduction charges incurred in the fourth quarter. Excluding non-core expenses, adjusted EPS was $3.16. Total revenue of $5.4 billion increased $128 million or 2% compared to the third quarter of 2023. Net interest income declined modestly by $15 million. And our net interest margin was 2.66%, a decline of five basis points. Non-interest income increased to $143 million, or 8%. Non-interest expense of $4.1 billion increased $829 million or 26% and included $665 million of non-core expenses. Core non-interest expense was $3.4 billion and increased $164 million or 5%. Provision was $232 million in the fourth quarter and our effective tax rate was 16.3%. Full year 2023 revenue grew 2% compared to 2022. Core non-interest expense was well controlled and grew 1%. Importantly, our disciplined expense management and CIP savings allowed us to deliver modest positive operating leverage and PPNR growth of 2% on an adjusted basis. Turning to Slide 8, we highlight our revenue trends. Fourth quarter revenue was up $128 million or 2% compared with the third quarter, driven by strong fee income as net interest income of $3.4 billion was down modestly. Fee income was $1.8 billion and increased $99 million or 6% linked quarter. Looking at the detail, capital markets and advisory fees rebounded as expected and increased $141 million, or 84%, driven by higher M&A advisory fees. Asset Management and Brokerage revenue grew $12 million or 3%, reflecting favorable market conditions. And residential and commercial mortgage revenue declined $52 million or 26%, primarily due to a decrease in the valuation of net mortgage servicing rights. Other non-interest income of $138 million increased $44 million or 47% and included favorable valuation adjustments and gains on sales. The fourth quarter also included a $100 million negative Visa fair value adjustment compared to a $51 million negative adjustment in the third quarter. As a reminder, at December 31st, PNC owned 3.5 million Visa Class B shares with an unrecognized gain of approximately $1.5 billion. Turning to Slide 9, our fourth quarter non-interest expense of $4.1 billion was up $829 million and included $665 million of non-core charges. Core non-interest expense of $3.4 billion increased to $164 million, or 5% linked quarter, reflecting higher business activity, seasonality and asset impairments. During the quarter, we incurred $42 million of impairment charges, which were largely related to building write-offs. Notably, in 2023, we reduced our non-branch footprint by 2 million square feet, or approximately 17%. For the full year, core non-interest expense of $13.3 billion increased $177 million or 1%. Expense growth was well controlled due in part to the $50 million mid-year increase in our CIP goal to $450 million, which we exceeded. As a result, we generated 41 basis points of adjusted positive operating leverage for the full year. Looking forward to 2024, our annual CIP target is $425 million. This program funds a significant portion of our ongoing business and technology investments. And as of year-end, we completed actions related to the workforce reduction that will drive $325 million of cost savings in 2024. Taken together, we're implementing $750 million of expense management actions, all of which are reflected in our 2024 guidance that I will cover in a few minutes. Our credit metrics are presented on Slide 10. While overall credit quality remained strong across our portfolio, we did see a slight uptick in NPLs and delinquencies. Non-performing loans increased $57 million or 3% linked quarter and included a $12 million increase in CRE. Total delinquencies of $1.4 billion increased $97 million, or 8% linked quarter. The increase included seasonally higher consumer delinquencies, the majority of which have already been resolved. Net loan charge-offs were $200 million in the fourth quarter and came in at the low end of our expectations. Our annualized net charge-offs to average loans ratio was 24 basis points. And our allowance for credit losses totaled $5.5 billion or 1.7% of total loans on December 31st, stable with September 30th. The CRE office portfolio is where we continue to see the most stress and fourth quarter's net loan charge-offs were $56 million. We continue to expect future losses on this portfolio. However, we believe we've adequately reserved for those potential losses. As of December 31st, our reserves on the office portfolio were 8.7% of total office loans and inside of that 12.9% on the multi-tenant portfolio. Importantly, our overall CRE office portfolio declined 6% or approximately $550 million linked quarter, reflecting a higher level of payoff. Criticized office loans were flat and nonperforming loans increased 2% linked quarter. Naturally, we'll continue to monitor and review our assumptions to ensure they reflect current market conditions. And a full update of this portfolio is included in the appendix slides. In summary, PNC reported a solid fourth quarter and full year 2023. In regard to our view of the overall economy, we're expecting a mild recession starting in mid-2024 with a contraction in real GDP of less than 1%. We expect the federal funds rate to remain unchanged between 5.25% and 5.5% through mid-2024 when we expect the fed to begin to cut rates. We expect a reduction of 75 basis points in 2024 with a 25 basis point decrease in July, November and December. Looking ahead, our outlook for full year 2024 compared to 2023 results is as follows. We expect spot loan growth of 3% to 4%, which equates to average loan growth of approximately 1%. Total revenue to be stable to down 2%. Inside of that, our expectation is for net interest income to be down in the range of 4% to 5% and non-interest income to be up 4% to 6%, core non-interest expenses to be stable and we expect our effective tax rate to be approximately 18.5%. Our outlook for the first quarter of 2024 compared to the fourth quarter of 2023 is as follows. We expect average loans to be stable, net interest income to be down 2% to 3%, fee income to be down 6% to 8% due to seasonally lower first quarter client activity as well as elevated fourth quarter capital markets and advisory levels. Other non-interest income to be in the range of $150 million and $200 million excluding Visa activity. Taking the component pieces of revenue together, we expect total revenue to be down 3% to 4%. We expect total core non-interest expenses to be down 3% to 4%. We expect first quarter net charge-offs to be between $200 million and $250 million. And with that, Bill and I are ready to take your questions.

I wanted to ask, Rob and Bill, about the loan growth outlook for 2024, the spot guidance of up 3% to 4% seems a bit better than what we're seeing in H8 currently? And I thought you could give some color on the drivers of your outlook there.

On the outlook, so average loans up 1%, spot 3% to 4%, as you mentioned. We see most of that being on the commercial side and most of that being on the back end of the year. Consumer, we do have some growth throughout the year but pretty modest.

And Rob, on the net interest income guidance, it sounds like you're assuming three rate cuts, a little bit less than what the forward curve has. Just kind of wondering what would be the sensitivity if the forward curve played out and we saw more rate cuts than what you're assuming. Is that helpful to the NII outlook, all else equal or relatively neutral? Could you update us on the sensitivity there, please?

Yes, the short answer is it's relatively neutral because, as you know, we've worked hard to get our balance sheet into a neutral sensitivity position. So not a lot of variance in terms of the forwards and our own expectations in terms of the impact on NII. The big question, obviously, is going to be on deposit pricing and how that behaves as the year plays out, but we don't expect a lot of variance.

On the capital markets revenue, the numbers certainly came in really solid this quarter. As you look into 2024 and in the context of your up 4% to 6% non-interest income guidance for the full year, how are you thinking about capital markets trajectory through the year off of this level?

We experienced the rebound in capital markets that we anticipated in the fourth quarter, primarily driven by our Harris Williams M&A advisory business. For our guidance in 2024, the pipelines look promising. We expect the performance in the fourth quarter of 2023 and the first quarter of 2024 to represent the range of quarterly results we can expect throughout 2024. The exceptions were the weaker performances in the second and third quarters of 2023. Therefore, we believe the first and fourth quarters of 2023 will reflect the quarterly run rate for 2024.

All right, thanks for that. And then separately…

I'll even help you, it's up about 20% year-over-year. I'll save you the math there.

Your guidance for 2024 suggests a negative operating leverage of about 100 basis points using the midpoint of your expectations, which appears to be relatively strong compared to your competitors. How feasible is that if the interest rate environment does not develop as anticipated or if your revenue projections are less optimistic? Do you believe you can maintain that expected negative 100 basis points in operating leverage, or could it potentially be worse?

We are essentially neutral regarding our Net Interest Income forecast in relation to whether there will be rate cuts or not. Therefore, the outcome should remain consistent.

Well, I would add to that, John. So we worked hard. We took some actions to position ourselves to have stable expenses year-over-year. So that's a lot. And then as Bill pointed out on the revenue side, the NII is fairly predictable on a relative basis outside of rates and the fees, we feel good about the guidance. So that's what we think is going to occur.

I think if there's variance anywhere, it's going to be on our assumptions as it relates to deposit betas, the continued shift to interest-bearing versus non-interest-bearing and ultimately, the steepness of the yield curve, the rates at the long end of the curve as opposed to the front end of the curve. We've tried to be to the best of our ability a little bit on the conservative side of all of those things and we feel pretty good about where our forecast is.

I was hoping you might be able to share just some updated thoughts on sort of where and when NII might bottom and I think perhaps more importantly, magnitude of rebound that it might see thereafter. I know you sort of suggested last month that NII ultimately could be a record in 2025. I guess I'd just be curious for any updated context around your thoughts there.

So as we pointed out, we do see NII going down in the first half of the year, troughing around the time of the cuts and then growing from there and beyond. So think about where we are now, go down a bit and then grow back to where we are now. And then in '25 what gives us a lot of confidence around record NII is we will get the compounded effect of the repricing of our fixed rate assets as that continues into '25. So that's what we laid out a month ago and that's still what we think.

And then I guess just on the notion of deposit pricing, it sounds like you're expecting deposit cost to ease right around the time the Fed starts cutting. What's your sense for the sort of the pace of deposit betas on the way down vis-a-vis what they were on the way up?

I would say that on the commercial and high net worth side, and regarding the core consumer, we could see some increase in the rates paid even with potential cuts. This is a significant variable, and we'll need to see how it unfolds.

Thanks for outlining the macro assumptions behind the outlook, and I appreciate your comments on loan growth being more back end loaded. But can you give us some more color on how you're thinking about it? Because you also mentioned a mild recession midyear. So is it really a big uptick in CNI, maybe like 4Q as rates begin to come down and as we come out of that mild recession? So I was hoping you could give us some more color on both commercial and consumer there.

So I would just say just to follow up on that. So yes, back half of the year. On the commercial side, we see the uptick in the third and the fourth quarter. A big part of that being expected increase in utilization, which is a little bit lower right now and then just some pickup in general economic activity, not a lot, 3% to 4% spot to average up 1%. And then on the consumer, just sort of slow, steady growth, nothing big there, maybe a little bit more in card and auto and a little bit less in resi.

And then just on the credit side, last quarter you had some CRE loans move from criticized into NPLs. And it looks like things have been pretty steady this quarter on both criticized and NPLs. So do you think at this stage you guys have scrubbed the books and it should remain steady over the next few quarters with just NCOs ticking up or is it likely to be lumpy? The question is more, given the new outlook for rates to come down, do you think the worst is behind us?

Well, not on charge-offs. We think we're reserved correctly. But you have to remember that as these loans go to NPL and eventually if we have charges against them, we'll charge them off. It won't run through P&L because we've already created a reserve for it, but the work set on actually maturing the loans and dealing with the outcome is yet to come.

And I would just add to that the key number to look at there is the criticized percentage, which has not changed much. To Bill's point, that's the first bucket. The movement of that to nonperforming or charge-offs will occur, but it's that criticized number that's the key number.

Can you share with us your thoughts on the commercial loan growth this quarter? Excluding the Signature purchase, it was slightly down. You mentioned prospects for growth in 2024. Do you see significant competition from the private credit market and private equity firms that have become more aggressive in lending recently? Additionally, since you also serve them as customers, how do you balance their role as competitors and customers?

We don't compete directly with them in the types of loans that are usually offered, and we have limited involvement in the unsecured leverage space. Most of the decline we observed at Signature was in utilization. Moving forward, a growing portion of the lending markets is shifting into private hands, which raises long-term concerns if they begin to broaden their services. We do engage with them, and I would characterize our client base, particularly large private equity or private managers, as our primary clients. We provide various services to them through Harris Williams and Solebury, along with business credit and treasury management for their portfolio companies. They are valuable clients. That said, we could potentially find ourselves competing with them in specific areas.

But not so much today.

And then, Rob, the follow-up with your comments and you gave us the Visa ownership and the unrealized gain. If I recall correctly, I think first quarter of '24 the owners of those shares are permitted to monetize that. Can you give us your updated thoughts on what you guys are thinking with your position in Visa?

So our position is, we have $1.5 billion in unrealized gains, 3.5 million B-shares. As you pointed out, there's a vote by the Visa shareholders at the end of this month to approve an action to enable the B-holders to monetize maybe up to 50%. So we don't control that. We see when the vote is scheduled, should it be approved, then we'll move forward with our monetization plans that would be allowed under whatever is approved.

Following up on credit, if we play out what the soft landing scenario could look like and the Fed starts cutting rates in mid-24, would you expect to be in a position to possibly start releasing reserves? Or are there sort of likely to still be late cycle concerns that would lead you to want to maintain the reserve levels that you've already established?

So first, our reserves are appropriate for what we expect to occur. So that's number one. Number two, if things should substantially improve yes, sure. We're running at 1.7% right now, which historically is on the high side. So if things normalize out in your definition of normal, we could be lower.

And then, Bill, following up on your comment about feeling good about your reserve levels, but that we haven't necessarily seen peak charge-off rates yet. If we were to go down the mild recession scenario path, should we expect there to be some lag between when those charge-offs would actually hit the P&L and when the corresponding reserves would get released, or would the releases kind of occur concurrent with the increase in charge-offs?

So remember, the charge-offs don't hit P&L. There seems to be a lot of confusion on that. The provisions we take hit P&L. And we've provided for our best expectation of future charge-offs in a scenario that assumes a mild recession. So if our scenario comes true, we're fully reserved for everything that might happen to us. Charge-offs will flow through but not hit our P&L because they're effectively neutralized against the debit to the provision.

That's worth pointing out…

There always seems to be some confusion on that, but does that make sense?

I understand. I was suggesting that some have hinted at the possibility of allowing losses to occur if the credit environment worsens, while maintaining the existing reserves instead of releasing them immediately. Even though reserves have been established, they might choose to keep those reserves and let the higher charge-offs occur before ultimately deciding to release them. I would like to know your thoughts on the timing of these different elements.

So it's a mechanical calculation that's dependent on our view of the economy at the time. So if you got to a place where the charge-offs occur and somehow we thought the economy was worse than our current expectation, we would be providing for the remainder of the portfolio at a higher level than we are today, but right now we don't expect that to happen. So if the economy is worse, simply put, if the economy is worse than a mild recession, then you would expect our total reserve to increase.

Because it's forward-looking per CECL…

If I could ask one last question about capital return. I appreciate the information on Slide 19. Can you discuss your thoughts on the 150 basis point impact from Basel III endgame, considering the feedback it has received? Are you comfortable with the 8.2% level, or would you aim for a slightly higher buffer? Additionally, how are you approaching buybacks with all these factors in mind?

We'll answer the easy question first. 8.2 would be too low, I think, in this new environment, assuming Basel III endgame goes so we'd run some higher number than that for certain. There does appear to be substantial commentary on the proposal such that I would expect that if it isn't reproposed, there still would be some relief in certain asset categories and risk weighted assets and maybe on operating risk capital, we'll see. Having said that, we don't know. So at the moment, what we know is we're going to continue to grow earnings. We're going to accrete AOCI back into our capital base and we're going to pull that 8.2% up. We think we have flexibility inside of that to be active in the share repurchase market between now and then and the more certainty we have, the more certain will be and explicit on what we might buy back during a given period of time.

I would like to add that we repurchased nearly $100 million in shares during the fourth quarter. In the first quarter, we expect to do at least that amount, possibly even a bit more depending on market conditions.

I just wanted to ask one follow-up question on NII, if I may. A lot of investors were really excited about the graphic that you put together at Goldman, the Nike Swoosh, if you will, that had sort of the first rate cut embedded under the Nike Swoosh 25 basis points in 3Q '24. And I completely understand this is abstract in a way. But I just wanted to put together everything that you guys said I think it surprises investors that when you overlay the forward curve that it is neutral to this outcome, at least for '24. But just looking back at the slides, Rob, and on Slide 6 of this earnings season, it does seem like a lot of your receipts fixed swaps don't really meaningfully mature until 4Q '24. So I guess, in terms of like the mechanical repricing that you keep talking about, the way to really ask this question is, it sounds like it is possible to have potentially a lower trough than people expected in '24 and still have that record net interest income in '25 because of those fixed rate dynamics, and who knows what can happen on the liability side and the deposit repricing side, if the Fed cuts sooner. But it feels like that swap maturity is part of why that Nike Swoosh could be steeper. Am I thinking about it the right way?

I don't think we expect it to be deeper. We intentionally set the line a bit thick because we aren't certain when that trough will happen. Much of the discussion about '25 is somewhat mechanical. We are merely taking our fixed-rate assets and replacing them at market value, and we know when those assets mature. In summary, one reason we emphasize this and also illustrate the steepness of the curve is that our balance sheet, with its fixed-rate assets, is shorter than nearly all our peers and has a somewhat lower yield. Therefore, we anticipate a significant increase in fixed-rate earning yields sooner than the market expects, which contributes to the slope of the curve. Whether it troughs in the second quarter or the first week of the third quarter or the fourth week is uncertain.

I don’t think it's the ideal time for investors to be concerned about the second and third quarters. It's just that your new guidance suggests that after the first quarter, your average net interest income would be around 3% to 3.7%. To achieve a record net interest income, there would need to be a substantial increase from that point. I’m trying to help you present a case for the investors because I believe they are confident you can achieve that.

I believe that if you want to refer to it as the Swoosh, that term still holds true. I would say it's in line with our guidance and remains accurate.

Just a follow-up on that swaps book on Page 6 of the deck, a couple of billion dollar decline in the receive fixed. Any changes this quarter, whether terminations or new adds? And any thoughts in terms of like how you change and utilize that in terms of last answer of trying to move that forward?

I don't know that we had changes this quarter…

Going into Q1 '24. Is that the question, Ken?

No, just did you terminate any swaps this quarter and add any new, and just kind of to remind us of the understanding of what's still yet to go after with the…

Yes, we terminated some, we added some net down. But that's all in the normal course.

I mean I think we're missing your question. What are you trying to get at?

Yes, I was just trying to get at just what changes you've made inside of the portfolio outside of the normal maturity schedule, which I think we see in disclosures quarterly. Just wondering did you terminate swaps, did you add some new ones and then just remind us about the way forward…

We terminated 3.6 and added some. And just to remind you, when you terminate you basically lock in a loss to the life of the original contract and we'll do that at times simply to reposition where we have exposure.

Second question, just on the fee outlook. Good to see, first of all, in the fourth quarter, the capital markets improvement that you saw. Just wondering how much of a driver is that of your expected fee growth next year, your pipelines in Harris Williams, et cetera? And what other pieces do you expect to see growth in this year?

Ken, just as I said earlier, on the capital markets, a nice rebound in our Harris Williams activity. Pipelines are good; they support year-over-year growth of close to 20%, which is what I mentioned earlier. In terms of the other fee categories, asset management flattish up a bit, that will be market dependent. Card and cash management up low to mid-single digits. Lending and deposit services that will be down mid-single digits, and that's reflective of anticipated lower service charges on deposits. There was a number of items that we did in '23 to reduce overdraft charges for our clients, so that's good for our clients, but that will be some lower fees, about mid-single digit down. And then mortgage outside of hedge gains, flattish, down if you include the hedge gains.

Bill, on December 5th, you mentioned that skill is more important now than it has ever been since March and the mini crisis. We understood that technology, scale, and brand were significant. We have essentially removed tailoring and regulation. You indicated that this change is irreversible and that scale is crucial now. While I could elaborate, your speech seemed more heartfelt than I have ever heard before. So, why is this the case right now? And if you had better scale, could you achieve positive operating leverage in 2024? It seems you're discussing longer-term organic and perhaps inorganic expansion plans, so I would appreciate your insights on this.

No, I was. If you consider what occurred this year along with nearly a decade of history since the financial crisis, we have observed, in your terms, Goliath winning in organic deposit share growth. This trend has accelerated due to the mini crisis in March, where companies do not entirely trust the regulatory environment to guarantee the safety of their deposits in banks. Consequently, we have seen those deposits moving towards larger institutions. If you do not have a primary relationship with a corporate client that is deeply connected through treasury management and other services, you will ultimately lose those corporate deposits. When you pair this with the cost of technology and the adjustments to tiering, regulations, capital requirements, and liquidity, scale has become increasingly important. We have benefited from the mini crisis, but only marginally. Meanwhile, others find it challenging to engage in discussions with corporate clients. For larger institutions, it may be easier, but we must advance to the next level to be recognized nationwide as a standard brand, supported similarly to how the major banks are during crises. This is essential.

So what does that mean, you've identified the need and desire. So what does that mean, does it mean…

So naturally, over time, we are gaining share on our newer markets at a rapid pace. And we see that client acquisition and growth in all forms from deposits to loans to fees to so forth. I think through time, you're going to see a clear differentiation of this dynamic played out across the market. But I think there's going to be banks that are looking for strong partners, and I think we are a strong partner. I'm not going to force that issue. But I think longer term, we are a natural player in the consolidation of an industry where scale matters.

And if you can't get the deals done and you've been opportunistic with National City and et cetera, since then. Organic ubiquity, how can you get there? Do we start seeing you advertise during the Super Bowl, do you double or triple your marketing spend? What do you do then?

You just have to execute. There's a simple process involved. Considering the current situation in the banking industry, there are some issues with the large banks. However, there are a few clear winners in terms of deposit share. There’s one that should do well over time, while some are neutral and others are losing ground. With 5,000 banks available in the country, I can source growth from them. This might take longer, but we intend to pursue it, especially as opportunities arise when others realize they're struggling with a declining business. I see the trends and I know how we would respond to opportunities. I’m confident in our execution plan. Ultimately, scale matters, and we need to focus on that.

Just one follow-up. I got several e-mails from people saying, well, I don't know if I want to own PNC stock because I'm afraid of what kind of deal they might do. What do you say to that?

I think they should look at our history is my simplest explanation. I think somebody asked that question once before, and I assure everybody, I still don't want to do math and I think the opportunities will come our way. I don't think we'll have to chase them. One of the reasons people say why am I as vocal about this as I am. And part of the reason is to make the public aware, the public being regulators, politicians, boards of other banks aware of what's happening in the banking industry and the need for consolidation. It doesn't mean I'm going to do something stupid in the pursuit of it. I just think it's going to happen.

I guess just maybe one to follow up on your discussion with Mike around M&A. I guess do you think the regulatory backdrop today is conducive for doing M&A or do we need a very different sort of DoJ just philosophical approach towards larger bank deals before we could see a pickup in deal activity?

I don't think there's a simple answer to that, because I think if you listen carefully to the various speeches that have been done that they'll talk about the recognition of the need for M&A, but they'll also talk about good mergers and bad mergers, good outcomes and bad outcomes along several metrics. So put differently, I think certain deals will get approved and others wouldn't. I think we have proven as an acquirer that we know what we're doing and that the result in institution is, in fact, stronger than the one we might acquire.

And I guess just taking a step back around your view around the mild recession. I'm just wondering how much of that is just theoretical informing your reserving model versus the weakness that you are seeing across your customers and that leads you to believe that we will have a recession in the middle of the year. Because once we go down that path, who knows how bad things could get. So I just would love to hear whether the recession assumption is just your conservatism or are you seeing weakness across your customers?

The credit metrics indicate that there is no concern regarding our customers. We have observed a decrease in profit margins for certain clients. According to soft inputs and surveys from the Fed districts, the economy is definitely showing signs of weakening, but not at an alarming rate. This aligns with our expectations given the Fed's tightening of monetary policy. We anticipate a mild recession, but we also believe that employment will remain strong during this time. The resilience of the labor market and consumer spending will prevent the economy from falling into a deeper recession. This trajectory aligns with what we have predicted for some time.

And one quick follow-up, yes, go ahead.

I was just going to add to that to Bill. So I mean, we can have a slowdown continue and technically hit a recession without adding a whole lot of credit risk or increased credit structure.

And just one thing, Rob, you mentioned that you expect non-interest bearing deposits to stabilize from here. Just playing devil's advocate, why should they stabilize from here? If rates remain if we are in a 3% plus Fed funds world, should we not expect the mix of deposits to move towards interest-bearing, towards more CDs, or is your view different?

Well, I think, obviously, we've been watching that for the better part of the year here in terms of the decline in non-interest bearing in absolute terms and relative percentages. Why we think it's largely happened is because it's been so long. And much of that base is our businesses and individuals that run on non-interest bearing deposits. So they're not necessarily shopping for a higher rate. There's something around the institution in terms of they pay for their services through deposits or on the consumer side, small transaction accounts.

Just wondering your thoughts on kind of medium-term loan growth, a bit of a bigger picture question. You obviously gave details for this year. But as you think out like the next couple of years, are you in the camp that there needs to be some structural deleveraging. So loan growth might be below GDP or where normally it would be or just any thoughts that you have on that?

I mean, I don't think there's going to be any structural deleveraging here. We're obviously seeing a lot of banks kind of on my prior point, coming to the conclusion that some of the ancillary lending activities they took on, on the back of the big stimulus, don't make sense anymore. So there's deleveraging maybe across the industry by certain groups, but not here.

And I guess I meant from customers, right? Look, even if rates go down a little bit, they're still structurally a lot higher than they've been for the last almost 15 years. So if you just think about like the lending demand that's out there, obviously, there's lots of factors. But just thoughts on if higher rates structurally have a meaningful impact on that?

Well, I think at the end of the day, our generic corporate client needs to redo their facilities and the price has gone up and that will occur. I think some of the activity that we saw on the back of just really low cost of capital in the private equity markets where it kind of leverages free, that's going to go by the wayside at a higher rate environment. But if you look at the composition of our book, we're kind of the bread and butter of America. So I wouldn't expect that we would necessarily see a decline in loan growth simply because the front end of the SOFR rate is higher.

Just back on the M&A discussion, I know you mentioned building in a bigger buffer than that 8.2% you have on your adjusted CET1 ratio today. But is the plan to also maybe retain more capital than you normally would to better position you for taking advantage of any inorganic opportunities, which might keep the buyback activity more muted this year? Just curious to get your thoughts there, how you might balance that.

Both of those thoughts are in agreement. An 8.2% ratio is too low, so we will grow. Whether that growth is aimed at achieving faster compliance or due to opportunities that arise, we will continue to grow. This will likely result in a lower capital return than we would have otherwise, especially considering the changes related to Basel III.

So you would expect buyback activity maybe to remain muted for the rest of the year, not just the first quarter?

There's too much up in the air. I mean, it's depending what the Fed does, look, they could have to repropose that. It could go through the elections, they could change it materially. We don't know, right? All we know is all else equal, 8.2 is probably too low. We're still burning through our AOCI, we don't think that's going to change. So we stay the course and we'll adapt based on what we learn.

And then back on your deposit betas you're assuming in the guide, are you thinking you can move those commercial rates down materially more like right out of the gate with the first cut, or are you baking in some sort of a lag at least for the first couple of cuts?

It'd be pretty fast.

Just a follow-up on your commercial loan growth, like why you're punching your weight in the growth rate, and which areas of commercial loan growth? And I know you've deployed teams to all these cities near the Nashville Main Street Bank and you're trying to gain share and all that. Is it that effort the market share by city, is it kind of smaller middle market, is it that effect you talked about scale versus the smaller competitors? I mean how much we put in each bucket as far as your delta versus peer when it comes to commercial loan growth?

I can tell you that we're winning more pitches than we're losing, and this is even more pronounced now than it was before March. Our success rate has increased because we have more opportunities in the new markets compared to the old ones. Thus, growth in those areas is stronger, and having our teams fully staffed there, including product offerings, might set us apart in a market where overall loan growth may be slower. Importantly, we've stated for years that in these new markets, we're not primarily focusing on credit. Our fee-based growth is actually outpacing our loan-based growth as we cross-sell into treasury management and other services. We monitor our pipelines and have a clear view of what we have in each market. I can't pinpoint any specific product as growing significantly faster than others; it's simply that we are acquiring clients.

Last follow-up. How much faster would your commercial loan growth be if there were no private capital competitors right now?

I believe the main way it affects us directly is through the margin in business credit. We collaborate with many private credit partners in that area. If companies are taken private, which I think will decrease due to high capital costs, we may sometimes lose a client to a leveraged lender because they went private, but that's the situation.

A structure that would be the margin. If that wasn't available, it would otherwise be a conventional loan.

Bill, I have a question for you. With your deposits at the Fed continually increasing, when do you plan to start locking in some of those yields? I’m curious about your thoughts on this, especially considering your comments about rates peaking, a mild recession, and loan growth, and how all these factors come into play.

Well, in the near term, we think the market's got ahead of itself. I think until we're clear of the outcome here, we’re clear. Inflation and Fed actions, we're happy to kind of stay neutral. I think my own expectation here, Vivek, is notwithstanding what the Fed does through the course of '24 with the Fed funds rate. My expectation is you're not going to see a lot of action in the longer rate simply because of the supply calendar and the fact that inflation will have a tail and while the Fed could ease somewhat, I think inflation is still going to be running against versus their goal. We'll have a lot of issues. So long story short, we don't see a burning desire to put money to work here because we think that opportunity is going to remain and the durations we typically invest in and probably get a little bit better just given how hot the market got post the last Fed meeting.

You mentioned many companies transitioning to private ownership, which increases competition from private credit for loans. However, rising capital requirements are leading to higher spreads to maintain returns. How do you navigate the challenge of not losing market share to private options while ensuring sustainability? Given this situation, do you anticipate spreads remaining high, or do you think they will shift in the opposite direction?

So again, we're kind of talking about two different universes of credit. But having said that, and I'm sure you've heard this inside of your own shop. Lending money for the sake of lending money doesn't give us an adequate return on capital. Didn't before, it doesn't now. What gives us a return on capital is the relationship, the annuity-like fees you get from TM, the additive fees you get from capital markets related activity, and price is kind of a third order effect on the return on capital we get with that client relationship. Private credit at the moment sees a return in private credit because they could put some leverage on it, and there's not a big opportunity in private equity and yields are high. And I'll chase that for a period of time. I don't know that, that's a particularly great investment through the cycle and we don't try to compete with it in that lending environment.

Well, thank you very much for participating in the call. And if you have any follow-ups, feel free to reach out to the IR team. Thank you, and good luck this quarter.

Thanks, everybody.

Thank you.