Earnings call: PNC reports a net income of $1.5 billion

The PNC Financial Services Group (NYSE: NYSE:PNC) reported a strong third quarter for fiscal year 2024, with net income of $1.5 billion or $3.49 per diluted share. The company achieved positive operating leverage for the third consecutive quarter, driven by increases in net interest income and fee income.

Key Takeaways:

• Net income of $1.5 billion or $3.49 per diluted share

• 3% increase in net interest income

• 10% rise in fee income, notably in capital markets

• Tangible book value per share rose 9% to approximately $97

• Common Equity Tier 1 (CET1) ratio increased to 10.3%

Company Outlook

• Expects stable average loans in Q4 2024

• Forecasts 1% increase in net interest income for Q4

• Anticipates 5% to 7% decrease in fee income for Q4

• Projects 2% to 3% rise in total non-interest expenses for Q4

• Expects continued economic growth with real GDP rising approximately 2% in 2024

Bearish Highlights

• $75 million increase in non-performing loans, primarily in commercial real estate office loans

• Net loan charge-offs rose to $286 million

• Soft loan utilization despite growth in loan production and commitments

• Challenges in the office commercial real estate sector due to high vacancy rates

Bullish Highlights

• Positive operating leverage for three consecutive quarters

• Investing in retail branch network, particularly in the Southwest

• Stable credit quality and adequate reserves

• Plans to return roughly $800 million to shareholders through dividends and share repurchases

• Raised Continuous Improvement Program goal from $425 million to $450 million for 2024

Misses

• Under-investment in consumer lending, plans to improve penetration rates among existing clients

Q&A Highlights

• CEO Bill Demchak noted loan growth below historical trends due to uncertainties

• CFO Rob Reilly expects net interest margin to approach 3% over time

• Projected decline in interest-bearing deposit rates starting next quarter

• No current plans for acquisitions due to high stock prices and unfavorable financial math

• Cautiously optimistic outlook with focus on strategic investment in organic growth and retail expansion

PNC Financial Services Group reported a strong third quarter performance, with net income reaching $1.5 billion. The company saw positive growth in both net interest income and fee income, particularly in capital markets. Despite challenges in the commercial real estate sector and soft loan utilization, PNC maintained stable credit quality and adequate reserves.

Looking ahead to the fourth quarter of 2024, PNC expects stable average loans and a slight increase in net interest income. The company anticipates a decrease in fee income compared to the elevated third quarter, while projecting a modest rise in total non-interest expenses.

PNC is investing in its retail branch network, with a focus on expansion in the Southwest. The company plans to return approximately $800 million to shareholders through dividends and share repurchases, reflecting confidence in its financial position.

During the earnings call, CEO Bill Demchak addressed the current economic uncertainties affecting loan growth. He emphasized the company’s commitment to generating shareholder value without relying on uncertain loan growth forecasts. CFO Rob Reilly projected that the net interest margin would approach 3% over time, although the company does not strictly manage this as an outcome.

PNC acknowledged under-investment in consumer lending and indicated plans to improve penetration rates among existing clients, particularly through new credit card offerings. The company is also focusing on organic growth and retail expansion, with no current plans for acquisitions due to high stock prices and unfavorable financial conditions.

Despite challenges in the office commercial real estate sector, PNC maintains adequate reserves and is proactively addressing potential issues related to high vacancy rates and property valuations. The company remains cautiously optimistic about its outlook, focusing on strategic investments and organic growth opportunities.

InvestingPro Insights

PNC Financial Services Group’s strong third-quarter performance is further supported by data from InvestingPro. The company’s market capitalization stands at $77.66 billion, reflecting its significant presence in the banking industry. PNC’s P/E ratio of 16.38 suggests a reasonable valuation relative to its earnings, which aligns with the reported net income of $1.5 billion for the quarter.

InvestingPro Tips highlight PNC’s commitment to shareholder returns, noting that the company “has raised its dividend for 14 consecutive years” and “has maintained dividend payments for 54 consecutive years.” This consistent dividend policy supports PNC’s plan to return approximately $800 million to shareholders through dividends and share repurchases, as mentioned in the earnings report.

The company’s profitability is underscored by an InvestingPro Tip stating that PNC has been “profitable over the last twelve months,” with a reported revenue of $20.4 billion. This solid financial foundation enables PNC to invest in its retail branch network and focus on organic growth, as outlined in the company’s strategic plans.

Another relevant InvestingPro Tip indicates that PNC is “trading near its 52-week high,” with the stock price at 99.02% of its 52-week high. This aligns with the reported increase in tangible book value per share and the overall positive quarterly results.

For investors seeking a more comprehensive analysis, InvestingPro offers additional tips and insights. Currently, there are 6 more InvestingPro Tips available for PNC, providing a deeper understanding of the company’s financial health and market position.

Full transcript – PNC Financial Services (PNC) Q3 2024:

Operator: Greetings, welcome to The PNC Financial Services Group Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Bryan Gill, Executive Vice President and Director of Investor Relations. Thank you. You may begin.

Bryan Gill: Well, good morning. Welcome to today’s conference call for The PNC Financial Services Group. I am Bryan Gill, the Director of Invest Relations for PNC, and participating on this call are PNC’s Chairman 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-GAPP 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 Invest relations. These statements speak only as of October 15, 2024, and PNC undertakes no obligation to update them. Now I’d like to turn the call over to Bill.

Bill Demchak: Thank you, Bryan, and good morning, everyone. As you’ve seen, we had a very good third quarter. We executed well and saw a strong momentum across our franchise. We generated $1.5 billion in net income worth $3.49, diluted earnings per share. Rob will take you through the details shortly, but I wanted to highlight a few points. First, we generated positive operating leverage for the third consecutive quarter. And as an aside, our strong performance has positioned us to deliver positive operating leverage for the full-year of 2024. Inside of the third quarter performance NII grew 3% as we continue our growth trajectory towards expected record NII in 2025. Our fee income grew 10% with a very strong quarter in capital markets and we remain disciplined on the expense front. Second, we continue to see strong growth and activity across our franchise. CNIB continues to have great momentum as new loan production and commitments increased this quarter. While overall loan utilization has remained soft, the recent Fed actions to lower interest rates and the expectation of further cuts is likely to spur greater demand as we move ahead. Importantly, we are well positioned to serve our customers when loan growth returns. Within retail, we continue to invest heavily in our branch network to build density in our most attractive growth markets, and we are seeing success. We continue to grow customer households and checking accounts with the highest customer growth being realized in the Southwest markets. AMG is accelerating growth in high-opportunity markets and benefiting from favorable equity markets. Third, our overall credit quality remains relatively stable, reflecting our thoughtful approach to managing risk, customer selection, and long-term relationship development. While we expect additional charge-offs in the CRE office segment, we’re adequately reserved. Lastly, we continued to strengthen our capital levels during the quarter, and with the ongoing improvement in AOCI, our tangible book value per share increased 9%. In summary, we delivered strong results in the quarter, and we remain well positioned to continue our momentum. In fact, we’re in the middle of our strategic planning process and I can’t recall a time when our organic growth opportunities have ever been more attractive. Now before I turn it over to Rob for more detail on the financial results and outlook, I’d like to say thank you to our employees for everything that they do for our customers and our company. And with that, I’ll turn it over to Rob to take you through the quarter. Rob?

Rob Reilly: Thanks, Bill, and good morning, everyone. Our balance sheet is on slide four and is presented on an average linked quarter basis. Loans of $320 billion were stable. Investment securities increased slightly by $1 billion or 1%. And our cash balances at the Federal Reserve were $45 billion, an increase of $4 billion or 10%. Deposit balances grew $5 billion or 1% and averaged $422 billion. Borrowed funds decreased $1 billion or 2%, primarily due to the maturity of FHLB advances, partially offset by parent company debt issuances. At quarter end, AOCI was negative $5.1 billion, an improvement of $2.4 billion, or 32%, compared with June 30. Our tangible book value increased to approximately $97 per common share, which was a 9% increase linked quarter and a 24% increase, compared to the same period a year ago. We remain well capitalized in our estimated CET1 ratio increased to 10.3% as of September 30. Regarding the Basel III endgame, while certain aspects of the proposed rules are likely to change, we estimate our revised standardized ratio, which includes AOCI to be 9.2% at quarter end. We continue to be well positioned with capital flexibility, and we returned roughly $800 million of capital to shareholders during the quarter through common dividends and share repurchases. Slide five shows our loans in more detail. Average loan balances of $320 billion were flat, compared to the second quarter, as well as the same period a year ago. And the yield on total loans increased 8 basis points to 6.13% in the third quarter. Commercial loans were stable at $219 billion linked quarter, as utilization rates remained low and well below the historical average of roughly 55%. We continue to have confidence that commercial loan demand will return in the coming quarters as our loan commitments continue to increase and we expect business investment to return to historical levels. Consumer loans average $101 billion and were stable with the second quarter as growth in auto loans was mostly offset by a decline in residential real estate balances. Slide six details our investment security and swap portfolios. Average investment securities of $142 billion increased $1 billion or 1%. The securities portfolio yield increased 24 basis points to 3.08%, driven by higher rates on new purchases and the full quarter impact of the securities repositioning. As of September 30, our securities portfolio duration was approximately 3.3 years. Our active received fixed rate swaps pointed to the commercial loan book totaled $33 billion on September 30, and the weighted average rate increased 58 basis points to 3.08%. Our forward starting swaps were $15 billion with a weighted average received rate of 4.26%. Importantly, with our forward starting swaps, we’ve locked in the replacement yield on the majority of our 2025 swap maturities at levels higher than existing swaps in current market rates. Turning to slide seven, we expect considerable runoff of lower yielding securities and swaps, which will allow us to continue to reinvest into higher yielding assets over the next couple of years. Accumulated other comprehensive income improved by approximately $2.4 billion, or 32% to negative $5.1 billion on September 30, compared to negative $7.4 billion on June 30. The linked quarter improvement in AOCI was primarily due to lower rates, which benefited our swap and available for sale portfolio valuations. Going forward, AOCI related to these securities and swaps, as well as our held to maturity portfolio will accrete back as they mature and prepay, resulting in further growth to tangible book value. Slide eight, covers our deposit balances in more detail. Average deposits increased $5 billion or 1%, reflecting an increase in interest-bearing commercial balances, as well as higher-time deposits. Regarding mic, non-interest-bearing deposits were stable at $96 billion and remained at 23% of total average deposits. Our rate paid on interest-bearing deposits increased 11 basis points during the third quarter to 2.72%, reflecting growth in commercial interest-bearing deposits. We believe our total rate paid on deposits has reached its peak level, and with the 50 basis point cut in September, we’ve already begun to reduce deposit pricing. Looking forward, we expect the Federal Reserve to cut the benchmark rate by 25 basis points at both the November and December meetings, which will accelerate deposit repricing, particularly within our high-beta commercial interest-bearing deposits. Turning to slide nine, we highlight our income statement trends. Third quarter net income was $1.5 billion or $3.49 per share, comparing the third quarter to the second quarter, total revenue of $5.4 billion increased $21 million. Net interest income grew by $108 million, or 3% and our net interest margin was 2.64%, an increase of 4 basis points. Fee income increased $176 million, or 10%. Other non-interest income was $69 million and included negative $128 million of visa related activity. Non-interest expense of $3.3 billion decreased $30 million, or 1%. As a result, PPNR grew 2% linked quarter, and we generated positive operating leverage for the third consecutive quarter. Provision was $243 million reflecting portfolio activity and our effective tax rate was 19.2%. Turning to slide 10, we highlight our revenue trends. Third quarter revenue increased $21 million, driven by higher fee and net interest income, partially offset by lower other non-interest income. Other non-interest income included negative $128 million of visa-related activity. Net interest income of $3.4 billion increased to $108 million, or 3% driven by higher yields on interest-earning assets. Fee income was $2 billion and increased $176 million or 10% linked quarter. Looking at the detail, asset management and brokerage income grew $19 million or 5%, reflecting favorable equity and fixed income market performance. Capital markets and advisory fees increased approximately $100 million, or 36% driven by higher M&A advisory activity, as well as broad growth across most categories. Card and cash management decreased $8 million or 1%, as higher treasury management revenue was more than offset by credit card origination incentives. Lending and deposit revenue grew $16 million or 5%, due to increased customer activity. Mortgage revenue was up $50 million linked quarter, driven by a $59 million increase in the valuation of net mortgage servicing rights. Other non-interest income of $69 million included visa derivatives fair value adjustments of negative $128 million, primarily related to visa’s September announcement of a $1.5 billion litigation escrow funding. Notably, we continue to see strong momentum across our lines of business and throughout our markets. And year-to-date, non-interest income of $6 billion grew approximately $400 million or 7%, compared to the same period last year. Turning to slide 11, our non-interest expense of $3.3 billion declined $30 million or 1%. Excluding the second quarter $120 million contribution expense to the PNC Foundation, non-interest expense increased $90 million or 3% late quarter. Personnel expense increased $87 million or 5%, reflecting higher incentive compensation related to increased business activity. Importantly, all other categories declined or remain stable. Year-to-date, non-interest expense has increased by $80 million or 1%, excluding the $130 million FDIC special assessment and the $120 million foundation contribution expense in 2024. Non-interest expense is down 2% compared to the same period a year ago. We remain diligent in our continuous improvement efforts. We increased our CIP goal last quarter from $425 million to $450 million and we’re on track to achieve that goal in 2024. As you know, this program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on slide 12. Non-performing loans increased $75 million or 3% linked quarter, primarily driven by an increase in CRE office loans. Total delinquencies of $1.3 billion were stable with June 30. Net loan charge-offs were $286 million, the $24 million linked quarter increase was driven primarily by lower commercial recoveries. And our annualized net charge-offs to average loans ratio was 36 basis points. Our allowance for credit loss is totaled $5.3 billion or 1.7% of total loans, on September 30 stable with June 30. Slide 13 provides more detail on our CRE office credit metrics. We continue to see stress in the office portfolio given the challenges inherent in this book and the lack of demand for office properties. CRE office criticized loans were essentially stable link quarter, but NPLs increased due to the migration of criticized loans to non-performing status. Net loan charge-offs within the CRE office portfolio were down slightly. However, going forward, we expect additional charge-offs on this book, the size of which will vary quarter-to-quarter given the nature of the loans. As of September 30, our reserves on the overall office portfolio were 11.3%, and inside of that 16% on the multi-tenant portfolio, both up slightly from prior quarter. The modest increase in reserves reflects the continued valuation adjustments across the portfolio and specific reserves for certain credits. Furthermore, CRE office balances declined 4%, or approximately $270 million, linked quarter as we continue to manage our exposure down. Accordingly, we believe we are adequately reserved. In summary, PNC reported a solid third quarter, regarding our view of the overall economy, we are expecting continued economic growth in the fourth quarter, resulting in real GDP growth of approximately 2% in 2024, and unemployment to remain slightly above 4% through year-end. We expect the Fed to cut rates two additional times in 2024, with a 25 basis point decrease in November and another in December. Looking at the fourth quarter of 2024, compared to the third quarter of 2024, we expect average loans to be stable, net interest income to be up approximately 1%, fee income to be down 5% to 7% due to the elevated third quarter capital markets and MSR 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 stable. We expect total non-interest expense to be up 2% to 3%. And we expect fourth quarter net charge-offs to be approximately $300 million. Importantly, considering our year-to-date results and fourth quarter expectations, we’re on track to generate full-year positive operating leverage. And with that, Bill and I are ready to take your questions.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Erika Najarian with UBS. Please proceed with your questions.

Erika Najarian: Hi. Good morning.

Rob Reilly: Good morning.

Erika Najarian: Rob, if we could just unpack a little bit of the commentary you made on the swap. So I guess the first part of this question is I noticed that the received fixed rate on your asset, on your active swaps went up quite a bit quarter-to-quarter implying that what’s rolling off is well sub-one? You know, you went from 250 to 308. So I’m wondering if you could confirm that? And looking forward, I think you said something in your prepared remarks about replacing expiring ‘25 swaps at a higher fixed rate — receive fixed rates, then you thought to maybe just clarify that statement as well?

Rob Reilly: Sure. Good morning, Erika. So, yes, you’re right. And again, all of this in terms of your question points to what is occurring, which is that our repricing of our fixed rate assets, including our securities loans and swaps, is occurring at higher rates. So that’s all of what we’ve been talking about for a while. True in terms of the swaps, new swaps are at a higher rate than the old swaps. And then as you recall back in the spring, we did execute some forward swaps that locked in rates for maturing assets in ‘25 that contribute to our statement, which we might as well confirm upfront, our NII being a record level in 2025, we’re sticking to it.

Erika Najarian: Got it. Okay. And just the second part of my question that’s the mechanical side now on the strategic side. Bill, it’s been such a long time since the market has seen a neutral rate of not zero. You know, everybody’s talked about deposit betas, but as we think about what the natural deposit cost is for PNC, how should we think about what the spread is? Let’s say we settle at 2.75%, 3% in terms of Fed funds, what’s the spread in terms of Fed funds versus your funding costs naturally? And additionally, just a quick follow-up to Rob, as we’re in the liability side of the balance sheet, is there — what drove the strength in deposits, and was that mostly corporate, and is that permanent balances, or is that sort of some corporate balance is just parked for now, given the uncertainty in the market?

Bill Demchak: I can’t give a specific answer to where we might end up if rates, you know, Fed rates kind of hold it pre-end change, which I expect they will. You know, practically you can do most of that yourself, right? So the zero-cost deposits are obviously worth a lot more. If there’s any steepness to the curve, we get that benefit with our fixed rate assets. So maybe inside of your question is all else equal if we end up in an environment where front rates are three and change and back rates are somewhat higher than that, that’s the really attractive environment for banks, ourselves included.

Rob Reilly: Yes, and then the second part of that, Erika, was the outperformance that our deposit balances came on the commercial interest bearing side. As commercial clients continue to build cash on their balance sheet, our expectation is that’ll hold for the most part through the end of the year.

Erika Najarian: Got it. Thank you.

Operator: Thank you. Our next questions come from the line of John Pancari with Evercore. Please proceed with your questions.

John Pancari: Good morning.

Bill Demchak: Good morning, John.

Rob Reilly: Good morning, John.

John Pancari: On the loan side, still balances are clearly still pressured and you flagged line utilization down a bps to 50.7 and below your historical? Can you maybe talk about the demand, the underlying demand trends that you are seeing? And what do you think is going to be the biggest catalyst to get borrowers off the sidelines in borrowing? Is it continued rate cuts, confidence in that front? Is it the election? If you could just maybe give us some thoughts there? And what do you think a growth rate is reasonable as you enter 2025? Thanks.

Rob Reilly: Hey, John, it’s Rob. So, yes, you know, all year we’ve yet to deliver the loan growth that we thought was coming at some future point and for all the obvious reasons that you’ve seen utilization is low. And there is a bit of a pause feeling obviously with the election coming up and the rate environment. What we point to in terms of on the constructive front is we do continue to add customers, we do continue to add loan commitments quarter-over-quarter. So our commercial clients are putting those lines in place with the anticipation of borrowing. So that’s a constructive sign. And then you’ve seen the low inventory levels, the low CapEx to sales levels. So it does feel as though we’re at the point of the cycle to where, you know, loan growth is not too far off.

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

Rob Reilly: Yes, yes, we do. I’ll expand that a little bit in terms of our fee guidance for the fourth quarter. So we’re pointing it down 5% to 7% and all of that decline is being driven by the elevated MSR levels and the elevated capital markets levels that we achieve in the third quarter. So for the fourth quarter, you know, the MSRs is pretty straightforward. We don’t expect to have those levels in the fourth quarter. And then on the capital market side, the short answer is we probably pulled a little bit of the fourth quarter activity into the third quarter. A lot of that is in our Harris Williams M&A advisory businesses that had a really strong third quarter, as well as some of the other broader capital markets stories. So it’s a little bit lumpy. The pipelines, though, are strong. The momentum is strong. Capital markets year-over-year is up north of 23%. The back half of ‘24, including our capital markets guidance for the fourth quarter, is up 20% over the first half. So the momentum’s there. It’s just not necessarily going to fall linearly quarter-to-quarter.

John Pancari: Got it. All right. Thanks, Rob.

Rob Reilly: Sure.

Operator: Thank you. Our next questions come from the line at Scott Siefers with Piper Sandler. Please proceed with your questions.

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

Bill Demchak: You know, we can come up with 10 different theories on why loan growth hasn’t been there and why it might come back, but all of them are me making up theories. It’s been below trend on utilization. There’s a bunch of uncertainty, not the least of which is the election and rates and all the other things that may impact it. But it’s, you know, it’s one of the reasons why we kind of said, look, we’ll you know, produce growth for our shareholders without having to rely on some made-up story as to why there might be loan growth. If there is, it’s terrific, and at some point it’ll come back, but I’ve given up trying to forecast it personally. On the funding side, we are very liquid, so we have an opportunity, should it arise. We have a lot of capital and cash and that would be a great thing for us you know I just move some balance at the Fed this…

Rob Reilly: 35 spot 45 average, so a lot.

Bill Demchak: Yes, so I don’t know that it’s going to — it would impact our funding costs whatsoever.

Piper Sandler: Perfect okay good. All right thank you very much.

Operator: Thank you. Our next questions come from the line of Matt O’Connor with Deutsche Bank. Please proceed with your questions.

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

Rob Reilly: Yes, hey, Matt, it’s Rob. I do recall you asking the question before, and the answer is going to be the same, which is, you know, our NIM is increasing. We don’t manage the NIM as an outcome. We’ve operated close to 3%. My expectation is that we’ll approach those levels. I don’t remember saying by the end of ‘25, but maybe that’s something that you added then, but we’re on our way up, and 3% is reasonable through time.

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

Bill Demchak: Yes, look, we’ve — you know, historically we have under-invested in it and we’ve under — we are under penetrated with our existing clients.

Rob Reilly: On consumer.

Bill Demchak: On consumer, yes. And that’s our opportunity set. I don’t know that we need to be heroic and go beyond that, but we ought to have the same penetration rate that our peers do with respect to our consumer lending. And there’s fairly material upsides if we can pull that off and we’re investing to be able to do so.

Rob Reilly: And we’ve introduced a new credit card and plans to continue to do that along those lines.

Matt O’Connor: Okay. When do you think you’ll start seeing some of those efforts kick in? I mean, we are seeing pretty good credit card volume growth in the industry and at most peers, and obviously there’s a little bit of a lag, but what do you think some of those efforts will be a little bit more evident?

Bill Demchak: I don’t know that I have a timeline on it. I would tell you that we’re investing in people. We’re investing in our credit management capabilities and our marketing and our product delivery, you know, all of the above that will, you know, hopefully through time allow us to get the penetration we should have. I don’t know what the timeline is on that, but I know it’s a journey and I know we need to start it.

Rob Reilly: And we’re at the beginning now.

Matt O’Connor: Thank you.

Operator: Thank you. Our next questions come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.

Bill Carcache: Thanks. Good morning, Bill and Rob. Following up on your loan growth commentary, you’ve had a lot of success over the years in taking share within C&I. If we do get a reacceleration in loan growth over, say, the next year or so. How does that influence your ability to continue to take share and perhaps outpace industry growth, recognizing your competitors are obviously not willingly ceding share?

Bill Demchak: Well, I think that will show up. We are growing DHE and winning new clients at a record pace, I think. So you know, when utilization comes back, we ought to, as we have in the past, my best guess is we would outperform.

Rob Reilly: Yes. Well, DHE is our loan commitment. They’re unfunded at the moment, but they’ve been put in place. And I think the most of the momentum that we see is in our Southwest markets, where we are achieving record levels and would expect to be above average if it all plays out as we expect.

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

Rob Reilly: Yes, I don’t know. That’s a tough one to answer. I mean, what we’re encouraged about is that we’ve clearly stabilized now for a couple of quarters at the levels that we are following several quarters of pretty substantial decline. So we’ve stabilized. There’s a lot of theories in terms of what sort of the magic short-term rate is that kicks that up. But no one has a definitive answer.

Bill Carcache: Right, but is the credit that you give customers on compensating balances a sort of lever that you’d expect to use or be willing to use as you look to grow non-interest bearing deposits. Just trying to think through whether that’s a potential something that could spur growth?

Bill Demchak: You should assume that crediting rate is below market versus open deposit rate. And so it’s not going to have a moving beta for some period of time relative to rates coming down.

Rob Reilly: It’s relatively constant and we’re fine with that.

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

Rob Reilly: We’ll have to see, Bill. We’re in the process of doing our budgeting for next year right now, so we’ll have more for you on that in our January call.

Bill Carcache: Thanks for taking my questions.

Operator: Thank you. Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.

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

Bill Demchak: We wouldn’t have said it if we didn’t feel confident to begin with, so I don’t know levels of confidence but we feel pretty good about that.

Rob Reilly: That’s confident. That’s for sure.

Bill Demchak: And we don’t have any long growth in there whatsoever to get to that number.

Mike Mayo: So no loan growth for next year?

Bill Demchak: We have something, but it’s…

Rob Reilly: Well, we will have something, but the record NII level is not reliant on it.

Bill Demchak: Yes, it’s not dependent on long growth.

Mike Mayo: Okay. And then back, I know, I think last quarter you used the word befuddled as to why long growth wasn’t coming back. I guess number one could be the election, number two could be private credit, number three could be disintermediation of capital markets, number four, companies could just be managed differently today or number five, you could have a weaker economy or it could be all of the above. Just give us your best stab at why loan growth remains just so weak in an economy that’s still growing?

Bill Demchak: I think all of your reasons other than three and four. I don’t think private is causing utilization rate on middle market companies to remain low, for the businesses we play in. And I’m not sure, I mean at the margin, public markets being wide open has caused some of our larger clients to pay down outstanding balances and hit the capital market. So that’s probably true at the margin. But this basic notion of people just aren’t using working capital the way they used to. And maybe that’s the way they run the company post-COVID. Maybe that’s the uncertainty. It’s going to play out over time. And we can all guess about it. I just don’t know the answer, so I’m still befuddled.

Mike Mayo: Okay, and then lastly, your reserves on office CRE were taken even higher, especially multi-tenant. Last quarter you said the industry is in the first inning. I think a lot of people disagree with that. I’m not saying, yes, I’m not sure. We’re two years into this at least and it’s still a big question mark, I think, in a lot of people’s minds. So when you said the industry’s in the first inning and clearly your reserves are higher than others. Why do you say it’s only the first hitting? What’s your reasoning?

Bill Demchak: I think we’re just now starting to clear buildings in sales, right? We’ve had some extensions, we’ve had maturities hitting, we have a whole slew of term loans in the CNBS market and with small banks that will be out there three, four, five, five years. I just think this plays out through over a long period of time. Office vacancies, pick your market, are quite high. And we’re just now realizing the market-to-market value of that as we resolve properties. That’s why we’re reserved where we are and that’s why I’m not worried about it per se from PNC standpoint, but no this is going to be noisy for a while.

Rob Reilly: I might refine that a little…

Mike Mayo: Go ahead.

Rob Reilly: Early innings. Early innings, yes.

Bill Demchak: But we’re not, I mean, importantly, we’re not in early innings with respect to how we’re reserved, yes. I mean, you know, you can love or hate, but you know, to the best of our ability, we’ve taken all that up front.

Mike Mayo: And then sneaking one more last one. As far as acquisitions, I know you’d like to buy them on the cheap. I mean, national city, you know, you go down the list. It’s getting tougher for you to buy things on the cheap. Maybe if you, a bank does have a office or CRE problem that you swoop in there, but am I right in thinking it’s a lot less likely you do an acquisition now that some of these stocks have come back or what you’re thinking?

Bill Demchak: Yes, you’re right. We don’t see value in an acquisition at the moment.

Mike Mayo: Okay. Thank you.

Operator: Thank you. [Operator Instructions] Our next questions come from the line of Ebrahim Poonawala with the Bank of America. Please proceed with your questions.

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

Rob Reilly: Sure. So, you know, we’re early on, just a couple of weeks out from the rate cut. But now we’re in a down beta cycle. You know, we said that we think that our terminal data will be approximately 50%, and we will reduce rates paid through the balance of this year, and maybe we get a little bit less than half of the way there by the end of 2024. But that’s going to play out. It’s early, but that’s sort of our thinking. So, you know, rate paid will be coming down, particularly in the higher interest bearing commercial deposits, some wealth deposits, and that’s underway, and we’d expect that to continue.

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

Bill Demchak: I guess it maybe it varies by industry, but a simple notion is companies at the margin are losing margin, right? They have an end, they can’t pass on prices like they once could, they’re not making it up in volume. So the discussion of how do I cut costs has at least entered the dialogue. But we haven’t seen that show up in layoffs, right? The data remains strong, and as long as the data is strong, consumers are spending and the economy is strong. So everybody’s staring and watching and looking and there’s margin pressure on corporates. But there’s no — we don’t see in conversations some pending big layoff spike hitting the U.S. economy. There’s specific industries that are in slumps, whether it’s transportation, health care, struggling consumer state, they’re at the margin, but that’s — it’s just at the margin.

Rob Reilly: And nothing new.

Bill Demchak: Yes.

Ebrahim Poonawala: Got it, Got it. And if one last one, just following up on Mike’s question on M&A. Bank transactions usually stock for stock. I mean, your stock’s done well. Why would a deal, given your history and track record on deal integration, like is it just completely ruled out at this point? Is there a willing seller acquiring a good franchise? Does it no longer make sense just because of pricing?

Bill Demchak: Yes, it’s — I mean, the fact that we have a multiple advantage, our stock is worth the money it trades at. I’m not sure other stocks are. So straight up financial math saying it works doesn’t mean it’s a good deal. And when we look at potential targets, it would be interesting from certain geographies and so forth. They just don’t pencil out when you look at their balance sheet and the amount of investment we’d have to put in the franchise and just the time sync it takes to do it. So I, you know, and by the way, we look at everything. I don’t think the market’s anywhere close where we’d find something attractive.

Rob Reilly: Or pay a premium on top of what you think is already a premium priced in.

Bill Demchak: Yes.

Ebrahim Poonawala: That’s fair. Thank you.

Operator: Thank you. Our next questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

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

Bill Demchak: No, there’s legs on acceleration certainly in C&I as we continue to build out these new markets, what you’re going to see us do is more aggressively invest into our retail distribution franchise, very targeted and high-volume branch builds in particular markets. At the moment, go back to somebody’s question of, hey, what if rates are [3.25%] (ph) at the front end and what do you earn on deposits? The break even on a branch has become a lot easier to achieve. And my historical comments on the need for scale are still true. It just looks like the way we’re going to have to get there, at least in the near-term, is through investment and organic growth. And we’re good at it. We’ve been executing on it. And we’ll just continue on.

Rob Reilly: Particularly in the Southwest markets where the momentum is very strong across all our businesses CNIB, retail and the private bank.

Betsy Graseck: Okay, great. Thanks so much. Yes.

Bill Demchak: Same here.

Operator: Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

Gerard Cassidy: Hi, Rob. Hi, Bill.

Bill Demchak: Hey, Gerard.

Gerard Cassidy: You guys have done a very good job in managing credit over the years and it shows up again this quarter. Can we take a look at, in the C&I portfolio, what are the trends that you guys might be seeing in your [SNIC] (ph) portfolio or the asset-backed portfolio or the leverage portfolio, the trend is pretty benign. What do you guys see in there?

Bill Demchak: Not much. At the margin, we still have more downgrades than upgrades, a very simple ratio across that whole book. Much of that is driven by margin compression as opposed to anything fundamental with the underlying company. But now the economy is healthy, and company and our portfolio is healthy. We’ll have lumpy one-offs. There’s always some story that happens and we had one of those this quarter actually. But overall, the portfolio feels pretty strong.

Rob Reilly: And just to clarify with those.

Bill Demchak: Go ahead, Robert.

Rob Reilly: Yes, they’re still very acceptable bookable credits. They’re just not as strong as the ultra-strong they were. Now, the last time I read them.

Gerard Cassidy: Got it. And I know you touched on this on commercial loan growth about companies might be stronger. Have you seen any evidence that because of the pandemic, because of what companies went through your longtime customers that you’ve talked to for years, do you actually see them better managed or stronger, because of what happened during the pandemic?

Bill Demchak: I think that almost has to be true. And certainly, part of the answer to the utilization question, by the way has to be the notion that basically working capital was free for a bunch of years, and all of a sudden it got expensive. So you’re looking at places where you can improve margin and you’re trying to cut your borrowings and be more efficient at what you’re running in inventory and investment. So companies did without a lot of stuff during the pandemic and then you learn from that and you try to keep to insight. Yes, we’ll see. But broader messages, the economy’s fine, companies are fine, labor still feels strong. You know, a lot of things in the geopolitical horizons that could disrupt that, but those are exogenous variables to the basic economy we operate in.

Gerard Cassidy: Great, and just a final follow-up. You gave us some good data, of course, on the Commercial Real Estate Office portfolio. What kind of impact, I guess, if the cap rates start to come down, when do you start to see that be beneficial for the commercial? I mean, where it could really help you — help the values of those properties. I know each property is different, vacancy rates are critical, but is there any kind of point that you guys look at that if the cap rates fell 100 basis points or 150, that would help the valuation process?

Bill Demchak: Look, lower cap rate at the margin is to help. I think what you’re running into though is you’ll have office buildings that if they’re 50% vacant, they’ll hit the market and the question will be, can they ever get to normal occupancy through historical absorption rates? And if the answer to that is no, then the value of that building, we just saw one in New York, is next to zero. If there’s a tail on absorption where yes, I think I can rehab it and get this thing back to my normal 90%, 95%, then it has value as a going concern and it’s worth something. The cap rate almost is irrelevant in those two scenarios. If the thing is never going to be occupied, it doesn’t matter what the cap rate’s worth, it’s worth land.

Gerard Cassidy: Very good, good insights, thank you.

Operator: Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to Bryan Gill for any closing comments.

Bryan Gill: Okay, well thank you all for participating on the call this quarter and feel free to reach out to the IR team if you have any follow-up questions.

Bill Demchak: Thanks a lot everybody.

Rob Reilly: Thank you.

Operator: Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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