Earnings Call Transcript - PNC Q2 2021

Operator, Operator

Good morning. My name is Pama, 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. Sir, please go ahead.

Bryan Gill, Director of Investor Relations

Well, thank you Pama, 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.

Bill Demchak, CEO

Thanks, Bryan, and good morning, everybody. As you’ve seen, we accomplished a lot in the second quarter, and most importantly, we closed the acquisition of BBVA USA on June 1. Obviously, this created a fair amount of noise in our reported results, adding one month of BBVA USA operating results and the impact of purchase accounting adjustments as well as merger-related impacts. Rob's going to take you through all of that in a couple of minutes. But putting those things aside, we had a pretty good quarter driven by solid net interest income, strong fee growth, continued improvements in credit quality and announcement of higher capital returns. While loans increased primarily due to the acquisition, we did have spot loan growth from both consumer and C&I in the legacy PNC balance sheet. We've seen loan utilization rates stabilize within our corporate institutional banking business; however, they remain near historic lows. While new loan approvals have rebounded actually to the highest level in a couple of years, that's been offset by continued pay downs. Within the legacy PNC consumer book, we saw loans grow in the quarter, which was encouraging, and we're confident that strong economic growth is ultimately going to drive strong loan growth, but it remains an open debate as to the timing of that loan growth relative to the second half of '21 and into '22. During the quarter, we continued to deploy excess liquidity through $10 billion of net security purchases. Going forward and considering the significant recent rally in treasuries, we will be disciplined as we look to reduce our elevated cash position. Our results underscore the strength of our balance sheet and our commitment to returning capital to shareholders. Following the results, we announced a 9% increase in our quarterly common stock dividend and a $2.9 billion share repurchase program. Importantly, we're well positioned with substantial capital and liquidity to continue to support our customers and invest in our businesses.

Rob Reilly, CFO

Thank you, Bill, and good morning, everyone. As Bill just mentioned, during the second quarter, we successfully completed our acquisition of BBVA USA, significantly expanding our footprint, which now includes growth markets throughout the Sun Belt region. Our balance sheet is on Slide four and is presented on a spot basis. While we typically cover our average balance sheet, this quarter we will focus on spot balances due to the timing of the June 1 closing of the acquisition.

Betsy Graseck, Analyst

Hi, good morning.

Rob Reilly, CFO

Hey, good morning, Betsy.

Betsy Graseck, Analyst

So it's great to see the loan growth start to pick up here. The first question I have is just on how we should think about the loan growth in your book. Now that BBVA USA has come in, is there going to be a churn period here where you've got some loans in that book that you're likely to be exiting and then growing through that churn, or would you suggest that that's not really big enough to matter when we're thinking about the loan growth?

Rob Reilly, CFO

Well, it's the margin it's going to matter, but it's extended over a bunch of years. We're not going to sell portfolios or rapidly exit. So through time, we will mature things, and those balances will likely run off from certain industries as we grow balances from other target industries, but that stretches over two, three, four years.

Betsy Graseck, Analyst

Okay, great. All right, and then separately, your house loans business obviously is already national, but does the BBVA footprint that you've added now do anything for them in their business with middle market?

Rob Reilly, CFO

It's at the margin, right. It just adds a larger network of potential clients and conversations. So, yes, now they obviously are in all of these markets already, but now we have more clients and will therefore have more dialogue, so I would expect it will.

Bill Demchak, CEO

Yeah, for sure, so we'll be able to introduce our new commercial clients who BBVA USA to Harris-Williams if they haven't already been introduced.

Betsy Graseck, Analyst

Yeah, all right. That was a really strong result from them this quarter. And then just lastly, the dividend hike that you recently announced how do you think about that from the perspective of payout ratio? And I'm just wondering, should we expect that your full run rate of the BBVA USA expenses coming out is already in your earnings outlook when you were thinking about setting that dividend up?

Rob Reilly, CFO

I'm trying to think of the simple way to answer this. So long story short, there's room on the dividend on our forward income. We were in a bit of a fire drill because we managed to close the deal a month sooner than we thought, which meant that we kind of had CCAR results in the deal closed, which then threw us into the fire drill to figure out what we could do. I'm not going to say in a hurry, but on short notice, which is what we did and color acceleration of kind of what we've thought. So there's room on that. Certainly as we go forward, we just thought it was important to get something done and not miss this cycle, which is what we acted on.

Betsy Graseck, Analyst

Okay.

Rob Reilly, CFO

We've said for years that we expect, with this model and this business mix, that a 40% to 50% payout ratio on the dividend is in our target range.

Betsy Graseck, Analyst

Okay, great, all right. Yeah, no, that was my gut feel that there was room there. So appreciate the commentary. Thanks so much.

Operator, Operator

Thank you for your question. Up next, we have a question from the line of Bill Carcache with Wolfe Research. Please proceed with your question.

Bill Carcache, Analyst

You guys have made impressive progress in your national expansion strategy. As you look ahead, how integral is the acquisition of additional branches to your furthering your national expansion on paper? It's easy to do a traditional analysis where you look at PNC's revenues per branch and BBVA's revenues per branch to isolate the opportunity to improve productivity and what that would mean in terms of incremental revenues per branch. But when you try to sell the idea of acquiring additional branches to generalists, there's a natural pushback on why those branch acquisitions are necessary in the first place, given what we're seeing with the digitization of the business. RBC is a great example where we saw your branch count rise sharply in 2012 before falling significantly for the better part of the next decade. How important was it to acquire those branches to begin with? I know there's a lot there, but I was hoping you could speak to that point in general?

Rob Reilly, CFO

I wouldn't focus so much on branches as I would on clients. So in the future, could you see us do smaller deals in markets to gain greater share? Possibly. Now the values today just seem way too high to me, but possibly. But the purpose of that wouldn't be to get branches per se; instead, it would be to get clients, and then we would optimize the branch network like we did with RBC after the fact.

Bill Demchak, CEO

And some natural conversion to solution centers, foundational branches, which we've been doing.

Bill Carcache, Analyst

Okay, all right. Understood. Separately, with the curve having flattened a bit since your comments last quarter, has there been any change to your thought process around deploying a larger percentage of your liquidity into securities? And within that, how worried are you about giving up some of your future asset sensitivity in exchange for the near term? We're hearing different philosophies from different banks, but I would just love to get your thoughts?

Rob Reilly, CFO

We have approached the situation aggressively before experiencing the significant rally. Our liquidity remains strong, and we have not significantly reduced it even after the BBVA acquisition, so we are still sensitive to assets. However, the recent rally will lead us to be more cautious and strategic compared to the last quarter, and we will monitor how things develop. I believe that the current rally is exaggerated, and I don't completely grasp the reasons behind it, so we will definitely be slowing down compared to our activities in the last quarter.

Bill Demchak, CEO

And our expectations of that are built into our guidance.

Bill Carcache, Analyst

Got it. And then if I could squeeze in one last one, I wanted to ask if you could look ahead a bit longer-term at the opportunity to drive efficiency improvements. If the forward curve is correct and we get one hike around the end of 2022 to one another in the middle of '23, and assume no further steepening there, there are a lot of moving parts there, but could you just speak to your confidence level in being able to drive your efficiency ratio into that sort of high 50% range?

Rob Reilly, CFO

The math takes you there. The question is simply a function of it. When we look out to '22, it functions around the tailing integration costs as to whether you see it, what period of time you'll actually see it. But the math takes you there once we get the costs out of the BBVA franchise and what we would expect that revenue environment to look like.

Operator, Operator

Thank you. And up next, we have a question from the line of Mike Mayo with Wells Fargo Securities. Please go ahead, sir.

Mike Mayo, Analyst

Hi. So, I guess I have a short-term question, a long-term question. The long-term question is what inning are you in, in your tech transformation? And you spent seven years getting your common infrastructure together, and that prepares you well for the BBVA integration. So that's kind of the good news. What inning are you in? But then I think the bad news is you're guiding this year for slightly negative operating leverage on the last slide. And I know you don't like having that. Why is that worse than expected when you should be having some synergies from BBVA banks?

Rob Reilly, CFO

Well, I'm glad you asked that question, Mike, because at first read, you might conclude that, but that's not what we're saying. What we're saying in the guidance for full year with revenues percentages going up less than expense percentages. That's simply the overlay of the BBVA USA acquisition six months into our results. They have a higher efficiency ratio. So that's, if you think about it, that's largely the opportunity there. PNC standalone, we said at the beginning of the year, it was going to be stable. We were going to fight for a positive operating leverage. Halfway through, revenues are up low single digits, expenses are up low single digits, so we're still fighting. And as I mentioned in my comments prior to the Q&A, we're going to keep fighting until, I don't know if we want to do that long-term.

Bill Demchak, CEO

To follow that up, it's simple. We layered on a less efficient organization on top of us, and it's causing the outcome to be what it is. That's a legacy PNC business is kind of a target for what we said. The opportunity set is to drive the new organization down to the level of efficiency. Yeah, we're better.

Mike Mayo, Analyst

Okay.

Bill Demchak, CEO

The issue on technology, think about it. We're 80% of the way along where we would like to be in terms of what I would just call a modern platform across everything from data centers to the way we develop, to the way we do automated testing and deploy and so on and so forth. So we're pretty far along. I think what happens down the road with technology is much more about client-facing technology and the ability to compete effectively in the new ecosystem of fintechs and where payments are going and all of that stuff. We're prepared for that. We're going to invest hard in that. We have the core technology behind us to allow us to play in that space, but that's where the fight is going to be. And I think that game is just getting started.

Rob Reilly, CFO

And to extend the metaphor, the game's going into explaining technology that is going to be around for a while.

Mike Mayo, Analyst

And where do you think, I mean, I appreciate a number like 80% in building a modern platform, but again, after seven or eight years of doing that, where do you think the average bank is in that transformation because you've been talking about this more than others?

Rob Reilly, CFO

Yeah. I look, I don't know. I don't have an informed view. It's hard to figure out what other people are actually doing. If I just think about our ideal state compared to where we are, PNC's ideal state might be different than somebody else's. I still see us with certain applications that need to be re-engineered to be plug and play through API. Other people may or may not care about that. So, we're playing our own game. Our goal obviously is to be able to use technology as an advantage, not just in terms of cost, but also in terms of speed to market and creativity as to what we can offer to clients, and we're well on our way right there.

Operator, Operator

Thank you for your question. And now we have a question from the line of John Penn Carey with Evercore ISI. Please go ahead, sir.

John Penn Carey, Analyst

Good morning. I want to see if you can give a little more color on loan demand, particularly on the commercial side, or are you starting to see any signs of CapEx activity beginning to influence a line draw down? And if you are aware in what areas are you seeing some strength and what borrower segments? Thanks.

Rob Reilly, CFO

Yeah. Hey, John, it's Rob and I can give you a little bit of color there. Generally speaking, utilization rates were up a little bit quarter over quarter, though not much. We are seeing continued growth that we started to see as green shoots in the first quarter in our business credit to asset base book. Real growth there is encouraging because that tends to be a leading indicator of loan demand. So that's largely where we've seen the growth. But on the margin, we would expect to see, in terms of getting to where strong loan growth would be coming, more utilization across the general middle market book, which has yet to show up.

Bill Demchak, CEO

I mean, the good news inside all of that is we're actually winning a lot of clients and we're extending facilities at a pace beyond where we've been for a bunch of years. The problem is they're just not drawing under the credit facility. So we're in a good place for when loan demand comes back, and we continue to grow client share, and we see that, by the way, on the fee growth that we're getting through TM and other activities that picked up again.

Rob Reilly, CFO

So we definitely advanced in the first quarter.

John Penn Carey, Analyst

And then on the M&A front and they are still digesting the BBVA deal and everything, but as you look at other markets, are there any other markets geographically that you think a deal would make sense to give you a more critical mass just like you look at the southeast that way? I just wanted to see if you could talk a little bit about your footprint and how you think about that? And then separately Bill I am curious what your take is on Pres. Biden's Executive Order particularly implying more scrutiny around bank mergers. Does that change how you think about deals? Thanks.

Bill Demchak, CEO

You should just assume that we look at all the same stuff that you do. I am not going to give you an area of the country when you look at. You’ve seen us through time make decisions based on value creation for shareholder, so that may or may not mean additional geographies and may or may not mean filling in an existing geography. It will very likely mean we'll continue to do small add-on acquisitions that give us product capability for clients. The executive order looking at competition amongst banks is a practical matter that would actually have to change for the bank approval process to change. It would be more about the feds' rules on approving mergers than I think it would be coming out of what President Biden's order. I'm not an expert on it, but I think it is safe to say that a larger deal in today's environment would get much more political scrutiny and noise than we did with the BBVA deal that weighs on us.

Operator, Operator

We now have a question from the line of Scott Siefers with Piper Sandler. Please go ahead, sir.

Scott Siefers, Analyst

Rob, I can back in the things based on the guidance, but just would be curious to hear your thoughts on how the net interest margin rate moves from here? Just lots of moving parts between shifting some of the cash and the securities letting a full quarter BBVA, and then you’ve got the fair value premium amortization as well. So any thoughts there would be appreciated.

Rob Reilly, CFO

There's a lot there, Scott. We in fact in the first quarter, we had said we'd call the drop in NIM. We're still holding that, and I do think NIM will drift higher, not necessarily by a lot, but I think we've seen the bottom.

Scott Siefers, Analyst

And then just on the reserves, I think pre-adjustments that were made for COVID but CECL, I think you guys were around the 145-ish reserve. Is that a good number to assume you'll gear down toward even with BBVA now in the mix?

Rob Reilly, CFO

Well, our day one was 154, not 145, and that was standalone. If you do some of the math, you'll find that BBVA day one, we're going to be a little bit higher on average. So as we said, to clearly answer that question, if you consider those times normal, back to normal would be somewhere in that neighborhood.

Scott Siefers, Analyst

Okay. Perfect. All I appreciate the thought.

Operator, Operator

Thank you. We now have a question from the line of Gerard Cassidy with RBC. Please go ahead, sir.

Gerard Cassidy, Analyst

Bill, can you share with us when you think back to the National City deal and the RBC deals that you guys delivered 10 years ago? Granted, they're different than the BBVA deal, but obviously that experience has given you confidence on this deal. Can you share with us when you think the BBVA gets fully integrated based upon the experiences that you guys have with those prior two deals? Is it three years out, four years out? How long does it really become seamless where you can't tell everything is running very smoothly?

Rob Reilly, CFO

There's a lot embedded in that question. I mean, the basic service structure, what happens in a branch, the applications, the product delivery, all of that stuff basically will be done by the end of this year. Right? So the real question then becomes how do we get the client penetration and growth rates in the newer markets, and the fee penetration to grow to legacy PNC markets? What we found in RBC is in some of those newer markets, that took us somewhere around three years. I guess, Rob, we expect it'll be faster, today, first, because BBVA had a reasonable book of business that we could cross-sell into immediately. Secondly, we just kind of have a better playbook. We've been at it for a while. So we have the teams built today, they're calling today, and I generally would expect we'd be a little faster. I think the receptivity to the PNC brand is probably a little more than it was 30 years ago, so that helps too.

Gerard Cassidy, Analyst

Very good, and then I apologize if you addressed this or already in your comments, but Robert, do you guys have any timing on the share repurchase program? I think you said it's going to be over four quarters, but I know there's no restriction now, like the old CCAR tests and you guys had limits on how many gigabytes; you've given any thought on how you want to calibrate the repurchases?

Rob Reilly, CFO

Well, we're going to do it opportunistically, chart, so we will ideally put together, like we always have, some autopilot program. On top of that, some discretionary piece, and the discretionary piece will be variable, obviously. That's what we've done in the past and what we'll continue to do. So there's some more flexibility there, obviously, and we'll take advantage of that.

Operator, Operator

Thank you. And next question comes from the line of Terry McEvoy from Stephens Inc. Please proceed with your question. Go ahead.

Terry McEvoy, Analyst

Thanks. Good morning. Just two questions here. I wonder if you could discuss the strength in consumer services fees? Last quarter was up what $442 million just on a standalone basis. And I know in the release, it said increased business activity. I was wondering if you could provide any more color there?

Rob Reilly, CFO

Yeah. Hey, Terry, this is Rob. We did see a lot of activity there. Most of that is just more consumer activity, as you'd expect, as the economy comes back on track. Inside of that, where we saw particular strength was in debit card spend. The debit card spend is a big component of it, and the acceleration there was really strong. Maybe more color than you want, but what showed up this quarter is debit card spend. What our team was telling us was a lot of micro purchases that had gone away, so cups of coffee and morning purchases on the way to work are now part of the volume again.

Terry McEvoy, Analyst

Perfect, and then there's a follow-up just on the corporate service fees. Maybe you could talk about the pipelines there and is the quarterly run rate now, is that a $600 plus million in revenue quarterly run rate today?

Rob Reilly, CFO

Well, I would say just in terms of the color, you got to take a look at it now, obviously with him combined, and to put in a full three months of BBVA. But corporate fees are also, as we said earlier, showing increased activity. We are a little elevated in the second quarter because of Harris Williams, which had twice the volume of the first quarter. So you got to take that into account, but you’re massing in the right run rate place.

Operator, Operator

Thank you. And we now have a follow-up question from the line of Bill Carcache with Wolfe Research. Please proceed.

Bill Carcache, Analyst

Thanks for the follow-up. I just had a quick one on the money transfer business and the opportunity that you see there. Some investors have expressed concerns over disintermediation risk in that business as the cost of transferring money continues to fall and competitors in the space leverage technology to help consumers transfer money more cheaply. Is disintermediation risk and legacy BBVA's money transfer business a concern for you guys? If you could discuss how you're thinking about the growth outlook for that business and the opportunities that you guys may have to leverage technology and just speak to that opportunity in general, that'd be helpful.

Rob Reilly, CFO

I think the whole product, including the business transfer services is a disintermediated product. What we have is the same thing that other people are building and frankly doing more at scale. The key to success on it is to make sure that you have distribution receiving networks, which we do have through Latin America and Europe, and that you have compliance to be able to build it. So it's a competitive space. I'm glad we have the product; I think the actual product is going to be table stakes for banks. Our ability to grow it and scale it, we're going through different use cases that bring on potential corporate disbursements and other things that we hadn't thought of before. But I think it becomes a table stakes product that started through disintermediation, kind of to your original question. This was built outside of the banking system, and BBVA just happened to have built one that we're now integrating into our core platform. So we're pretty excited by it. I think time will tell how that product evolves and who uses it.

Bill Demchak, CEO

The financial impact isn't large; it's more of the upside in anything under, so thank you.

Operator, Operator

Thank you. There are no further questions.

Rob Reilly, CFO

All right. Well, very good. Thanks everybody. And we'll see you at the end of the third quarter. Thank you.

Operator, Operator

Thank you. This concludes today's conference call. You may now disconnect.