Yahoo Finance PNC Financial Services Group Inc (PNC) Q1 2024 Earnings Call Transcript Highlights: Navigating ...
Release Date: April 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
PNC Financial Services Group Inc (NYSE:PNC) generated $1.3 billion in net income and an adjusted EPS of $3.36 per share.
The company continues to grow its business, adding new customers across segments and increasing deposits on a spot basis.
PNC Financial Services Group Inc (NYSE:PNC) announced a multiyear investment of nearly $1 billion in its branch network to drive growth and gain market share.
Credit quality remained stable during the quarter, with the company adequately reserved overall, especially with respect to Commercial Real Estate (CRE).
PNC Financial Services Group Inc (NYSE:PNC) continues to build on its strong liquidity and capital position, providing financial strength and flexibility for future opportunities.
Negative Points
Loans of $321 billion decreased by $4 billion or 1%, and investment securities declined by $2 billion or 1%.
Deposit balances averaged $420 billion, a decline of $4 billion or 1%, reflecting seasonally lower commercial deposits.
Net interest income declined by $139 million or 4%, and net interest margin decreased by 9 basis points to 2.57%, primarily due to higher funding costs.
Nonperforming loans increased by $200 million or 9% linked quarter, almost entirely driven by commercial real estate, particularly the CRE office portfolio.
Total revenue of $5.1 billion decreased by $216 million or 4% compared to the previous quarter, with both net interest income and noninterest income showing declines.
Q & A Highlights
Q: How is PNC thinking about the net interest income (NII) indicating 2Q as the trough and improving from there? A: (Robert Reilly - CFO): The trajectory for NII is consistent with full-year guidance, with average loan growth up 1%. The largest driver is the repricing of fixed-rate assets, with some loan growth expected, but not a heroic number. It's primarily the rollover of the securities book.
Q: What are the dynamics behind the ticking down of utilization rates? A: (William Demchak - CEO): It's a variety of things, including capital markets activity in Q1, which put cash into the system and led companies to pay down revolvers. There hasn't been much inventory build or CapEx, which typically drive utilization rates. The public markets were very liquid in Q1, impacting utilization rates.
Q: On the expense front, are trends coming in better than forecasted? Could the full year '24 outlook prove conservative? A: (Robert Reilly - CFO): For the full year, PNC is still planning and guiding towards stable expenses. The first quarter was better than expected, but it's too early to roll that forward for the entire year.
Q: Regarding credit quality, is there any mounting stress in C&I that could keep the reserve stable? A: (William Demchak - CEO): There isn't anything systematic in C&I that would cause a change in expectations. The pressure is in the CRE book, specifically the office book.
Q: Are there any surprises in the progression of credit quality in the office book? A: (Robert Reilly - CFO): No surprises; everything is progressing as expected, with criticized loans migrating to nonperforming status as anticipated.
Q: Can you size the revenue pickup from the runoff of fixed-rate securities and swaps? A: (Robert Reilly - CFO): The projected AOCI burn is in the guide for full-year NII, which is down 4% to 5%. The biggest variable going forward is the repricing of fixed-rate assets.
Q: What is PNC's outlook for commercial real estate, particularly office properties? A: (William Demchak - CEO): The value of office properties has fallen significantly, much higher than 15%. The variance is building-specific and market-specific, but loss rates are a lot higher than in other types of real estate.
Q: What is the assumption for deposit flows and securities purchases in the NII guide? A: (William Demchak - CEO): The assumption is forward curve adjusted for the right spread of the asset being replaced. Deposits are expected to decline year-over-year, albeit the first quarter outperformed that expectation.
Q: Does the "higher for longer" interest rate environment impact the loan growth outlook? A: (William Demchak - CEO): The official outlook is for two rate cuts starting in July, with the curve largely staying where it is. The NII forecast isn't sensitive to near-term rate assumptions for this year.
Q: How does PNC view the risk of a recession in the back half of the year if there are no rate cuts? A: (William Demchak - CEO): It's a possibility. If the economy slows significantly to control inflation, it could hurt loan growth and lead to long-term credit losses for the industry.
Q: What is PNC's perspective on bank M&A and the potential for deal-making ahead of the elections? A: (William Demchak - CEO): The banking industry is set up to do well over the next 18 months due to rates normalizing. Long term, consolidation trends are concerning, but there's no immediate expectation for significant M&A activity.
Q: How should we think about the use of proceeds from the Visa B shares monetization? A: (Robert Reilly - CFO): The proceeds will be capital, and PNC will look at how to apply it in terms of excess capital. They plan to monetize half of the $1.6 billion in unrealized gains.
Q: What is the outlook for fee-based businesses if loan growth doesn't pick up? A: (William Demchak - CEO): Loan growth is driven by the economy, not necessarily by Fed funds versus CPI. If the economy remains strong, it will translate into loan growth.
Q: What is the plan for capital build and buybacks? A: (William Demchak - CEO): PNC is gradually building capital organically and with Visa proceeds. They are looking to build from the current 10% reported CET1 ratio to a higher level over the next year while doing some buybacks.
This article first appeared on GuruFocus.
