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Victoria.Larson


PNC Financial Services Group: Cautious Outlook and Potential Growth Opportunities

2023-07-25

The PNC Financial Services Group recently held a call meeting to discuss their second-quarter earnings and various aspects of their business. The meeting featured presentations from the company's top executives, including the Chairman, President, and CEO, Bill Demchak, and the Executive Vice President and CFO, Robert Reilly.

During the meeting, the management expressed a cautious market outlook and reduced their expectation for year-over-year growth to up 2%. They cited the impact of the FDIC special assessment and inflationary pressure as factors contributing to this cautious outlook. The management also acknowledged that the disruption in the industry has been driven by the rate environment and volatility in rates, affecting earning assets, deposits, and interest rate-sensitive fees. They believe that they may be in the later innings of this disruption but it is difficult to predict accurately. The management expects growth to be slow until the market forces a new environment and pricing. However, they see tremendous upside in growth through clients in new markets once they get through rate normalization.

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In terms of regulatory compliance, the company's LCR ratio is close to 100%, indicating a strong position. The management also highlighted the key drivers of the business, including deposit outflows, core consumer and commercial customers, competitive dynamics, capital markets recovery, and Harris.

The meeting also provided insight into some important numbers for the company. The management mentioned that their unemployment assumptions are over 5%. Additionally, a significant amount of reserves are focused on commercial real estate office specifically, indicating the company's risk management strategy and preparedness for potential challenges in the market. The company has also reserved 7.4% for the office book, with the multi-tenant piece having reserves close to 11%.

The competitive landscape in the industry is evolving, and the company is experiencing deposit outflows in line with industry expectations due to quantitative tightening. They are not actively seeking broker deposits or large certificate of deposit pushes to boost deposits. Instead, the company is focused on retaining their core consumer and commercial customers by offering competitive pricing. They have observed a shift from noninterest-bearing to interest-bearing accounts and an increase in the beta. The management anticipates significant differences in funding costs compared to others in the industry due to the pace of deposit flows, with replacement costs for deposits lost at a higher pace expected to be higher.

Furthermore, the company expects a recovery in the capital markets, particularly in debt capital markets, equity capital markets, and mergers and acquisitions. This indicates potential opportunities for growth and competition in these segments.

Overall, the company's outlook for the quarter/year is a reduction in expectations to up 2% year-over-year. They are cautious but optimistic about their performance, considering factors such as the FDIC special assessment, inflationary pressure, and the current rate environment. They believe there is potential for growth through clients in new markets and anticipate an improvement in the loan market once it adjusts to the new environment and pricing. However, they are uncertain about whether they have reached the lowest point in terms of guidance for the fourth quarter and the overall rate environment.