Good morning. My name is Frank, and I will be your conference operator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this call is being recorded. I will now turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Please go ahead, sir.

Well, thank you, and good morning, everybody. Welcome to today's conference call for the PNC Financial Services Group. 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 materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of April 16, 2021, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill.

Thanks, Bryan, and good morning, everyone. We had a strong start to the year, growing our revenue and managing our expenses to achieve positive operating leverage compared to the previous quarter. Our first quarter results were also boosted by our provision recapture, largely due to an improving economic outlook. Even with this recapture, our reserves remain above 2% of loans as we address the effects of COVID and assess potential long-term changes in certain asset classes. Our capital and liquidity levels are at record highs. With an increase in term yields, we've been utilizing some of this excess liquidity, increasing our investment securities by $9 billion at the end of the period. On average, they didn't change much as we made purchases later in the quarter. We also added another $9 billion in securities that will settle early in the second quarter. Our purchasing activity has continued into the second quarter, and we maintain very high levels of cash at the Fed that can be deployed over time into loans or securities based on market opportunities. The quarter was understandably impacted by ongoing weak loan demand amid strong bond market issuance, pay downs, and competition, resulting in historically low utilization levels. However, based on the resilience of the U.S. economy, we anticipate improved loan demand that will ultimately increase utilization rates over time. We are successfully advancing our strategic priorities, including national expansion, which will significantly accelerate through our pending acquisition of BBVA USA. We are making good progress on the integration planning for BBVA and are on track for a midyear close, pending regulatory approval. We haven't encountered any significant surprises regarding the quality or nature of BBVA's business, and our team is collaborating effectively with their BBVA counterparts across various aspects, including technology conversion. The quality of BBVA's markets, especially in their largest market, Texas, is meeting all our expectations. As we prepare for the integration of BBVA USA, we continue to invest in and enhance our technology to better serve our customers.

Thanks, Bill, and good morning, everyone. As you've seen, we reported first quarter net income of $1.8 billion or $4.10 per diluted common share. Our balance sheet is on Slide 3 and is presented on an average basis. During the quarter, loans declined by $8 billion or 3% due to lower utilization and continued soft loan demand. Investment securities grew approximately $700 million or 1% linked quarter. However, on a spot basis, balances increased $9 billion or 11% as we accelerated our purchase activity near the end of the quarter due to the steepening yield curve. Our average cash balances at the Federal Reserve grew to $85 billion in the first quarter, driven by continued deposit growth and lower loan balance. On the liability side, deposit balances averaged $365 billion and were up $6 billion or 2% linked quarter. Borrowed funds decreased $3 billion compared to the fourth quarter due to the runoff and redemption of debt obligations. Our tangible book value was $96.57 per common share as of March 31, a decrease on a linked-quarter basis primarily due to a decline in AOCI. Year-over-year, tangible book value increased 14%. And as of March 31, 2021, our CET1 ratio was estimated to be 12.6%.

Our first question comes from Betsy Graseck with Morgan Stanley.

I have two questions. First, regarding your net interest income guidance, you mentioned it is expected to increase by approximately 2% for the first quarter. However, in your commentary about the securities book, you indicated plans to raise it to 20% to 25% or 25% to 30% by year-end. I'd like to understand whether we should expect the same rate of improvement in net interest income for the second quarter to continue if the forward curve remains stable in the third and fourth quarters.

Sure. That comment was regarding our guidance on net interest income for the second quarter. Looking at the full year, we anticipate our revenue will remain stable. We expect an increase in net interest income from our securities portfolio as we grow those balances, although this will be slightly offset by lower loan growth than we had initially anticipated at the start of the year. Thus, we see a stable outlook overall. In terms of enhancing our securities portfolio, there are three main factors. First, we've allocated more capital due to the steepening of the yield curve. Second, we plan to continue this in a careful manner. Finally, we will maintain a higher percentage of our interest-earning assets in securities going forward. Historically, we've been around 20%, but we are now guiding toward a range of 25% to 30%.

Yes. I want to clarify that what you referred to as a goal is actually our expectation, considering the current carry and the cash we have on hand. We highlighted this because our security balances, like those across the industry, are expected to trend higher as a percentage of our total assets than they have in the past. We will continue to add to them throughout the year, as we have done previously. You can see evidence of this in our actions late in the first quarter. If our sole aim was to boost net interest income, we could have accelerated those purchases at lower yields to keep net interest income flat, but we chose not to do that. Waiting proved to be the right strategy, and we will maintain this approach moving forward.

I totally get it. It's such an unusual environment here with the loan-to-deposit ratio is so low and what's going on with the liquidity in your books, so that makes a lot of sense. And the revenue being stable for the full year with the loan commentary you just made, I mean part of that is a function of the PPP roll-off that's expected. Is that fair?

Yes, in part. Yes, that's all part. That's all built in.

And then on your question, please proceed.

I’d just say, look, the biggest unknown on loan growth specifically is when the inventory build starts for our corporate customers. Utilization is running as much as 11 points below the peak, maybe 5 points below sort of historic averages. And even though the economy has really kind of taken off here, for whatever reason, we haven't seen the typical inventory build and CapEx that you would see in this economy, I guess just hesitancy waiting for more certainty on the pandemic. But when that happens, and it will happen, it almost mechanically has to happen, you're going to see pretty appreciable loan growth. We just don't know when that's going to be.

Particularly as it relates to 2021.

Got it. All right. And then just separately on the BBVA USA projected PPNR, that $700 million, up $100 million from your prior guide. What's driving that delta?

Yes, as I mentioned earlier, this is Rob. The changes are mainly due to adjustments in our expectations regarding interest rates and some general updates based on the assumptions we had when we announced the deal.

But just based on our prior conversation, is it more that you're expecting they have more asset sensitivity in their book than you thought before?

Not necessarily. No.

There are so many little things. Rates moved in our favor. We're doing really well on expense opportunities, a whole variety of things, and they ended up...

Yes, that's right, true-ups from assumptions that we made last November, and the environment has changed a lot.

And our knowledge.

Our next question comes from John McDonald with Autonomous Research.

Bill, I wanted to follow-up on the loan growth thoughts. We're all just kind of thinking out loud here. But could we see the inventory and the CapEx pickup, but still not kind of see loan demand because corporates have a lot of cash and other alternatives in supply? How much is that a factor too do you think going on right now?

That will obviously impact our large corporate book, which I think at the moment, has its lowest utilization rate ever. But the bulk of our book, remember, some 90-plus percent of our clients are private companies. And so our middle market and commercial book really doesn't have access to the public markets and that cash build that you're seeing in large corporations. So I do think you'll see utilization there increase. By the way, we've seen utilization increases in our asset-based lending book, but they're small. That's kind of the first place you would expect to see it. So that's encouraging.

Got it. And Rob, did you say that you're not building in a second half pickup too much in your expectation?

Yes. That is what I said, John, yes. Because at this point, it’s conjecture.

Yes. And Rob, a follow-up for you. Obviously, your capital ratios have gone quite high. Is it fair for us to think that you'll close the deal with a higher capital than the 9.3% pro forma, given your starting point? And could you remind us of what CET1 ratio you consider appropriate as a long-term target?

Yes. Sure. Sure. On the BBVA, I would say, on everything, we'll have a whole bunch of numbers for you once we close the deal. But for today's purposes, we're tracking at or above all of our assumptions including the CET1 ratio. So yes, my estimations are that it will be higher than that 9.3%, but we'll get into that detail once we own the bank. In regard to our targets, we've always set around 8.5%. That's been sort of the level that we felt comfortable with. Obviously, we've been a lot higher than that. So the relevance of that number isn't as strong as it was a few years ago.

John, you're asking the question, are we going to have excess capital that can be deployed in share buybacks and other things? And the answer is, yes.

Yes. That's right.

Yes. And the deal doesn't change or how you think about the right capital level for the company?

No. No.

Our next question comes from Scott Siefers with Piper Sandler.

And maybe to revisit the loan growth thing. So I mean, you guys are seeing same trends as everybody else, but you guys are a bit unique in terms of how much of the country you see. Are there any geographic differences on utilization or sort of hesitancy on inventory? I mean, certain parts of the country just didn't necessarily shut down. They reopened earlier, more quickly, et cetera. I guess, I'm just curious if there's any differences either geographically or anywhere?

Not particularly, no. We haven't seen geographic differences. Utilization is low across the board.

I think one of the issues is supply chains have been so disrupted that people actually can't build inventory. And we're strangely being held back by demand and production capacity.

Yes. Yes, that definitely makes sense. It's just such an unusual phenomenon, but I appreciate the thoughts there. And then maybe just more of one. The other fee expectation, so it was a very, very strong quarter this quarter. I think the guide is a bit higher than is typical in the second quarter. Just maybe sort of the nuance, Rob, just sort of how you're thinking about that line going forward?

Yes, we experience some variability from quarter to quarter due to various factors involved. However, we anticipate that our guidance will be between $300 million and $350 million for the second quarter.

Our next question comes from Erika Najarian with Bank of America.

During this earnings season, we've asked a lot of questions as analysts of when loan growth is going to recover from a cyclical standpoint. But I'm wondering, given the deal expected to close in midyear and as we think about how this could potentially help. Maybe, Bill, talk through how these newer markets could potentially give you an even better opportunity to capture loan growth recovery once that comes?

I believe that's likely going to be the case. However, we have been cautious in setting expectations regarding BBVA, acknowledging that there are aspects of their balance sheet we may need to reduce due to concentrations within the combined firm, as well as certain sectors they wish to exit. This will be balanced by our growth in new markets. Looking ahead, I feel very optimistic about our growth potential. In the first year, we will experience some trade-offs, focusing on growing the preferred business while reducing less desirable segments. Therefore, significant acceleration in growth may be a couple of years away.

Got it. And as you have made more progress towards closing the deal, can you give us a sense of, you still feel like there's not going to be a significant amount of investment that you have to put into the combined franchise in terms of technology and other things. So obviously, some investors are thinking about another deal that had closed prior, where there was a lot of investment spend that was a little bit of a surprise. That's the question.

I won't comment on what others are doing, but we have a clear plan. We understand our position, and it's supported by the numbers we've shared. We will be investing in certain capacities for our branches, such as improving connectivity and upgrading to faster routers. We also plan to increase some of our cloud compute capacity. We've communicated all of this, and it aligns with our deal assumptions, which have all proven to be accurate.

Our next question comes from Ken Usdin with Jefferies.

I just wanted to follow-up on the fee side, 3 to 5 growth in the second. It was pretty good numbers to begin in the first. Just wondering if you could help us understand just where you expect growth is coming from and what do you think is going to lead that forward?

Sure, Ken. Yes, I would say on the fees, as we look forward to the second quarter relative to the guide, corporate services and consumer services will be up, we'd expect in sort of that mid-single-digit range and then the other fee categories, asset management, mortgage and service charges on deposits, probably low single-digits. So that's sort of how we get to that range.

Okay. Great. And then just as a follow-up on mortgage, obviously, not a bigger line for you guys. But just given some changes in the business you guys have been making and the relatively new platform. Just do you see share gain opportunities? And is the fight just against gain-on-sale margins in terms of just how resi can continue to build over time?

Yes, mortgage isn't as significant a part of our business as it is for others, but we are very enthusiastic about what we have developed and the opportunities ahead. Specifically, the market will perform as it will, especially regarding the expansion of the purchase side for our consumer customers, which will be further enhanced by the BBVA acquisition.

Okay. Last little follow-up. Just, Rob, I know you guys don't really give us a number on just premium inside the bond book. But can you just help us understand, has it been a drag? You're buying a lot of bonds, you're probably still buying some premium bonds, too. Just how should we just think about that big picture?

Yes. It's come down a little bit, and we'd expect it to continue to come down a bit.

Our next question comes from Mike Mayo with Wells Fargo Securities.

In terms of the guidance for the acquisition, so from $600 million to $700 million. Look, the bank index is up 40% since November 15 when you announced the deal. So I guess, it seems logical that your benefits are going to be greater, especially with a fixed price. So what does that mean for 2022 and the ultimate savings? I mean, mathematically, if you look at the industry and you look at BBVA, of course, it should be higher at this point. It’s good timing. Can you say what it means for the next kind of couple of years?

I'm trying to understand your question, Mike. Once we finalize the deal, we'll provide updates on the numbers and other details. I want to emphasize that we are very excited about the growth potential of this deal. Typically, when completing a deal, you give guidance for about a year and a half while working on cost savings and integration. The opportunities for the franchise in these markets are outstanding. The potential for cross-selling and acquiring new clients is also exceptional. We are genuinely excited about this.

I guess I'll just wait until you close it and get more information for 2022 guidance.

And we'll have it.

Yes.

Okay. Can you provide some specific numbers? I appreciate what you're saying about the loan data; I really value data. When you mention being 11 points below peak utilization and 5 points below average, what do those figures represent? Additionally, you mentioned that corporate lending utilization is at its lowest ever. What percentage is that? It would be great to have those details.

The only figure that comes to mind is that our corporate finance utilization stands at 57% of its peak level.

That was lower there. Yes.

The significant drop is primarily due to all the corporate cash available. The 11-point decline stems from the high utilization we experienced, particularly with the draws in the first quarter of last year, which could explain the average being around 5%. Certain areas are affected more than others, with municipal utilization drastically lower and corporate finance significantly down as well. Even our asset-based business, which typically maintains high utilization, has faced challenges due to difficulties in building inventory. Although we have analyzed various factors like economic growth and retail sales against inventory levels and loan utilization, which typically align at over 80, we have yet to see growth in this area today. Unfortunately, I cannot provide a clear reason for this.

And then last one. You said private companies are over 90% of your customers as a percentage of loan balances, how much of that be could you say?

That's by number. So by loan balances, I would say it's about half.

Yes, that's right. That's a better number. And that's obviously on the institutional corporate side.

And I guess you're being conservative, right? Because you're suggesting that it has to happen mechanically. It's in progress. You're beginning to see asset-based lending, but you're not including it in your expectations for the fourth quarter of this year. Is that just your conservative approach?

Yes. We could discuss all the factors, and I’ve participated in discussions about them. The second half of the year looks promising, and I hope that's accurate. If it is, we will perform well. However, I can't guarantee that will be the case.

Or specific timing.

What we show you is the stuff we know. I know that mechanically our loan balances are going to grow as the economy improves and they build inventories. I can't tell you the timing of that. By the way, nobody else can either.

Our next question comes from Gerard Cassidy with RBC.

Can you discuss your deposit balances, which have increased significantly? Bill, you've mentioned how your customers are utilizing their liquidity. Is this the primary factor influencing a potential decrease in deposits? Additionally, some of the custody banks, although not your direct competitors, are expecting higher rates to reduce their balances. How much could rising short-term interest rates assist you in lowering your deposit balances to align the loan-to-deposit ratio more closely with historical trends without requiring a dramatic increase in loans?

I don't believe that rising short-term rates will have any effect. In practice, deposit balances in the industry are influenced by the size of the Fed's balance sheet and fiscal transfers, along with loan growth. Once we see an increase in loan growth, it will actually contribute to higher deposit balances. I expect that excess liquidity in the system will persist for a long time because I don't anticipate the Fed will reduce their balance sheet anytime soon. Therefore, I believe we are undergoing a structural change in banking that will result in more liquidity and higher security balances for an extended period.

For the foreseeable future for sure.

Yes.

Very good, which obviously, I agree with you guys on that as well. Shifting over to the allowance for credit losses in your slide, I think it was Slide 10, you gave us good color on the levels and what drives those with the portfolio changes and the economic qualitative factors, recognizing BBVA is going to influence this number on the out years. But when you look at the reserves and you compare them to the day one reserves back in January 1, 2020, which you guys show here, you're still well above them. And if the economy over the next 12 to 18 months is even going to be better than what we all thought on January 1, 2020, pre-pandemic, that would suggest reserves should come down. Do you think you'd get close to that day one level? Or is that just too low?

No. I think you can get there to that level. It's just a question like as you pointed out in terms of timing. So our reserves right now reflect our current forecast. If subsequent forecasts are more bullish or more optimistic, we'll continue on that trend. But the timing of how fast we would get there, Gerard, it’s per earlier comments, difficult to be precise about.

Our next question comes from Matt O'Connor with Deutsche Bank.

Can you talk about your interest rate positioning post the actions you plan to take in the securities portfolio and then also after you fold in BBVA USA? I realize there are some moving pieces, but what would your expectations be in terms of how asset sensitive you are in factoring those two things in?

We're going to still end up being asset sensitive. I mean, largely because even with our suggested build, the deposits we're going to have with the Fed are going to be quite large. I would tell you that our duration of equity and measured asset sensitivity has decreased as a function of the rise in rates, but that's less about what we're doing and more about the negative convexity in the bank's balance sheet.

Okay. Any way to kind of just frame how meaningfully levered you will be to rates, I guess, both the short and long end?

No. I mean…

I guess, put another way, like you have a lot of leverage to rising rates now, but as you grow the securities book…

We're not going to have a significant impact. You can see the chart that compares our cash balances to security balances. We have a large opportunity to grow loans, but we are not focused on the long end of the curve. As always, we will gradually increase our involvement. Incrementally increasing our position is how we aim to reach that 25%.

And then separately, I'm probably getting a little ahead of myself here. But as we think after the BBVA deal closes, you've clearly shifted your view to wanting branches nationally. And would the thought be to lead with organic growth? Or because you're basically folding them into your platform, would you be ready to do another deal, maybe quicker than normally? We certainly mechanically would be ready to do another deal. I think like all things, it's a function of where you created value. It's cheaper to go organically, which it was for a bunch of years, then we would choose that route. I personally believe that we will see opportunities in smaller institutions simply because of the massive shift in technology and the cost of technology that we've seen to serve customers. So, I think low rates, not a lot of loan growth, and big technology costs are going to give us opportunities to continue to create scale.

And we'll have those capabilities.

Our next question comes from Bill Carcache with Wolfe Research.

So Bill and Rob, can you discuss how you guys are thinking about pent-up demand dynamics for your consumer versus commercial customers? Where is there greater gearing to the reopening and how to access savings and excess liquidity on both sides shape review?

Well, sort of our outlook for consumer lending, is that sort of what you're getting at?

Trying to find your question.

As we consider the dynamics of pent-up demand and the reopening, which are expected to positively influence loan growth in the second half of the year, how do these factors differ between consumer and commercial lending? There is significant liquidity on commercial balance sheets, while consumers have substantial savings. Does this indicate a potential delay in balance growth for each sector, or will both experiences be similar or distinct? I would appreciate your insights.

I see where you're going. I think consumer lending is going to drag C&I increase. I think consumers are really flushed with cash. You've seen retail sales. I think they continue to accelerate, by the way. But what's happening is that people who don't are buying and the people who would normally borrow are sitting on fiscal payments that they're going to have to burn through over time before you see balance growth. We're seeing massive transaction volumes. So we see it in our swipe fees in effect. But I don't know that you're going to see balanced growth. I think consumer will lag commercial. And I get back this place where inside of commercial, the smaller non-public companies and even some of the smaller public companies will continue to rely on bank balance sheets to fuel their growth.

Got it. That's very helpful. Bill, I wanted to revisit a question I asked some time ago regarding financial technology players like the times of the world. Can you provide any insights on how active you are in discussions with regulators about the uneven playing field with many of these players? Specifically, some of these players are benefiting from unregulated debit interchange, which was never intended for them; it was meant for smaller banks post-Durbin. Is there any expectation of leveling the playing field in the future, or is this competitive landscape the new reality?

It is a topic of importance on both the political and regulatory fronts, focusing less on competition and more on safety, soundness, data protection, and fraud. I’m not referring specifically to Chime, but rather to new entrants in the payment sector and the significant rise in fraud we have observed due to less stringent know-your-customer regulations and likely also due to the COVID environment. This situation has attracted the attention of politicians and regulators. We welcome competition, and I’m somewhat surprised that no one has asked about the Low Cash Mode we launched recently. That product is the outcome of years of technological investment, enabling us to offer what I believe is a real-time view of our customers' accounts. This capability allows customers to see what is happening in their accounts and empowers them to make informed decisions. Fintech companies don’t have this. They rely on smaller banks for back-end operations, which in turn depend on outdated core processing systems. We welcome competition; however, at some point, those companies must generate profits to justify their existence. Our focus is on delivering an excellent value proposition to our customers, characterized by ease of use and top-notch products. I think we have the technological foundation to accomplish this, so my concerns lean more towards safety, system soundness, and data issues, particularly regarding the disruption for our customers who may be unaware of how and where their data is shared and who has access to it.

That's very helpful. I was going to ask about the new service, which I saw you talk about on CNBC, I figured I’d save my question. If I could squeeze in maybe one last one. Are treasury departments of any of your clients even remotely considering the idea of having some allocation to Bitcoin? We've seen some businesses move in that direction. And with the coin-based IPO, I guess, it sort of seems like it's a bit out of left field, but perhaps you can argue becoming more mainstream. And so just wondering, is that something that your treasury function is preparing for? And then maybe on the wealth side, are any wealth clients expressing interest in gaining exposure to crypto assets? Any thoughts on how you guys are sort of positioned for any potential emergence of crypto as a potential asset class, especially in the aftermath of that Coinbase?

Well, we've been working on this long before Coinbase went public. We've talked to Coinbase about partnership and custody for our wealth clients. Practically, we've had a work stream around this, both for our corporate clients and treasury, but also for our wealth clients. The technology stretch isn't a big deal for us. It's more of a compliance-based issue that you would expect; and then importantly, choosing the right partners that you would choose as a trading transfer platform, and importantly, the custody platform. So that's an open and continuing dialogue here.

And suitability in fiduciary.

Yes. You can imagine that for wealth clients, there would be a lot of disclosure around. It's your own risk.

Right. Right.

We have a follow-up from Mike Mayo with Wells Fargo Securities.

The fintech comment, not me to ask another question. If you think about some of the players in the bank, in the industry, they're starting to set up bilateral relationships, even multilateral relationships with some big tech. And that's an option versus going directly for the consumer, especially with you going national now. Are you looking to continue permanently with getting customers directly? Or are you looking to partner more to lower your customer acquisition cost and go more broadly, kind of like banking-as-a-service as a plan B?

We need to engage with customers directly. Mike, when you position your products as the low-cost option for someone else who manages the client relationship, you compromise your franchise's integrity. It's crucial that we maintain ownership of the customer relationship and prove our value through an offering that doesn't rely on having a fintech platform at the forefront. If technology companies take over client relationships, we risk becoming just another commodity in an oversaturated market, which would be disastrous. We cannot allow that to happen; it's essential to own the customer.

And when you think about the risk with data, to the extent customers open banking and if customers opt-in to share their data with other providers, does that force your hand more? Or how do you defend against that?

I believe there is significant attention being given to data issues. The CFPB is actively working on this, along with various lawmakers and regulators. Ensuring safety and soundness regarding data is currently my biggest concern for systemic risk. While many discuss cybersecurity, what they are really addressing is data integrity. Disruptions in account and payment flows occur when data is compromised. A solution for consumers lies in tokenized API-based authorization at banks, allowing individuals to control what data they share, rather than relying on screen scraping. We are progressing toward this ultimate goal. Consumers need the power to decide what data to share and when, not all the time and not indiscriminately, especially with entities that may lack adequate data controls.

And looking to monetize that data in some way.

Yes.

There are no further questions at this time.

Okay. Well, thanks, Frank. Bill, would you like to make any closing time.

Thank you, everybody. Look forward to talking at the end of the second quarter. Stay safe. Looking forward to summer here, I hope you're doing the same.

Take care.

Thank you.

This concludes today's conference call. You may now all disconnect. Have a great day, everyone.