Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- PNC Financial Services Group Inc (PNC, Financial) reported a strong second quarter with $1.5 billion in net income and $3.39 diluted earnings per share.
- Net interest income (NII) and net interest margin (NIM) both grew in the quarter, with expectations for record NII in 2025.
- The company saw accelerated growth in demand deposit accounts (DDA) and added new corporate and commercial banking clients above historical rates.
- PNC Financial Services Group Inc (PNC) launched a new credit card, PNC Cash Unlimited, and plans to introduce several more in the coming months.
- The company maintained strong expense control, generating positive operating leverage and increasing its continuous improvement program target for 2024.
Negative Points
- Average deposit balances declined by $3 billion or less than 1% due to a seasonal decline in corporate balances.
- The credit environment showed an increase in charge-offs within the commercial real estate (CRE) office portfolio.
- Nonperforming loans increased by $123 million or 5% linked quarter, driven by an individual secured loan within the asset-based lending business.
- Average consumer loans declined by approximately $600 million or less than 1%, driven by lower residential real estate and home equity loan balances.
- The company recorded a $497 million loss on the sale of securities as part of a repositioning strategy, which was offset by a $754 million pretax gain from the Visa exchange program.
Q & A Highlights
Q: On NII, I know you guided to the upper end of the range even though you've got slower loan growth clearly due to your NIM improving, at least that's one driver. There's others as well. I just wanted to understand how you're thinking about the securities restructuring from here. Is this something that you would consider continuing, or is it -- we should look at it as a one-off from using the Visa gains? And I ask just from a context of trying to think through NIM trajectory from here.
A: You should think of it as one-off. I mean, you never say never, and I don't know what the future holds. But practically at this point, we don't have to do any restructuring on anything to hit that stated goal of the '25 record NII. And we don't have any plans to do that.
Q: Could you speak to how you're thinking about deposit, pricing, and levels? I mean, clearly there was tax-related outflows and things like that this quarter. And with loan growth being muted, should we be anticipating deposits stable to down, or are you going to be out there trying to get deposit growth? Just, again, asking from the context of how we should think about deposit pricing as we work through our models.
A: Sure, Betsy. I would say the short answer to that is stable to down is our expectation with an emphasis on stable. These things have really stabilized year over year, as you know, so our expectation is some downward drift but not anywhere near the level that we've seen in the last couple of years.
Q: On your NII outlook, it's good to hear the NII inflection and the components there. Excluding the $70 million benefit from the securities repositioning in the back half of this year, I mean, it appears that the underlying NII run rate for the back half was guided a bit lower. Is that mainly loan growth that's the driver? I mean, if you could just talk through that a little bit in terms of the factors impacting that run rate.
A: If you backed out the restructuring, the guide would still be higher. And we did that while maintaining our loan growth assumption, and we did that because we just got tired of saying that, hey, loan growth is going to come at some point. So we took it out of the forecast. If it shows up, we'll benefit like everybody else.
Q: How do you feel now in terms of the pace of buybacks as you look out just given where you stand now on CET1 and from a fully phased-in? How does that make you feel about the pace of buybacks? Are you going to remain at the $100 million pace per quarter or possibly accelerate?
A: Right now, we're on pace, and we continue to -- we expect to continue the pace that we've been on for the first couple of quarters. And as you know, the new rules are still in flux, so there's not finalization there. And then beyond that, I think a driver will be what happens with loan growth which should be a factor in terms of that being our highest and best use of our capital. But that was a factor in terms of deciding on buybacks. But the important part is that we are buying back shares.
Q: Perhaps give us a sense on how you think deposit rate paid will trend from here and maybe under the scenario of rates staying where we are versus the scenario of what the forward curve is pricing and how quickly you may be able to reprice.
A: Our plan -- so slide 9 is a good slide, and it clearly shows a decline in the increase of the rate paid. The short answer to one of your questions there is, we do expect the rates may drift up a little bit. But in contrast, more like a handful of basis points versus the contrast to the previous quarters where you 60 or 50 and even 30 and in recent quarters. So it slowed down considerably. That's our expectation in the short term, Erika. When we get into rate cuts, we'll see. We'll be able to move pretty quickly on the high rates paid on commercial and wealth. But we still do have these interest-bearing consumer deposits that are below market that will grind higher. So that's something that we've talked about before and something that we'll need to keep our eye on.
Q: When I look back at your 10-Q disclosure, it seems that you're largely neutral to interest rates. And I know that your and Bill have talked a lot about the different factors that drive the inflection point in the Nike Swoosh. I'm wondering if the addition of the $18 billion in forward starters with the received fixed of 4.31%, does that impact the magnitude of the Swoosh for 2025?
A: Well, my answer to that would not necessarily be the magnitude, but the certainty. Essentially what we've done is lock in some of the Swoosh. One of the issues, of course, when everybody talks about fixed rate, asset repricing is -- what does it reprice to? And of course, therefore, we're exposed to whatever the five-year rate is. We're a year and two out, and those forward starting swaps simply, with a very opportunistic point, locked in materially higher rates than where we are today. To Rob's point, it just locks in the certainty of what we'll be able to produce on a go-forward basis.
Q: Rob, I was hoping you could maybe touch on major fee components in light of the softer expectations. I mean, it sounds like it's just a -- or mostly a function of mortgage which sort of [it is what it is]. I'm just curious to hear what you think is going well, what will need heavy lift, that kind of thing.
A: It's mostly a refinement, Scott. So for the full-year guide around the fees, we lowered our expectations of increase especially now from up 4% to 6% to up 3% to 5%, so still up and and a small shift. Most of that coming from continued softness in mortgage, which we expect to be on the -- continue in the balance half or the second half of the year, a little bit less than what we were expecting. To a lesser extent, tied to the reduced loan guidance, we do have loan-related fees within our capital markets segment, think loan syndication. So generally speaking, if there's fewer loans, there will be fewer loan syndication fees. So that's just the direct correlation there to that guide. And again, we could see loan growth. And if that's the case, then those fees would come back. But that's the general thinking everything else on the schedule, so to speak.
Q: I think, Bill, in your prepared remarks, you noted the introduction of your first new credit card in a while as
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
