PNC Financial Services Group Inc (PNC) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to The PNC Financial Services Group fourth-quarter 2013 earnings call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder, this conference is being recorded Thursday, January 16, 2014.

I would now like to turn the conference over to Bill Callihan.

Please go ahead, sir.

Good morning, everyone.

Welcome to today's conference call for The PNC Financial Services Group.

Participating on this call is PNC's President and Chief Executive Officer, Bill Demchak and Rob Reilly, the Executive Vice President and Chief Financial Officer.

Today's presentation contains forward-looking information.

Our forward-looking statements regarding PNC's performance assume a continuation of the current economic conditions and do not take into account the impact of potential legal and regulatory or federal debt ceiling contingencies.

Actual results and future events could differ, possibly materially, from those anticipated in our statements and from historical performance due to a variety of factors and risks.

Information about such factors, as well as GAAP reconciliation and other information on nonfinancial measures we discuss, is included in today's conference call, earnings release and related presentation materials and in our 10-K, 10-Q and various other SEC filings and investor materials.

These are all available on our corporate website, PNC.com, under the Investor Relations section.

These statements speak only as of January 16, 2014 and PNC undertakes no obligation to update them.

And now I'd like to turn the call over to Bill Demchak.

Thanks, Bill and good morning, everybody.

As you have seen, today, we reported record net income of $4.2 billion, or $7.39 per diluted common share for the full year.

That's up 41% versus last year's net income of $3 billion, or $5.30 per diluted common share.

Our return on average assets for the full year was 1.38%.

Now, without question, 2013 was a good year for us and our results offer an important measure of validation of the strategy and the priorities on which we have been executing.

Our diversified business has delivered fee income growth of 22% for the full year in 2013.

Now to be fair, this includes a large positive swing from the mortgage business year-on-year, but even excluding mortgage, we increased fees by almost 9%.

We also grew loans and deposits throughout the year.

Year-over-year commercial and consumer lending combined were up $9.8 billion, or about 5%.

Deposits were up $7.8 billion, or 4% and it's worth noting that results in the Southeast continue to outpace our expectations as we work aggressively to raise awareness of our brand, capture marketshare and build franchise value in our recently acquired markets.

Consolidated asset management revenue was up by $173 million, or 15% year-over-year, due to increases in the equity markets and strong sales production resulting in net positive flows.

Within our Asset Management Group, net primary client acquisitions were up 22% with referral sales from other PNC lines of businesses, up 44% compared to a year ago.

In Retail, we took important steps to redefine the value exchanged between the bank and our retail customers and we made progress towards the reinvention of the retail banking experience that will enable us to more effectively and efficiently meet our customers' needs for generations to come.

Indicative of our customers' rapidly evolving preference for a customizable multichannel experience, we had record high migration of deposit transactions in 2013.

In the fourth quarter, non-branch deposit transactions by ATM and mobile increased to 30% of the total deposit transactions.

That is almost twice the rate we saw in the fourth quarter of last year.

Now while it was a tough year for the mortgage industry, we made a lot of progress in building an integrated mortgage lending business that is a contributor to the PNC brand.

To that end, in 2013, we introduced seamless delivery, which is just the first step in our long-term effort to reengineer the home buying experience to get customers from application to closing more efficiently than our peers and to improve the quality of service they receive throughout their experience.

Customer loyalty continues to grow stronger as a result of these efforts.

You saw we also reached settlements relating to repurchase obligations with the GSEs that will take some uncertainty out of the future performance of this business.

Now while origination volumes overall were down for the industry in 2013, we, in fact, were flat.

Further, in keeping with our strategic focus, we grew purchase volume year-over-year by 31%, more than double the industry purchase growth rate.

Meanwhile, we took steps on expenses in line with the decline in refinance originations and we will continue to monitor and manage against these trends in 2014.

Now on the whole, 2013 was a good year for PNC, but frankly it was a good year for the industry.

What distinguished us was our ability to outpace the falloff in purchase accretion accounting with organic growth and to continue our focus on our long-term strategic priorities.

We improved our efficiency ratio from 68% last year to 61% in 2013, but it remains higher than we would like, but there is a myriad of reasons as to why it is higher than our peers.

But, in the end, our expenses are higher than they should be and we are focused on doing something about it.

In 2013, we exceeded our $700 million continuous improvement goal and reduced expenses year-over-year by 7% and moving forward, we are identifying opportunities to streamline core processes in order to further move the needle on expenses and to improve operating efficiency.

At the same time, we will continue to make targeted investments to bolster critical infrastructure and in support of our lines of business, particularly as we continue the transformation of our retail branch network.

Those are efforts we are going to talk about more not just in 2014, but for the foreseeable future.

Throughout 2013, we also effectively managed our credit risk appetite as market conditions evolved and we continue to build on our strong capital position.

This stronger capital position should position us well in terms of returning more capital to our shareholders this year, subject, of course, to the CCAR process.

So building on what we achieved in 2013, our priorities for this year are very similar -- to continue our growth in clients, cross-sell and resultant fee streams, all the while focusing on our long-term strategic initiatives.

Our challenge in 2014 remains the same as well.

We will need to outpace the ongoing decline in purchase accounting accretion and the impact of low rates and heightened competition through organic growth of clients and tight expense control.

Now with that, I will turn it over to Rob who will talk to you about the fourth-quarter results.

Yes, good.

Thanks, Bill and good morning, everyone.

As Bill just mentioned, 2013 was a very good year for PNC.

We ended the year with a strong quarter and accomplished virtually all of our financial goals in 2013.

I'll start our fourth-quarter review with our balance sheet on slide 4. Our strong loan and fee income growth, along with well-managed expenses, resulted in higher retained earnings in the fourth quarter, which led to strengthened capital.

As you can see, total assets on our balance sheet increased by $11.7 billion, or 4% on a linked-quarter basis.

Drivers of this growth were higher investment securities, which increased by $3 billion, or 5%, as well as loan growth of $2.8 billion, or 1%.

In regard to loans, total commercial lending grew $2.7 billion, or 2%, primarily in real estate and other specialty lending businesses, including public finance.

And consumer lending saw modest net growth on a linked-quarter basis as we continued to see strong increases in automobile lending and credit card, but that was largely offset by lower residential mortgage, home equity and education loans.

Turning to the deposit side, total deposits increased by $4.9 billion, or 2% in the fourth quarter.

This was primarily driven by increases in transaction deposits, which were up $4.6 billion, or 3%, reflecting seasonal increases.

Shareholders' equity increased by $1.3 billion, or 3% in the fourth quarter, due to growth in retained earnings and higher AOCI.

This helped drive our capital ratios higher.

Our Basel I Tier 1 common ratio at the end of the fourth quarter is estimated to be 10.5%.

That is up 20 basis points since the end of the third quarter.

Our Basel III Tier 1 pro forma common capital ratio was estimated to be 9.4% as of December 31 without the benefit of phase-ins.

This represents a 70 basis point increase from September 30.

Breaking down the components of this ratio, we had higher retained earnings and a lower deduction for quantitative limits, slightly offset by an increase in risk-weighted assets.

On top of that, we had an approximate 20 basis point benefit from higher AOCI, primarily related to the annual evaluation of our pension plan assets.

As you know, we are an advanced approach bank and I want to highlight the changes in AOCI are clearly one of the factors that will fluctuate and will impact our B3 ratio going forward.

I should add that, at year-end, our B3 ratio under both the advanced and standardized approaches are close to converging and it's possible that the standardized approach will become our binding constraint going forward.

We will have further disclosures on our B3 ratio in our upcoming 10-K.

Importantly, as Bill mentioned, we continue to believe we are well-positioned to return additional capital to shareholders this year, subject, of course, to the CCAR process.

Our balance sheet also reflects our efforts to reach the goals with a proposed liquidity coverage ratio.

For example, our interest-earning deposits with banks increased by $4.1 billion on a linked-quarter basis and by more than $8 billion at the end of the fourth quarter compared to the same period a year ago.

We increased total borrowings by $5.8 billion, or 14% linked quarter.

A substantial portion of this supported our enhanced liquidity position, as well as loan growth.

And as I introduced in our third-quarter earnings call, we successfully wound down the Market Street commercial paper conduit.

All commercial paper from that entity was repaid in full as of December 31.

These changes affected our net interest margin in the fourth quarter, which I will discuss in a few minutes.

As you know, the rules on liquidity coverage are still in proposed form; however, we believe we have a clear line of sight on reaching the final targets once they are established.

Turning to our income statement, our fourth quarter reflects strong overall performance.

As you can see on slide 5, net income was $1.1 billion, or $1.85 per diluted common share and our return on average assets was 1.34%.

These results reflect ongoing growth in loans and fee income and continued disciplined expense management.

This quarter's results also benefited from the release of reserves for residential mortgage repurchase obligations and a lower-than-expected provision for credit losses.

Let me highlight a few items in our income statement.

Net interest income increased by $32 million, or 1% compared to the third quarter as loan growth and higher investment securities offset the decline in purchase accounting accretion.

Noninterest income increased by $121 million, or 7% linked quarter and I'll provide more detail on this in a moment.

As a result, total revenue for the fourth quarter was $4.1 billion, an increase of $153 million, or 4% compared to the third quarter.

Fourth-quarter expenses were $2.5 billion, an increase of $123 million compared to the third quarter, a bit higher than expected due to items that were specific to the quarter.

As a result, our pre-tax pre-provision earnings were $1.5 billion, up $30 million, or 2% compared to the third quarter.

Provision in the fourth quarter was $113 million, this was lower than the guidance we provided due to continued overall positive credit trends and improved housing prices, which impact our loss estimates.

For the full year, our pre-tax pre-provision earnings were $6.2 billion, up $1.3 billion or 26% compared to 2012.

These results were driven by a 17% increase in noninterest income during 2013 while reducing full-year expenses by more than 7%.

Now let's discuss the key drivers of this performance in more detail.

Turning to net interest income, as you can see on slide 6, total net interest income increased by $32 million on a linked-quarter basis as a result of continued loan growth and higher investment security balances and yields.

Those same factors drove an increase in core net interest income, which was up $40 million, or 2% on a linked-quarter basis.

Purchase accounting came in essentially where we thought and for the full-year 2013 declined by almost $300 million compared to 2012.

Looking ahead, we continue to expect purchase accounting to be down another $300 million for full-year 2014 compared to 2013.

Net interest margin declined by 9 basis points linked quarter and 7 basis points of this decline can be attributed to the increase in our deposits held at banks in light of anticipated LCR requirements.

In terms of positioning, our balance sheet remains asset-sensitive as we have maintained a duration of equity of approximately negative two years.

Going forward, we will continue to take a measured approach to managing our balance sheet.

Bill talked about the progress we are making with our strategic priorities and one of the places you will see that is in our fee income.

As you can see on slide 7, our fee income grew by $114 million, or 9% on a linked-quarter basis, primarily driven by a reserve release related to our residential mortgage repurchase obligations, partially offset by lower net hedging gains on servicing rights.

The other drivers of our quarterly increase were asset management consumer services revenue.

Turning to our fee categories, asset management fees increased by $34 million, or 10% as a result of higher equity markets, coupled with strong business performance for both PNC and BlackRock.

Consumer services fees were up $11 million, or 3% compared to the third quarter, primarily as a result of higher volume of customer-initiated transactions.

Corporate services saw an increased merger and acquisition advisory and capital market fees in the fourth quarter.

That was offset by a lower net valuation of commercial mortgage servicing rights compared to the third quarter.

And as a result, corporate services fees declined $5 million on a linked-quarter basis.

Residential mortgage was up $72 million on a linked-quarter basis.

Three primary factors drove these results.

First, we recorded a $124 million release of reserves for repurchase obligations.

This was the result of our previously announced settlement agreements with both GSEs.

Second, we saw a decline in net hedging gains on residential mortgage servicing rights and third, we had a decline in loan sales revenue driven by lower origination volume.

As you know, higher interest rates affected fourth-quarter originations, which were $2.5 billion, down $1.2 billion, or 33% as a result of lower overall mortgage activity.

A final point on residential mortgage, the gain on sale margin was 396 basis points in the fourth quarter.

As you know, our margins tend to be higher than the industry as we don't utilize the broker channel to originate loans.

However, this quarter, our margins benefited even further by favorable mark-to-market accounting adjustments.

Going forward, we expect the gain on sale margin will trend closer to 300 basis points in 2014.

Other noninterest income increased by $23 million, or 6% linked quarter, primarily due to higher revenue from private equity investments and higher credit valuations related to customer-initiated hedging activities.

These increases were partially offset by the impact of the sale of Visa stock, which took place in the third quarter.

Overall, noninterest income was up $121 million, or 7% compared to the third quarter.

Our diversified businesses resulted in noninterest income to total revenue of 44% in the fourth quarter.

That is up from 43% in the third quarter and 40% in the same quarter a year ago.

This reflects the impact of delivering our strategic priorities and we expect this percentage to continue to grow over time.

For the full year, total noninterest income was $6.9 billion, an increase of $993 million, or 17% compared to 2012.

Turning to expenses on slide 8, fourth-quarter levels were up due in large part to three factors.

First, higher incentive compensation costs due to increase business activity; second, a $50 million contribution to the PNC Foundation; and third, higher settlement costs and legal accruals primarily related to former National City residential mortgage activities.

These items in total represent virtually all of the linked-quarter increase.

As you will recall, our 2013 goal was to achieve a total of $700 million in cost savings for the year through our continuous improvement program.

For the full year, we reached more than $775 million.

As a result, for full-year 2013, expenses were lower by $781 million, or more than 7% compared to 2012 expenses.

Because of the success we have had with our continuous improvement program, we plan to sustain our efforts in this regard.

We have established a continuous improvement target for 2014 and have a goal to reduce costs by an additional $500 million.

By design, these savings will essentially fund the significant investments that we are making in our infrastructure and in our retail bank transformation this year, which is consistent with our strategic priorities.

As you can see on slide 9, overall credit quality continued to improve in the fourth quarter as both criticized commercial loans and total delinquencies decreased on a linked-quarter basis.

Nonperforming loans were down $118 million or 4% compared to the third quarter as we saw broad-based improvement in our commercial loan portfolios.

Net charge-offs decreased $35 million or 16%, primarily due to declines in the commercial portfolio, partially offset by increases in the consumer portfolio.

While we were pleased with this performance, we continue to believe the low level of net charge-offs is not sustainable over time.

Finally, our provision of $113 million declined by $24 million or 18% on a linked-quarter basis.

This was driven by overall improved credit quality and better-than-expected improvement in housing prices.

In summary, PNC posted strong financial results in the fourth quarter and for full-year 2013.

Turning to 2014, we believe that the US economy will expand at a muted pace and that short-term interest rates will remain low.

With that in mind, we expect full-year revenues to continue to be under some pressure and as a result could likely be down year-over-year due to further purchase accounting declines, as well as lower residential mortgage revenues.

Partially offsetting this, of course, will be our ability to grow loans and sustain growth in our fee-based businesses.

Recognizing this environment, disciplined expense management will continue to be a priority.

As a result, we expect full-year expenses to be down when compared to 2013.

Looking ahead to the first quarter of this year, we expect modest growth in loans.

However, we expect net interest income to be down modestly reflecting the continued decline in purchase accounting and the impact of fewer days in the first quarter.

We expect fee income to be down due to the benefit we had this quarter from the release of reserves for the residential mortgage repurchase obligations along with some seasonality.

We expect noninterest income expense to be down mid-single digits when compared to the fourth quarter.

And finally, assuming continued credit quality improvements, we expect the provision for credit losses to be between $125 million and $200 million.

And with that, Bill and I are ready to take your questions.

Operator, if you could give our participants the instructions please.

(Operator Instructions).

Paul Miller, FBR Capital Markets.

Good morning, guys.

This is actually Thomas on behalf of Paul.

Just a quick clarification point.

The $500 million of expenses that you expect to take out in 2014, that's off -- that's full-year 2014 over full-year 2013, correct?

That's correct.

Yes, that's correct.

Okay, perfect.

And then you have about $130 million of repurchase reserves left.

Do we see that to begin to come back a little bit with sort of the GSE suits behind you and all that?

Tom, this is Rob.

Yes, we would expect to see that come down.

We don't have definitive numbers on that, but that will be part of our disclosures in our upcoming 10-K.

Okay.

Thank you very much.

John McDonald, Sanford Bernstein.

Hi, good morning.

I was wondering, Rob, in terms of the loan growth, are you seeing any change in customer mindset on loan demand or is the growth you are seeing still kind of marketshare gains?

I would say in terms of what we are seeing on the commercial side is very consistent with what we saw most during the year in terms of commercial real estate and some of the specialty lending businesses that we have seen.

On the consumer side, the growth is coming in the form of the indirect auto, as well as the credit card offset by the residential mortgages.

So I wouldn't say there is any major change.

Bill often alludes to the fact that the marketshare gains that we are seeing are sort of limited to certain geographies that we are in, but not necessarily big movements.

Okay.

And the core NII did well this quarter.

What is your outlook for the core NII assuming the kind of current rate environment?

What are some of the puts and takes on growing core NII?

So we said in our first-quarter guidance for core NII we expect that to be modestly down.

The challenges in the first quarter will be the continued decline in purchase accounting, as well as a couple of less calendar days.

Our ability to go against that will be the loan growth.

Got it.

I was thinking broader for the year ex-purchase accounting.

It's really loan growth versus still low rates?

Yes.

Yes.

Okay.

And then just a little bigger picture for Rob or Bill on capital return, it seems like you are in good shape to increase capital return, as you mentioned.

Any kind of broad level comments even beyond this year about what an appropriate payout ratio should be for PNC when you look at the math of your ROE and your asset growth profile over the next couple years?

I'm not trying to back into this year --.

I will purposely be vague so you can't.

Going forward, I think for us and the rest of the industry capital returns are going to become a bigger part of the story.

What's going to be interesting is that, at some point as we all hit our operating targets on capital, the total amount of capital return is going to approach 100% or even go over.

And then you get into this debate of whether -- how you can split that between dividends and share repurchase.

But, for PNC, absent the capital we need for organic growth, which has been pretty robust, our intention is to return it back to shareholders.

Okay.

One quick follow-up on the NII.

You mentioned LCR.

Are you now fully prepared for your understanding of what LCR is?

Well, we still have some moving parts on their proposal in terms of what's in and what's out.

We are close, but not there yet and working towards it.

You saw this quarter the big increases in balances at the Fed and that will continue to increase.

We still have some outstanding questions on level I securities we pledge against municipal deposits and a whole bunch of other random things that we need to work through.

But long story short on LCR, we can get there.

It's kind of a mechanical exercise that will cost us a little bit of money at the margin.

Okay, thanks.

Matt O'Connor, Deutsche Bank.

Hi, good morning.

This is Rob Placet from Matt's team.

First question on expenses, your guidance is for 1Q expenses to be down mid-single digits.

Does that include the $50 million charitable contribution and the legal accruals taken this quarter?

Yes, hey, Rob.

This is Rob.

Yes, it does and just a clarification to the earlier question around the continuous improvement.

That $500 million are additional ideas, but that's largely -- as I mentioned in my opening comments, much of that will be used to fund the investments in technology and the retail transformation.

So I just wanted to clarify that earlier point.

Okay, right.

So on the cost savings, should we not expect that $500 million to reduce your run rate expense levels from here?

It will be used for investment?

So fourth quarter to first quarter comparison is a big comparison because fourth quarter was elevated.

So that is why we said mid-single digits.

And then the guidance for the full year is just that we will be down without getting specific about it.

Now we have a lot of programs in place and we are going to try to be aggressive about it, but we haven't given you specific numbers on actual expenses for next year.

For full year.

Yes.

But year-on-year comparison target is to be down.

Okay.

Thanks very much.

Keith Murray, ISI.

Good morning.

Would you guys be able to quantify the private equity gains and the hedging gains that you noted on the fee income side this quarter?

Sure.

That's in our other income and that is why it's elevated.

I don't think we disclosed a specific number around the private equity transactions.

They were up year-over-year, which was part of the elevated incentive compensation that we talked about in the fourth quarter.

But generally speaking, in that other income, we say that we can usually count on roughly $300 million or so in that category on a quarterly basis.

This particular quarter, it was a little bit higher because of that transaction, as well as some [CDA].

Okay, thanks.

And then on the $500 million of savings that you targeted, is there a pension expense improvement in there and would you be able to quantify that?

No, no, we don't have any pension-related items in the expense savings.

So could that be something on top of that for 2014?

It's already embedded in the generic guidance that we think we can be down year-on-year in total expenses.

We talk about continuous improvement and the important thing is saying that we will have expenses down year-on-year.

Continuous improvement is an eternal exercise that allows us to recycle expenses in effect to fund our investments.

So it's an internal goal; it's important because we try to self-fund things, but practically focus on the year-on-year down and we haven't been specific on that percentage.

That's right.

Okay.

And obviously, you showed very strong commercial growth, loan growth this quarter.

Is there any uptick on the consumer demand yet?

I know there was a small uptick in loans through this quarter, but are you seeing any change in mindset there?

Not particularly.

We have gives and takes where you see auto and a little bit of card offset by residential home equity and student lending, which will continue to roll off for us.

So basically flat this quarter and fairly muted growth we would expect going out.

Okay.

Thank you very much.

Ken Usdin, Jefferies.

Hi, good morning.

This is Bryan Batory calling from Ken's team.

My first question is just on the size of the balance sheet going forward.

So loans, securities and cash were all up on a quarter-over-quarter basis and we get the loan guidance for modest growth in the first quarter, but how would you expect the securities balances and liquidity to trend going forward?

I don't know that I have a specific answer to that.

Some of the security balances that you saw on a spot basis kind of all occurred late in the year and frankly were treasury securities that were asset swapped largely against LCR requirements.

So it's inflated, but it is not -- that wasn't what was driving our net interest income.

So as we go forward, that mix between what we hold in securities to deal with LCR is going to kind of drive that.

Loan growth basis, we are kind of saying mid-single digits.

Of course, what changes that is if the economy really comes back and we see utilization change.

You could then see that growth be quite substantial beyond that.

Okay.

And then a final one on loan yields.

So we saw them start to flatten out this quarter and just wondering if you think we should start to kind of see loan yields bottom here when we move through 2014?

We are not -- I don't know that we're expecting that.

If you follow cycles, loan yields continue -- loan spreads, I shouldn't say outright yields, but loan spreads continue to contract until something bad happens.

So we've seen -- on the C&I side, I think we said it has seen a pretty steady grind of 4 or 5 basis points a quarter and our expectation is we will continue to see that.

Consistent with what we saw in the fourth quarter.

Okay.

Thanks for taking my questions.

Erika Najarian, Bank of America Merrill Lynch.

Good morning.

This is Erika Najarian calling for Erika Najarian.

Terrific.

Good morning, Erika.

I was afraid that would fall flat, but I'm glad you laughed.

Just to take a step back, Bill, what do you think -- we are hearing you loud and clear, you made such great progress on efficiency this past year, but you think there is more wood to chop.

As you think about the franchise over the next two or three years, without the help of rates, what do you think is the natural efficiency ratio of your business as it stands today?

And can we look forward to an efficiency ratio that will go sub 60% at some point this year?

Look, I don't know where it gets to in 2014, but we don't target an end efficiency ratio because there is too many variables.

I mean you tell me an interest rate scenario and I'll tell you what the answer will be on efficiency ratio.

What we do know is when we look at the way we are spending money in our core operations, we are inefficient.

And more importantly, as we grow our Company, what we were finding was that we weren't getting economies of scale out of the back office.

In fact, our back-office costs were growing faster than our front-line operations.

So our big focus over the next two, three, four years is really to streamline operations and technology in a way that not just takes dollars out, but importantly gives us an ability to scale with revenues and create positive operating leverage.

So we can be better than where we are on a ratio basis, but I don't tend to think about it that way.

I tend to just look at what we are spending and say I can do better through time by rationalizing some of the stuff that we have put together through the integrations.

Got it.

And my follow-up question is -- thank you for the color that you gave in terms of further potentially building your liquidity position, but once that's behind us, if we just think about the core margin for this year, excluding purchase accounting and think about where the forward curve is indicating, is it too optimistic to think that the core margin ex-purchase accounting will bottom in 2014?

Will bottom in 2014?

No, I don't think that's --.

I wouldn't say that's too optimistic.

Great.

Thank you.

Moshe Orenbuch, Credit Suisse.

Great, thanks.

I'm representing myself too.

Just given that answer, I guess I'm kind of intrigued about your guidance in the discussion for net interest income because since you do have growth in loans and presumably earning assets, maybe could you just kind of flesh out your kind of expectations for full-year net interest income?

We know you've got kind of $300 million of purchase accounting reductions that you've got to face, but --.

Well, look, that's our fight, right?

So you have the $300 million that comes off the top.

We know we are going to grow loans.

Loans are contracting in spread by our 4 basis points a quarter.

We have largely run out the deposit repricing and our security balances, all else equal, if we keep them neutral to duration of equity, we are rolling off 3.25% yields and putting on at 2.75%.

Those are all the moving pieces.

It can change if rates went up and we invested more in securities, if loan growth was higher, if utilization went up, but when we look at sort of the assumption that rates are going to do what the forward curve says and we maintain a negative duration of equity, my comments are it's going to be the same fight in 2014 we had in 2013 to grow core.

Right, but at the same time --.

We are going to try to do it.

Right.

But I guess I was referring to the comment about the stabilization of the core margin during the year that would sort of lend credence to that --.

Well, but remember the question was an easy question to answer because she said is it going to bottom, so it could bottom on December 31 of 2014.

I hope it bottoms (multiple speakers).

I hope it bottoms before that, but those questions or those comments are kind of unrelated.

Got you.

I think this is -- I was going to say, this is Rob, I have (inaudible) and I think Bill said it well.

I think what we expect to see in 2014 is very much a continuation of what we saw in 2013 in regard to NII.

Got it.

And in terms of -- on the expense front, I mean just could you talk a little bit your thought process about the pace of investment?

In other words, is it something that to the extent you have more available you will do more, but are committed to keeping kind of headline expenses down or is there kind of a fixed amount that you feel like you have to do?

Probably a little bit of both.

I mean there is fixed infrastructure expense that we have in our budget that we need to do to be efficient in this environment.

We are self-funding that through continuous improvement.

With the margin, are there things that we could accelerate?

Yes, probably, but we are keeping our eye on that and it is important to us in this environment to be disciplined on expenses.

Got it.

And then just a very last thing, you talked about kind of a long-term framework for capital return of everything that isn't needed for internal growth.

What do you think is the timeframe to get there?

Is it -- I mean is it going to be 2014, 2015, 2016?

Like when do you think you reach that kind of normal level?

We are today running over operating targets that we have put out there before.

We are in an environment where, for the CCAR process, the body language and guidance is still in a build capital mode coming from the regulators.

At some point -- my comment was just kind of at some point we and everybody else are going to get to a point where we are well above whatever threshold you need to hold and you are going to see total return to shareholders increase.

I don't know when that is.

It is not this year.

Right.

Got it.

Thanks very much.

Gerard Cassidy, RBC.

Thank you.

Good morning, guys.

Bill, speaking of capital, what is a level, whatever it's determined that PNC will be required to keep let's say in the Basel III Tier 1 common ratio, I guess tentatively it is 7% today.

There might be a small SIFI buffer for you and your peers, but what level above that are you going to play?

Once we get to this normalization period, what level do you think you are comfortable with carrying your Tier 1 common ratio at?

It's a great question and the answer is actually what level do we want to end up at in the stress test.

So our starting point kind of is a function of the target of the ending point and of course, we want to maintain and be above the 4.5% in the severe adverse.

Now the reason I say that is, depending on the economy that we are in or risk factors, that could dictate that we would run at an 8.25% in one environment and an 8.75% in another environment.

So I don't know -- we've talked about being 8% to 8.5% as a guideline.

That kind of is reflective of where we sit today and what we expect we see in stresses.

That could change through time depending on the environment.

One of the things -- if you look at our ratio, the outperformance in B3 Tier 1 common this quarter, some of that came from AOCI and the effect of revaluing pension.

If you think of in a stressed that will disappear instantaneously the same way it appeared.

And that's 20 basis points.

Yes, yes.

So in effect, things that -- AOCI swinging around can cause you to have to -- cause you to carry a higher ratio than you otherwise might.

But we are not going to simply say we get to 8.5% and that's where we need to stay.

We need to look at the environment and we need to make sure that in a severe adverse case that we are above our thresholds.

Okay.

And shifting back to your comments about the investing that you are doing, what are some of the targeted areas where you are going to spend that money this year on the investment side for the firm?

So business-focused investment, a lot of it is going into retail where we continue rollout of image-enabled ATMs and reconfiguration of branches as we make that change.

On the technology side, core infrastructure side, we've got a lot going on, both application replacement, infrastructure, data center upgrades, cyber security, all the stuff that I think we need to be a top player inside of this environment and against the expectations we want to have with our retail clients on a seamless delivery through digital and physical space.

Should we anticipate -- I might have missed this; you might have already addressed it -- there will be more branch closings in 2014?

You are going to see reconfig -- it will be a push.

We are going to open some and consolidate some, but what you will see through time is the reconfiguration of branches with universal employees with square footage per branch on average going down, with the continued rollout of image-enabled ATMs into old branch structures.

So we are kind of -- the raw number of touch points feels about right, but you are going to still see us reconfigure those touch points.

Do you get a sense, without holding you to a specific number, but when you guys look at the retail delivery channel, you gave us a number today at 30% as being the deposits are coming from outside that traditional teller channel.

Do you have an idea where that can go to and then finally kind of like top out?

I don't know that I do.

I think it can go materially higher from where it is.

Our goal here, and it is important, we will serve the clients in whatever form they want.

So whether they want to use tellers or universal employees or use digital, we will do that.

Through time, the trend continues to be increasingly towards digital.

But we don't know the answer to that, right?

That's part of what is playing out in the industry and we are trying to figure that out as well.

Great.

Thank you.

Betsy Graseck, Morgan Stanley.

Hey, it's Betsy Graseck.

How are you?

Good.

So a couple of questions.

One was on reinvestments and it does look like you have reinvested in the mortgage market.

You mentioned that the purchase mortgage originations that you have had are about twice the industry in 2013.

So I wanted to understand what else you have to do there in the mortgage space to leverage the mortgage banking platform you have and how you are going to be navigating this year with again the big decline in refi.

Maybe you could just talk to that.

So mortgage investment, we rolled out seamless delivery.

We have -- I mean the investment goes back several years where we consolidated underwriting platforms and upgraded technology and worked through all the changing regulations.

All that is ongoing.

The big change though is the work we have been doing in integrating mortgage into the Company.

And that is why -- that is one of the primary reasons why you see our purchase volume outpacing perhaps some of our peers.

Instead of being a business where they were kind of out on their own originating transactions, now they are integrated into the branch network as part of our Company.

So we are working our retail channels a lot more aggressively than we used to.

New things that will roll out mortgage through time, we are working on a product that is kind of the equivalent of our Virtual Wallet or Wealth Insight or CFO Insight that will play in the mortgage space that we are pretty excited about and ought to help again with purchase volume.

Notwithstanding all that, 2014 is going to be tough.

Volumes are going to be down.

We've taken out costs, you saw in the third and fourth quarter and we'll continue to watch that and deal with that depending where volumes are.

And when you think about capacity utilization in the mortgage banking platform that you have, what is your sense of where it is running right now?

It's pretty close to capacity simply because -- one of the things we did when volumes were -- one of the reasons we saw volume actually stay flat year-on-year is we had to build capacity to keep up with the refi requests we had and we had, in fact, a third party out there who was helping us with some of that.

So for our downsizing relative to new origination volumes, we were actually just -- we were able to cut this third party out and then take expenses out.

So we are pretty much rightsized on the origination side today.

We have opportunities on the servicing side as we work our way through the new mortgage regulations and become efficient on that.

And then we will see where we go depending on volumes.

Yes, because I guess one of the questions is couldn't you take your platform and expand over a broader geographic mix that you have right now?

You could, but we are national now, so we are integrated into the bank and we deal with our retail footprint, but we are pretty much across the country as we sit today.

Right, right.

Okay, I was just thinking you might be able to do more in non-footprint locations than you have been doing, but I guess your answer is no.

I'm sure there is opportunity.

Our presumption is if we can get good loan originators in this market, we would do so.

Okay.

And then the second kind of theme is on auto and I just want to dig in a little bit on what your plans are for focusing on the auto space given that there is a little bit of a shift going on there too.

Yes, sure, Betsy; this is Rob.

I'll answer that.

We have, as you know, seen significant growth in our auto portfolio.

There has been a lot of talk in the industry in terms of where we are in terms of sort of the cycle in that regard.

We are starting to see longer tenors and some pricing contraction, which we are cautious about.

That being said, we still see growth in 2014 because auto numbers are still -- manufacturing are still very strong and we've expanded a lot of our dealer networks across geographies, particularly in the Southeast and we are seeing growth there.

So we still see growth, maybe just not at the historical run rate.

And then do you just feel like there is a better opportunity for you in either prime, near prime, subprime?

Some guys are talking about how capital requirements push them one direction or the other.

We are not going to change our risk bucket as it relates to auto.

So I think what we have the opportunity to do and we have been pursuing is as we have expanded into the Southeast we basically bring on board new dealerships with our program.

And that is a large part of the growth that you are seeing on our balance sheet.

Got it.

Okay, great.

Thanks so much.

Nancy Bush, NAB Research.

Good morning, guys.

Bill, a question for you and I apologize if you have given this answer.

I'm sure you probably have at recent conferences, but I missed it.

Could you just sort of give what you see as the high-level impact of the Volcker Rule for PNC and if there is any estimate that you have of how much it is going to cost you or not cost you?

Yes, maybe I'll give you sort of preliminary views.

The direct impact that we have, and we've talked about this, is that through time we will have to run down parts of our alternative investment book, so our private equity book.

We are prepared to do that.

A lot of it is going to be monitoring costs, so we are going to have to have lots of people proving that we don't do anything that we never did.

And we'll make sure as we go through certain of our hedging activities on the balance sheet that they are compliant.

So I don't know in the end that it is going to have a huge impact on us beyond the cost of compliance and the work set to make sure that we are there.

One of the things I'll just bring up that you see in the press is the impact on CLOs where, depending on the structure of CLOs, they were ineligible securities and of course, you see all the noise around the TruPS.

We own loan-based, so C&I loan-based CLOs, which are all largely at par thereabouts and there is some possibility that some of those might need to be exited, but frankly the industry is kind of working on that.

And I think they can be restructured, so no real impact from that either.

So I think a long-winded answer, but it is going to be a lot of work without a lot of impact I think.

Nancy, this is Rob.

I'll just add to that just to round that out.

We have very de minimis holdings in CDOs, so that's not an issue for us.

Okay.

And along the same line, Bill, could you just give us your view of how you see the housing market shaping up in terms of legislation, shape, etc.

and if you see any sort of long-term impacts for PNC?

I don't have a crystal ball into that.

I read the same press from the same players that you do.

I think at the end of the day, housing finance is going to be the single most important financial transaction that our retail clients are going to deal with.

We need to be good at it; we are going to evolve with the industry as it involves.

Fannie and Freddie are obviously going to play a role, but it is a product that we need to be very good at.

I don't have insight into the political movement as to whether or how they'll end up winding those things down.

Thank you.

(Operator Instructions).

Chris Mutascio, KBW.

Yes, it's Chris Mutascio from KBW.

Good morning, Bill and Rob.

How are you?

Good morning, Chris.

Just two quick questions.

Rob, on the standard approach, did you give that number on Basel III?

I noticed the 9.4% on the advanced approach.

I know there is a gap.

Did you give the standardized approach to that ratio?

No, no.

No, I didn't.

What I did mention though is, in terms of our calculations, we do use the advanced approach.

That is the 9.4% number.

What I had mentioned was the standardized, which we do calculate, is converging with that and going forward may be our binding constraint.

Right.

So if it is going to be your binding constraint, is it something that you might disclose at a future date so we can see the difference between the two right now?

Oh, sure.

Yes, at a future date, absolutely.

Okay.

The other thing I wanted to ask, if I back out the Visa gains in the third quarter, the other income line item that was very strong this quarter would've been about $380 million versus $270 million, so about a $110 million delta.

I know you kind of glossed over the private equity, maybe some hedging.

Can you provide any of the sequential quarter deltas, two or three line items and if you can't provide them, can you just talk to the sustainability of roughly the $380 million number that you posted this quarter?

Good question, similar to the earlier one.

Now I am going to refrain from the specific categories, but we did see higher than usual equity management gains, if you will.

And generally speaking, in terms of that other noninterest income per quarter, a $300 million number seems to be where we average over time.

But you won't provide what that was this quarter?

Well, the total was $383 million.

Oh, I'm sorry, I'm sorry.

I've got you.

Okay, all right, fair enough.

I appreciate your time.

Sure.

Todd Hagerman, Sterne Agee.

Thanks.

Good morning, everybody.

Just a couple of quick questions.

First, maybe, Rob, just in terms of credit quality and the provision guidance, you guys have been pretty consistent in terms of the provision outlook over the last several quarters.

It has come down slowly over that period of time, but you look at the credit measures where we are today, 39 basis points of loss, things have gotten markedly better over the last 12 to 18 months, if you will.

But as I think about the growth in the portfolio, are we now at a point where we are likely to kind of converge between charge-offs reserves as we think about growth in 2014?

It's a great question, Todd and one that we spend a lot of time on, as you know.

You're right.

Particularly throughout 2013, we continue to be surprised on the upside in terms of the improvement in credit quality and as a result, in terms of our guidance, we have continued to lower the range around provision.

As I said in my opening remarks, we don't believe that these low levels, particularly a 39 basis point charge-off ratio are sustainable over time, so we would expect, and I don't know what quarter that would be, but we would expect those numbers to go back more to historical norms.

And that is why our guidance for 2014 is above the $113 million number that we had here in the fourth quarter.

Okay, great.

And then just secondly, just in terms of on the legal accrual in the quarter, granted, it is effectively for settlements, if you will and where obviously you've seen a lot of that within the industry this quarter.

I am just wondering, as we think about the volatility within your legacy mortgage segment in Nat City and so forth, are we at -- have we hit that inflection point at this stage?

Is the bulk of kind of the primary litigation now behind the Company or could we expect to see a little bit more volatility from time to time as we go through the next 12 to 18 months, if you have any sense for that?

Without commenting on specific litigation, we have disclosed all that in the Qs and you can look through it.

I think the biggest piece of volatility we got out of the mortgage business was the settlements with the GSE, which weren't really litigation, per se.

And we will see.

We continue to operate in a fairly strange environment as it relates to people coming after banks, but we disclose everything and I guess we will leave it there.

Okay, all right, I appreciate the help.

Andrew Marquardt, Evercore.

Hi, guys.

It's Andrew Marquardt with Evercore.

A couple ticky tack questions.

In terms of fees or core fees, however you look at it, sorry if I missed it, did you give any color or commentary in terms of how you think about the full-year 2014 shaping up?

Andrew, hey, this is Rob.

No, we didn't do it for the full year.

Again, the full-year guidance was in broad categories in terms of revenues and expense -- total expenses.

What I did say was for the first-quarter guidance we expect fees to be down modestly because largely the residential mortgage repurchase release was a contra revenue or a fee item, if you will, in the fourth quarter.

Right.

Got it.

And in terms of spread revenue, understood that kind of core NIM is still grinding lower, but then I thought I heard maybe a comment that we should think about the spread revenue for this year being similar to last year.

And on a core basis that was down 2%, 2.5%.

Is that how we should be thinking about it ex-PCI or do I not understand that correctly?

No, I'm sorry, what I meant by saying what we will see in 2014 is similar to what we saw in 2013 was more around the struggle just in terms of spread compression, low rates against loan growth, so just that struggle in itself, not the outcome of that struggle for 2014.

Okay.

But maybe loan growth could be better with maybe less margin pressure, but still there on a core basis so that loan growth theoretically could offset the ongoing pressures.

Is that how we should think about it conceptually?

Yes, theoretically, absolutely.

Okay.

And then just lastly on expenses being down on a year-over-year basis, just to be clear, the base of that that we should think of is 9.8 kind of all in number.

Is that correct for this year, for 2013?

9.801 to be exact for the full year 2013.

Got it.

And then should we anticipate that you will be able to generate positive operating leverage in 2014 with that kind of expense management, though still challenged kind of top line?

Is it possible to get positive operating leverage with that kind a backdrop scenario?

Well, we didn't really approach it like that.

What we said in terms of our guidance for 2014 was that we do expect revenues to be under continued pressure, principally from the purchase accounting and the lower residential mortgage activity.

And in light of that, that we have expense management as a priority and we do have plans for the expenses to be down year-over-year.

Okay, got it.

Thanks, guys.

Sure.

Brian Foran, Autonomous Research.

Hi, good morning.

I have been hitting star 1 for the past 50 minutes.

I have got to listen to directions next time.

Most of my questions have been asked, but Visa, it's a big line item for you versus others.

You have kind of talked about the $300 million other fees.

That's a lot of moving parts, but $300 million with quarterly volatility is a good guess.

Would Visa -- any potential monetization of Visa be included in that $300 million or should we think about Visa as kind of a discrete item if it is monetized that would be above and beyond the $300 million run rate?

Yes, I think the majority of that would be above the $300 million.

Got it.

And then on capital, certainly we will wait for the standardized disclosure, but hopefully I am thinking about it right, the standardized would end the opportunity to continue to have RWAs come down while assets are going up or change -- optimize the RWA mix, whatever you want to call it.

But your numerator deduction has shrunk a lot over the past year to -- it's still $1 billion.

AOCI will do what it does on rates, but are there still opportunities to optimize the numerator independent of the standardized floor kicking in or is the numerator about where it is going to be now and we should expect it to grow with earnings?

Well, I think -- this is Rob -- I can answer that.

Clearly earnings will help grow it.

I think within the disallowance or the sin bucket, probably the room where we could get more room is, as we grow our Tier 1 common capital, that 15% general bucket, as you will, gets larger creating more room in terms of what would otherwise be disallowed.

Got it.

So we should kind of build in a little bit of a multiplier where every dollar of earnings less dividend less buyback kind of creates $1.15 of capital?

Formulaically, that's right.

I appreciate it.

Thank you.

Steve Scinicariello, UBS.

Good morning, everyone.

It is Steve Scinicariello, UBS.

Hi, Steve.

Just a quick one for you.

Just curious, just given the strength in the asset management side and I know that is an area where you guys are looking to focus and grow, just kind of curious what some of the key drivers are there and as you look forward, what are some of the opportunities to kind of keep that going into 2014 and beyond.

Sure, this is Rob.

We've been very pleased in terms of the growth in the asset management business, particularly following, as you know, several years of investments in terms of building out that distribution.

We are still optimistic, as Bill mentioned earlier.

In terms of what we are trying to do with the mortgage company is largely what we have been doing with the asset management group and that is why referrals being up 44% is driving those kinds of numbers and confirming and validating our strategy in terms of that cross-sell, if you will.

So we do see opportunities within the existing consumer base and then obviously with the addition of the Southeast territories and the offices that we have put in place there, we'll continue to be optimistic.

And so you still feel you'd be able to kind of grow that year-over-year at kind of a high single digit or even better kind of number in terms of revenues?

Yes.

Yes, that's right.

Perfect.

Thank you so much.

Bill, do you have some closing comments?

No, just quickly I guess, 2013 was a great year for us and for the industry.

We are looking forward to 2014.

I think we have been pretty clear on what our challenges and opportunities are.

We appreciate everybody joining us this morning.

Thank you.

Operator, do you want to close the call?

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.