PNC Financial Services Group Inc (PNC) 2015 Q1 法說會逐字稿

Good morning.

My name is Aladdin and I will be a conference operator today.

At this time I would like to welcome everyone to The PNC Financial Services Group earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I will now turn the conference over to Director of Investor Relations, Mr. Bill Callihan.

Sir, please go ahead.

Thank you and good morning.

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

Participating on this call are PNC's Chairman, President and Chief Executive Officer Bill Demchak and Rob Reilly, 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 trends and do not take into account the impact of potential legal and regulatory contingencies.

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

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

These are all available on our corporate website www.pnc.com under Investor Relations.

These statements speak only as of April 15, 2015 and PNC undertakes no obligation to update them.

Now at this turn I'd like to turn the call over to Bill Demchak.

Bill?

Thanks, Bill, and good morning everybody.

As you've seen today we reported net income of $1 billion or $1.75 per diluted common share for the first quarter.

That was pretty much as we expected and it's a decent start to the year.

Our average -- sorry our return on average assets for the quarter was 1.17%.

Linked quarter these results were impacted by seasonal trends in fewer days in the quarter but on the whole we've continued to deliver the consistent performance that has characterized the Company for a number of years now.

In the first quarter we grew average loans by $2.3 billion or 1% linked quarter.

Average deposits were up $3.7 billion, or 2% linked quarter.

We grew our average investment securities by $3 billion essentially keeping pace with our growth in deposits and without meaningfully changing our interest rate sensitivity.

And we also benefited from modestly improved credit quality.

You'll have seen that we maintained a strong capital position even as we continued to return capital to shareholders.

In the first quarter we completed the common stock purchase program we announced last year with total repurchases of 17.3 million common shares for $1.5 billion.

We also announced a new share repurchase program of approximately $2.875 billion over the next five quarters which begins in the second quarter of this year and earlier this month the Board of Directors approved a 6% increase in the quarterly dividend effective with the May dividend.

We continue to make important progress against our strategic priorities and I'm not going to run you through all those again but I'll be happy, or Rob and I will be happy to take a couple of questions about them during the Q&A if you have any.

Worth noting is that our strategic priorities are producing the results we've expected all along.

If you look back to when we introduced the priorities you see today that more of our customers are using more of our products which is intended as driving fee income growth.

In fact year over year in the first quarter we saw fee income up 7%, so we continue to execute well and control what's in our power to control.

As further evidence to that point you will also note that expenses were well-managed in the first quarter down 7% linked quarter.

But the challenge for PNC and for the industry continues to be this prolonged period of historically low interest rates.

For some time I've talked about the rates between the variables, interest rates and credit costs.

Fortunately the normalization of recent historically low credit costs seems to be happening more gradually than we'd expected.

However, it's also clear given the most recent jobs data and some data out this morning on manufacturing that we are likely to see interest rates rise later and slower than previously anticipated which if correct will have an impact on our net interest income for the remainder of the year and out years.

We remain very confident in our long-term strategic direction but we can't ignore the realities of the current environment and I am sensitive to the revenue expense relationship.

Given this we're going to have to work harder to find additional efficiency gains without slowing our strategic investments in technology and the transformation of our retail platform.

In spite of these challenges we are encouraged by the quality of our results particularly as they relate to our execution on our strategic priorities in the things that we can control.

We remain convinced that we have the right strategy and the right team to continue to deliver on our commitments to all of our stakeholders as we work to create long-term value for our shareholders.

And with that I will turn it over to Rob for a closer look at the first-quarter results and then we will step back and take your questions.

Rob?

Thanks, Bill, and good morning everyone.

Overall we had a solid first quarter that played out largely as we expected and consistent with our guidance.

First-quarter net income was $1 billion or $1.75 per diluted common share.

These results were driven by continued average loan and deposit growth, well-controlled expenses and modest improvements in credit quality.

As Bill just discussed our business results have generated significant capital return to our shareholders.

As is typical for the first quarter, seasonal factors affected revenue and expenses and I'll cover that in a moment.

Our balance sheet is on slide 4 and is presented on an average basis.

Total assets during the first quarter increased by $8.4 billion or 2%.

Commercial lending was up $2.9 billion or 2% from the fourth quarter primarily due to new account production and modest utilization increases in corporate banking and commercial real estate.

Consumer lending declined $600 million, or 1%, approximately half of which was due to the runoff of nonstrategic assets and the remainder was primarily due to decreases in home equity and education loans.

Spot loans remained essentially flat in the quarter due to higher activity levels at the end of the fourth quarter.

Investment securities were up $3 billion or 5% linked quarter as net reinvestment activity primarily agency residential mortgage-backed securities outweighed payments and maturities.

And lastly our interest-earning deposits with banks primarily with the Federal Reserve increased in the first quarter largely related to balance sheet management activities and strong deposit growth.

On the liability side total deposits increased by $3.7 billion, or 2% when compared to the fourth quarter driven by higher levels of consumer demand and money market deposits.

Total equity remained stable in the first quarter compared to the fourth quarter as retained earnings were essentially offset by dividends and common stock repurchases.

In regard to our efforts to comply with the liquidity coverage standards our interest-earning deposits with banks primarily with the Federal Reserve was $30.4 billion as of March 31, an increase of $18.2 billion or 150% compared to the same time a year ago.

As you know, the Federal Reserve's short-term liquidity coverage ratio went into effect on January 1, 2015.

PNC is an advanced approaches bank and we're subject to the full LCR approach.

As of March 31, our estimated ratio exceeded 100% for both the bank and the bank holding company under the month-end calculation methodology.

Further related to LCR and new this quarter you will notice a change in our funds transfer pricing which impacted our segment reporting.

This change reflects the liquidity premium now assigned to deposits which carry higher value under liquidity coverage ratio rules.

You can see an additional discussion of this in our press release and financial supplement.

Turning to slide 5 we've continued to maintain strong capital levels while delivering significant shareholder capital return.

During the first quarter we repurchased 4.4 million common shares for approximately $400 million.

Importantly we completed our entire common stock repurchase program that began in the second quarter of 2014 and purchased a total of 17.3 million common shares for $1.5 billion.

Period end common shares outstanding were 520 million down 3 million linked quarter and 14 million compared to the same time a year ago.

As you know following the approval of our capital plan last month we announced a new share repurchase program of up to $2.875 billion for the five-quarter period beginning April 1, 2015.

Our fully phased-in standardized approach risk weighted assets increased by $5.7 billion on a linked-quarter basis primarily due to higher commercial loan balances.

As of March 31, 2015 our pro forma Basel III common equity Tier 1 capital ratio fully phased in and using the standardized approach was estimated to be 9.9%, down 10 basis points from the end of the fourth quarter as a result of share repurchases and higher risk weighted assets.

Finally our tangible book value reached $61.21 per common share as of March 31, a 2% increase linked quarter and a 9% increase compared to the same time a year ago.

Turning to our income statement on slide 6 net income was $1 billion and our return on average assets was 1.17%.

Our first-quarter performance delivered seasonally expected lower revenue and expenses as well as a stable loan loss provision.

Let me highlight a few items in our income statement.

Net interest income despite the impact of the lower day count in the first quarter was essentially flat as higher balances were offset by lower yields.

Noninterest income was $1.7 billion, a decrease of $191 million or 10% linked quarter.

This decline was driven by higher fourth-quarter gains on asset dispositions and to a lesser extent lower seasonal client revenue.

Noninterest expense decreased by $190 million or 7% compared to the fourth quarter.

This was primarily driven by several elevated items in the fourth quarter, the largest of which was our contribution to the PNC Foundation.

Setting those aside first-quarter expenses continued to be well-managed due in part to the success of our continuous improvement program or CIP.

Provision expense in the first quarter was $54 million, roughly flat with fourth-quarter results.

Finally our effective tax rate in the first quarter was 24.4%, up from the 22.1% rate in the fourth quarter reflecting the tax favorability of our foundation contribution.

We continued to expect our 2015 effective tax rate to be approximately 25%.

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

Turning to net interest income on slide 7 total net interest income decreased by $25 million for the reasons I just highlighted.

Average interest earning assets grew by $7.8 billion or 3% linked quarter primarily due to higher securities and loan balances.

Core NII decreased by $27 million in the quarter.

All of the decrease was due to fewer days in the quarter which accounted for approximately $30 million.

Excluding day count NII was up approximately $3 million in the quarter as higher loan and security balances were mostly offset by compressed asset yields.

Purchase accounting accretion was flat linked quarter due to higher than expected net recoveries.

For full-year 2015 we continue to expect purchase accounting accretion to be down approximately $225 million when compared to 2014.

Net interest margin declined 7 basis points linked quarter.

Of that amount 4 basis points was attributable to our increased liquidity position and the remaining 3 basis points was due to spread compression.

In terms of our interest rate sensitivity, our duration of equity remains negative.

As you know our balance sheet is asset sensitive reflecting our view of the interest rate environment.

As we have said for some time we recognized it has and will continue to constrain our NII growth in the short term.

Turning to noninterest income on slide 8 seasonal factors caused fee income to decline $61 million, or 4% this quarter consistent with the guidance we provided.

However, importantly year-over-year fee income increased by $85 million or 7% reflecting our strategic priorities to grow higher quality, more sustainable revenue streams.

Higher fourth-quarter gains on asset dispositions caused total other noninterest income to be down by $130 million or 29% on a linked-quarter basis.

Asset management fees were stable on a linked-quarter basis consistent with market performance.

Assets under administration were $265 billion as of March 31, an increase of $10 billion or 4% compared to the same period a year ago.

On a year-over-year basis asset management fees increased by $12 million or 3% primarily due to market performance and net new business.

Consumer services fees and deposit service charges were both lower compared to fourth-quarter results reflecting seasonally lower client activity.

Compared to the first quarter of last year volumes underlying consumer services fees were up with increases in all primary categories.

Brokerage fees were up $12 million or 22%, credit card increased $10 million or 15%, debit card increased $6 million or 7% and deposit service charges increased $6 million or 4%.

Corporate services fees declined by $53 million or 13% primarily due to lower merger and acquisition fees.

As you will recall Harris Williams, our M&A advisory services firm, had an exceptionally strong fourth quarter.

Compared to the first quarter of last year and in fairness excluding the benefit of a fee reclassification from net interest income last year corporate services increased by $11 million or 4%.

A key driver was higher treasury management revenue which was up $8 million or 3%.

Residential mortgage noninterest income increased by $29 million linked quarter or 21% primarily benefiting from hedging gains and higher refinancing volume.

Mortgage originations were $2.6 billion in the first quarter up from $1.9 billion in the same period a year ago driven by an increase in refinancing activity which has been bolstered by lower interest rates.

Other categories of noninterest income decreased primarily due to the impact of the higher fourth-quarter gains including the sale of our regional headquarters building in Washington, DC and shares of Visa stock.

Of note we had no Visa stock sales during the first quarter of 2015.

Despite seasonal pressures noninterest income to total revenue was 44% in the first quarter down from fourth-quarter levels but up 2 percentage points from the same quarter a year ago.

Turning to expenses on slide 9 first-quarter levels decreased by $190 million or 7% as a result of continued disciplined expense management and specific elevated expenses which took place in the fourth quarter.

Expenses for third-party services declined in the first quarter along with personnel expense as lower incentive compensation was associated with seasonally lower business activity.

Compared to the same quarter a year ago total expenses were up by $85 million or 4% primarily due to investments in technology, business infrastructure and higher benefit cost along with some year-over-year timing differences such as marketing and outside services expense.

As we've previously stated our CIP program has a goal to reduce costs by $400 million in 2015.

We're one-quarter of the way through the year and we have already completed actions related to capturing more than 30% of our goal and as a result we remain confident we will achieve our full-year target.

Through the CIP program we intend to fund the significant investments we're making in our technology and infrastructure and as you know our objective is to keep our full-year expenses stable to 2014 expenses.

As you can see on slide 10, overall credit quality improved modestly in the first quarter compared to the fourth quarter.

Nonperforming loans were down $105 million, or 4% compared to the fourth quarter as we saw continuing broad-based improvements across commercial and consumer loan portfolios.

Total pass-through loans decreased by $196 million or 10% linked quarter.

Net charge-offs of $103 million declined by $15 million or 13% linked quarter and virtually all of that was consumer loans.

In the first quarter the net charge-off ratio was 20 basis points of average loans down from 23 basis points in the first quarter.

Our provision of $54 million had a slight linked-quarter increase but remained relatively stable.

Finally the allowance for loan and lease losses to total loans is 1.61% as of March 31.

This compares to 1.78% at the same time a year ago.

While we were pleased with this performance we continue to believe credit trends will not remain at these levels.

Regarding our oil and gas exposure as we highlighted in our fourth-quarter call we have a total of $2.9 billion in outstandings which has remained stable quarter over quarter.

Of that $2.9 billion, $900 million is in exploration and production, loans secured and covered by margin requirements, and $900 million is in the midstream downstream space and $1.1 billion is in the services sector.

Of the $1.1 billion in the services sector approximately $300 million of that is not asset-based or investment grade and this is the portion of the portfolio that we're concerned about.

This quarter we built into our reserves an allocation to reflect the incremental impact of lower oil and gas prices on our commercial loan portfolio and we continue to monitor the portfolio for additional changes as we move forward.

However, as we stated in the fourth-quarter earnings call and repeat again today in the context of our broader lending portfolio our oil and gas exposure is relatively minimal.

In summary, PNC posted solid first-quarter earnings consistent with our expectations.

We continue to believe the domestic economy will expand at a steady pace this year; however, we now expect interest rate increases to be later and slower than earlier anticipated.

So as we look out for the remainder of the year given this change in our interest rate outlook we expect total revenue to be under more pressure than previously anticipated.

While we previously thought we could see some slight growth in core NII we now think that may be more difficult to achieve.

In this environment we will remain focused on disciplined expense management and we expect 2015 expenses to be stable with 2014 on a full-year basis.

Looking ahead to the second quarter and when compared to the first-quarter reported results we expect modest loan growth, we expect net interest income to remain stable, we expect fee income to be up in the low single digits reflecting our continued focus on our strategic priority, we expect expenses to be up in the low single digits as second-quarter expenses typically increase compared to the first quarter and we expect provision to be between $50 million and $100 million.

With that Bill and I are ready to take your questions.

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

(Operator Instructions) Gerard Cassidy, RBC.

Thank you.

Good morning Rob, good morning Bill.

Can you guys share with us some of the color, you've had real good success on the commercial loan growth on a year-over-year basis, in particular commercial mortgage is up real strong.

Could you share with us where that growth is coming from?

Is it geographically the Southeast versus the Midwest or where is the best growth coming from?

On a percentage off of base the Southeast is higher than the remainder of the footprint but again it's coming off of a small number.

Geographically it's dispersed and as we've said several times we're getting growth and certainly growth versus our peers on the back of our specialty lending businesses.

The commercial mortgage side of it goes all the way back a couple of years to our desire to track what was maturing under the CMBS market and where appropriate balance sheet that product, more of a life insurance competitor than CMBS competitor.

And that has worked for us although probably slowing recently because of the take-up in CMBS.

I think that's right.

This is Rob.

What Bill says is true in terms of where we're seeing it across the geographies.

In this quarter, though, on the commercial mortgages we did have -- it benefited from a reclass in some loans that were in other.

So we did grow commercial loans but a big part of that increase quarter over quarter was a reclass from the other category.

I see.

Can you guys give us any color on the utilization rates of the commercial lines?

Did they go up this quarter?

Some of your peers are suggesting higher utilization rates now.

Yes, Rob may have better details.

It bumped up a little bit quarter to quarter, nothing dramatic and kind of consistent with we've seen that I guess over the last year.

Yes, I think that's right.

We continue to see modest improvements in utilization that have been consistent for the last three or four quarters but nothing dramatic.

And then one final question, can you just give us an update on your monetization program of the internal systems, obviously it's elevated spending.

How long do you expect that to last?

Well, in terms of the overall investments in our infrastructure and our technology, we're well underway as you know.

There's portions of that that we'll continue to be at forever particularly around cyber.

But in terms of a lot of the infrastructure build we're probably another 18 months or so --

I think that's probably right.

The other thing though, Gerard, you're going to see through time and you've already seen it that the increase in our equipment expense line as we start depreciating some of these investments offset by particularly in retail just lower personnel costs and lower personnel costs where we're automating a lot of the manual processes that we put in place as a result of new regulation.

We're well underway.

We have our you know new data center strategy up and running with the second one coming online soon.

Big investments into cyber and we feel pretty good about where we are there, modernization of applications.

So it's a big project that we feel good about where we are.

We're hitting our internal targets in terms of what we spend and getting it done on time but it will take a while.

Thank you.

Paul Miller, FBR Capital Markets.

Yes, thank you very much.

Can you give us an update on the RBC acquisition down south where you stand there and how the growth has been you experience the growth there?

Yes, sure, Paul.

This is Rob.

We're pleased in terms of our progress in the Southeast . Across all business segments we now have 6,000 employees in those markets and we're fully up and running in the key areas Charlotte, Raleigh, Atlanta, Mobile, Birmingham and Tampa.

So we feel good about that.

Growth rates continue to exceed our legacy growth rates in all the businesses, corporate banking, loan growth is faster on the retail side, household acquisition is faster and then on the asset management side by definition because we were de novo the percentage increases are significant.

So it's going well.

And the overall loan book where do you stand like C&I stuff like that down in the Southeast?

In terms of balances?

Well just in terms of growth.

You're getting good account acquisitions on the loan growth side where does it stand?

Quarter to quarter this quarter it was I want to say 2% or 3% higher than what we saw in the legacy markets but quarter to quarter it's been running materially higher, in some quarters it's been double just on a percentage basis.

And it's not and importantly we're not out booking loans.

We're trying to get lead relationships and established relationships across all of our core products beyond lending and we're doing pretty well with that.

But the growth down there on the back of having really good teams of people in the markets has frankly surprised us to the upside.

Okay, guys.

Thank you very much.

Matt O'Connor, Deutsche Bank.

Good morning.

Just a couple of rate-related questions.

If we get rising short-term rates but nothing on the long end and I guess in between things go up a little bit but not as much as the short end so you get a flattening yield curve.

Remind us how sensitive you are to that scenario.

Well look.

Short rates jumping up immediately help NII on a not to get into the weeds but on a value basis just in terms of the present value of future NII long rates going up is better.

But short rates up we're going to see that impact the yield that we get on our loans and the follow through on our deposits, well as you've heard me say I think it will be higher than past periods will still lag what we're able to do on loans.

It will be beneficial.

And then just if you thought the rate increases weren't going to happen for longer materially longer not just pushing out three months are there additional costs that you would cut and how meaningful could those be?

Well, look, you heard my comments that we're quite sensitive to revenue expense relationships and where our efficiency ratio resides today and all I will tell you is that we're going to turn up the heat on expenses starting last week.

And we will see where we get to.

At this point we're not changing guidance or throwing numbers up there.

I just want to put out the point that we're not blind to it and we're going to focus on it.

Okay.

Then just lastly if we look at call it the people cost I think you call it personnel they were up about 7%.

We're seeing similar increases at some of your high-quality peers like USB and Wells and everyone's pointing to these infrastructure risk management increases, you've been talking about it for a while.

But has something changed in the last six, nine months that's causing everybody to ratchet these up or is it just the progression of what we've seen in the last couple of years?

I think it's a continuation of the same as people work to comply with new regulations.

I think there's opportunity through time as I've talked about to automate some of that work set.

But what we are seeing generally while we're seeing decreased headcount or change in headcount in our retail facing businesses we're seeing more headcount in our staff services area and importantly more expensive headcount.

The average cost of some of the people that are coming in is higher than where we are reducing people.

Okay, thank you.

(Operator Instructions) Betsy Graseck, Morgan Stanley.

Hi, thanks, good morning.

A couple of questions just on the expense theme here.

So in the first quarter you mentioned 30% more than 30% of the $400 million outlined in efficiency improvements were reached in first quarter.

Do I take your comments to mean you reinvested all of that into the IT investment program or does any of that drop to the bottom line?

That's a good question, Betsy.

This is Rob.

Generally speaking you're conceptually right.

As we've said many times on the call the continuous improvement program and the expenses that we have outlined are more helpful to us internally in terms of going after those than being able for you to be able to net two numbers.

What I would say the relative to expenses we're off to a good start in terms of capturing those expense saves.

We're generally on plan in terms of our investment rate.

However, I do want to emphasize that we'll manage to the full-year guidance in terms of expenses being stable and you could see some quarterly fluctuations.

So annualizing any quarter might not work because it's just some of the timing differences of the moving parts.

Okay and then I just wanted to understand a little bit, Bill you mentioned how if rate hikes are pushed out from June until let's say December at you're likely to be ratcheting up the management of expenses.

So do I take that to mean that at least expenses are stable and could go down if the longer rate hike gets pushed out and how do you think about how much expense to manage, is it a function of ROE (multiple speakers) do want to hold?

I don't have an answer for that because it's too early into the process.

I'm simply go with the stable forecast for now.

We're simply pointing out that we're going to turn up the heat on where we're spending money and how we're spending money given the revenue environment and if and when we have an update we'll give it to you.

Okay.

All right, got it.

Thanks.

Erika Najarian, Bank of America.

Hi, good morning.

Bill I just wanted to get your thoughts on something that's top of mind for all your investors and it's sort of the worry that rates will normalize after credit quality normalizes.

Clearly the whole market we don't know when rates will normalize but given what you're seeing in your portfolio today your losses were 20 basis points this quarter, how far are we in terms of normalization of charge-offs for PNC granted that the provision is probably going to see some volatility quarter to quarter?

Well, look.

That's the right worry to have.

I've been talking about that worry for a year and a half.

Credit continues to be phenomenally good.

We're at 20 basis points charge-offs.

We talk about a 40 or 50 basis point number through the cycle.

So at some point unless we're just in a golden period of great credit forever which I never believe it's going to go up.

We're seeing no evidence of that today, our credit quality you heard us say actually modestly improved in terms of some of the statistics of upgrades, downgrades charge-offs, net delinquencies and other things quarter to quarter.

But that is a concern, if credit turns for the banking industry before we have rate normalization you are going obviously you are going to see depressed earnings.

I guess just to follow up on that question, you're not seeing any evidence of this now another CEO said it that it might be a multiyear process until the industry sees normal or getting back to average, do you agree with that?

Yes, I think that's probably right.

By the way I think in some ways they will be linked simply because certain parts of the credit book will be impacted by higher rates directly.

So there's probably some correlation of those things moving at the same time.

And just one if I could just sneak one more how should we agreed into your LCR being over 100% relative to the 80% 2015 minimum?

I know that this ratio is quite volatile but is there an opportunity to maybe add duration to defend the NIM or are you happy to just stay sure and keep this excess?

They are related but somewhat independent questions so we could add duration irrespective of just through swaps it doesn't impact what we do on LCR.

LCR compliance at 100% as with all the new regulations even though there's phase ins everybody wants it today so we pushed ahead and got there.

At the margin you saw our securities both go up quarter to quarter.

A lot of that was simply reinvesting deposit growth that we had but even inside of that securities growth we were probably into longer duration securities than we historically had been.

So look at the margin we'll do some of that but I think our core asset sensitivity position will remain.

We think it's the right position.

If rates are delayed at quarter or six months you don't take a massive shift in the way we position the balance sheet for a six-month delay.

Got it.

Thank you.

Vivek Juneja, JPMorgan.

Bill, let me follow up, Bill Demchak let me follow up to that answer you just gave.

The growth in securities, the longer duration securities, was that in the last couple of quarters you did more synthetics, you used rather than cash.

Was this just a shift to cash and rather than using the synthetics or did you actually do more?

A big chunk of that growth was actually just TBAs coming out of the balance sheet that we're on in the fourth quarter in terms of notional you see, so it hasn't necessarily been a direct shift there.

We did some balance, some repositioning of the securities from low coupon mortgages into some higher coupon stuff after the rally because it got very cheap.

But there's no big change in what we're doing inside of the securities book.

I recognize the confusion that changing on balance sheet balances cause because sometimes we'll use interest rate swap, sometimes we'll use TBAs and sometimes we'll use securities.

So I guess my simple message is that we remain with our core short position in asset sensitivity and at the margin we take advantage of opportunities in the market by yield curve, by asset type and by as you've seen pretty volatile interest rates intraquarter.

All right.

Thanks.

John McDonald, Bernstein.

Yes, hi, good morning.

Bill, I was wondering if in this environment is your appetite for portfolio purchases or even Company acquisitions increase with the persistence of the low rate environment and what's your take on the supply of those kind of assets?

I suppose there's lots of folks looking but is there any kind of assets or deals that you might be able to look at and are you more prone to looking now as this goes on?

Well, a lot of headlines recently on a really big seller of assets.

I might have read something about that.

Yes, you know, the struggle we have with that is buying loans is the same as buying a security.

I'm not investing in a relationship, I'm not getting cross-sell, so it's sort of a positioning trade.

And I guess at the margin to the extent we got a better return on an individual asset that was alone versus a security we would do it.

With that particular seller what we have found in the businesses where we overlap with them is they are further out on the risk curve than we typically operate.

Having said that at the margin if we saw assets and relationships out of those businesses that made sense for us we look at them.

And we are looking through all the materials that are showing up from the different dealers on portfolios that are for sale.

But it's a tough putt for us.

There is not an entire business that we're not in that we want to be in and as I said most of those assets particularly on the commercial side will struggle inside of a regulated bank space at least in my view.

And I think you're going to see a lot of that go into private equity and ultimately into CLOs.

Okay.

And then just more broadly beyond that particular seller just your appetite and whether it changes much as low rates persist.

Again I think they are independent of each other.

If we see let me answer it a different way.

If there's an asset for sale that we can get a good economic return on either directly because it's very cheap or because it comes with a relationship that we can cross-sell then we will do that independent of where interest rates are.

But they are not substitutes.

And to simply pile down on credit where I'm not getting a return to cover a hole made by something I can't control which is interest rates it's a lousy long-term strategy.

It putties over near-term problems but creates longer-term problems.

Got it.

Okay, great.

Last quick thing on just also on low rates, is there any more room on interest expense, anything you can do whether it's deposits or wholesale funding or are you really tapped out on lowering your interest expense potentially?

We're probably tapped out.

Interestingly you see it will have jumped over the last couple of quarters on rate paid for deposits.

One of the things that we have been focused on is testing in effect the elasticity of deposit pricing and our ability to gather deposits by having leading rates.

Frankly it surprised us a little bit to the upside.

Part of it was we executed well but our deposit growth on the consumer side in fact almost all of it was on the consumer side was --

In part due to some of this experimentation --

Well, it was quite phenomenal and it was in part due to in some places paying up for deposits which we when they finally raise rates and when QE slows and the mix shift and deposit flows in the sector we want to be ready for it.

We're playing around with that at the margin right now.

Got it.

Thanks.

Scott Siefers, Sandler O'Neill and Partners.

Good morning guys.

Maybe if I could sneak one more rate question in here.

You had made the comment in your prepped remarks about the lower for longer risk having ramifications not just for this year but for out years as well.

Is your concern more not just about say a three- or six-month delay and when the Fed moves but about how much they eventually move?

Is that the change, which is the bigger, the when or how much in your mind?

In terms of long-term upside it's the how much.

When they move helps income immediately but I think there are substantial real substantial upside in our (technical difficulty) if and when rates would actually normalize whatever that means.

We'll still benefit even if they don't go nearly as much.

We'll benefit a lot.

But I worry as it drags out I worry about the strength of the dollar, the impact we're seeing on manufacturing, the impact that that is going to flow through on to jobs, the fact that cheaper imports will keep inflation down further.

So I think all of this has given the Fed the ability to drag this out and go slower and that's all my comments are meant to reflect.

We just don't see by the way I don't know that I ever saw a very quick six months from now everything go back to a normalized rate environment.

That would be great but we never planned for that.

Yes, I understand and I appreciate that.

Then maybe if I can switch over switch gears to maybe fees for a second, Bill either for you or for Rob fees, have been a really good offset for you in this sort of pressured NII environment and I think last quarter you had given some top-level thoughts for the full-year and I think most of your individual components you were looking for like mid- to high-single-digit increases in fees in those categories in 2015.

Has there been any change to the growth you think you can generate just in light of anything you've seen through the first three months of the year?

Hey, Scott, this is Rob.

No, no change.

We're still optimistic in terms of our ability to grow those fees.

Obviously across all the categories for that part, so no change there and that's part of our second-quarter guidance and our full-year guidance, we expect growth.

Okay, perfect.

I think that is all I have got.

Bill Carcache, Nomura Securities.

Thanks, good morning guys.

Bill, I had a follow-up question on the comments you just made about your efforts to be well-positioned post-QE.

With QE now over we've started to see loan growth outpace deposit growth across the banking system as a whole but it's interesting that that doesn't appear to be the case for the big banks where deposit growth is still outpacing loan growth according to the H8 data.

And I guess as far as PNC goes specifically over the last couple of years we've seen some quarters where your loan growth has outpaced your deposit growth and others where it's been the reverse.

Can you give us a little bit of just speak to what's been driving these trends and I guess what you guys expect going forward?

Yes, I won't speak to the industry flows.

I guess there has been some confusion on trying to figure out where in fact that deposit growth from the Fed data is coming from or where it's going to.

But as it relates to PNC we were never massive beneficiaries of the flows from corporates, which I think was a lot of what you saw into the large banks.

Our recent growth has been on the consumer side and we're focused on the consumer side because those are the LCR friendly deposits.

We paid for them so the good news is that in fact there is price elasticity in being able to drive volume.

The bad news is they cost more.

I don't know that quarter to quarter I would try to read into we have bigger flows one quarter than the next.

We see that at times with operational deposits on the corporate side coming in heavier than we otherwise expected.

None of those help us with LCR.

We have plenty of balance sheet room for them, at the margin we make money on them.

And they are part of a relationship.

Got it, thank you.

Separately, Bill can you discuss how you evaluate and think about the contribution of BlackRock to your overall results?

I guess some investors take more of an enterprise-wide view and others try to evaluate core PNC separately by stripping out the contribution from BlackRock which some suggest flatter year consolidated results.

I was just hoping that you could discuss how you think about it.

BlackRock obviously has been a great addition to the PNC family going back many years and is an important part of our earnings stream today, they continue to do very well.

Having said that we are cognizant that at this point in our relationship with them they are a strategic investment but not a core part of our Company.

Look, we strip them out as well and look at some of our metrics ex-BlackRock.

Some of them are not flattering and we're focused on that.

But in terms of the way we think of their earnings they are a diversified fee generating cash flow generating entity to our holding Company that's a great part of our franchise.

That's great.

Thank you.

Ken Usdin, Jefferies.

Thanks, guys.

Hey, Bill just on your points about on credit expansion this quarter you had point balances below the averages and some of it's the nonstrategic runoff that Rob alluded to earlier but I'm just wondering in that context of being conscious about both rate risk and credit risk is any of this a conscious effort to either pull back from certain areas and what do you see about at least the competition/term structure in the environment today?

Well, probably three different things that I'll highlight.

Rob can jump in here.

At the margin we're starting to make choices on LCR.

So there are certain places, municipal finance, financing insurance companies so it's their financial sector get hit by LCR, at the margin we are lowering balances there.

We don't have an ability to reprice.

In fact we haven't seen much repricing occur in the market at all as it relates to LCR prior capital standards which is an interesting comment.

So at the margin that has impacted it.

We've seen inside of the retail space particularly in an auto decline year on year as we have held to our standards and we have seen others extend maturities and drop FICO, I saw a stat somewhere on the percentage of new car lending that is now subprime which was a very high percentage, 40%.

And we are not -- we do not play in that space.

So we're losing share in auto purposely.

And then at the margin again in C&IB competition is tough, particularly for the plain vanilla product.

We're still winning clients and growing volumes but not at the pace we did when frankly many of our competitors were struggling.

Yes, the only thing I would add to that Ken is the risk return has gotten tighter.

And the best example is the auto where we are deliberately pulling back from some of the risk.

Understood.

Hey, Rob, quick follow-up for you.

Just you mentioned that the expected purchase accounting decline this year is still expected to be $225 million.

I think the first quarter was probably a little bit ahead of maybe a trajectory.

But would you agree with that and would you expect there to be a pretty decent follow-up from here?

Yes, I would agree with that.

And I'd still count on $225 million down for the year.

It's really the recoveries as you know that are difficult to schedule in but they did occur in the first quarter.

That's a good thing.

But in some respects they're recoveries that would have otherwise happened later in the year.

Understood.

Okay, thank you guys.

Matt Burnell, Wells Fargo Securities.

Good morning.

Just a follow-up on your energy-related exposures I realize that you did provision a little bit for that this quarter not particularly meaningful in the context of the overall portfolio but I'm curious if you have been giving any thought to the potential impact on lower oil prices in the consumer portfolio or is the credit quality there overall just so good at this point that you're not really concerned about that?

It's a good question.

And our economist is on record seeing lower oil prices as being a net positive for our consumers.

But we haven't which is a good thing --

For the economy the consumers are a slamdunk.

And for the economy.

That's right.

So we haven't done anything in terms of reserves related to that but we welcome it.

Okay.

Then just going back to the idea of somewhat slower potentially revenue growth and stable expenses, you're talking about those in terms of guidance in terms of dollar figures.

I don't believe you have an outstanding efficiency ratio target but does this make it harder to generate operating leverage gains in 2015 if your outlook for lower for longer on rates continues?

Yes.

That's the whole -- I mean that's a mathematical truism, but that's the whole reason we've got to refocus on expenses and turn up the heat a little bit on that.

Because I think we hope we're wrong on rates and they move middle of the year but we don't expect it and given that definitionally it hurts us we're going to try to react at the margin on the expense line.

We'll continue to focus on fee income and cross-sell in controlling the things we can control.

By the way we're not -- this is an industry issue.

We kind of highlight it and lay it out for you guys, but everybody is facing the same issue.

Your reaction to this can take one of two directions.

Our choice is to not change our core balance sheet position and ride this out.

That's a PNC choice, another choice could be to invest into it through portfolio purchases, through levering the balance sheet and securities and you'd putty over it for a period of time.

We're just not doing that.

So everybody is facing this and has the same decision to make and people will choose differently.

And that's been our position for some time, not just this quarter.

Thanks very much.

Mike Mayo, CLSA.

Hi.

You said revenues were under more pressure.

Is the sole reason due to lower rates for longer or are there some other contributing factors?

You mentioned more competition in commercial but that's not new.

For example maybe service charges on deposits are going to be worse than you thought before.

The comment is entirely related to our previous guidance on NII where we had referenced our economist forecast that the Fed would start moving towards the middle of the year.

Since we have backed off of that forecast and are now saying three months later there is a mathematical impact on what our NII might do assuming we hold everything else constant.

And that's what we were talking about.

So the more part of that pressure is the rate push out.

Okay.

Just back on your comment on fees we have seen nothing but good news in terms of continued progress on what we're doing on the fee side across retail, wealth and C&IB cross-sell.

So that continues and it has a lot of our attention and we can control that, can't control the rates.

And I guess you can't really control the purchase accounting accretion.

So if I heard you correctly you're guiding for negative operating leverage first and second and for the year and is that strictly due to purchase accounting accretion or is that the tougher environment for longer?

I'm trying to do the numbers in my head.

Basically what we're saying is if you took out accretion accounting in its entirety we had previously talked about hopefully having positive growth in core.

We fight for it.

Now we're saying that's tough.

We're going to have expenses flat, we're going to grow fees, provision will be what it will be.

I don't know (multiple speakers)

Well I think -- let me add.

Maybe I can just say it differently, Mike.

So at the beginning of the year we said hey, revenues would be under pressure as we thought the combined revenue growth of our businesses including our fees and some growth in core NII could offset partially the $225 million purchase accounting decline.

So everything stays the same.

Take out the rate movement it's under some more pressure.

Just one more question, just how about a big picture perspective, Bill, in your CEO you talk about PNC as a Main Street Bank and it seems like Wall Street is beating Main Street right now.

And if you stick to your core it sounds like what you are saying in the CEO letter Main Street banks will win in a normalized environment.

Is that a fair characterization?

Well, I think we mean a lot of things when we talk about ourselves as a Main Street Bank and I'm glad you bring the question up.

To us a Main Street Bank means going to market locally, living and working in the communities with the customers we serve, having extensive relationships with customers as opposed to having transactions with customers.

So it's not only the businesses we choose to be in but how we choose to execute those businesses that I think differentiates who we are from any number of our competitors, particularly the large competitors in New York and elsewhere where they're more transaction focused.

At the end of the day I think a Main Street traditional bank model offers good return opportunities independent of where rates are.

I think it's a healthy part of our economy.

I think it is a needed product and service for consumers in small business and middle-market alike and I think we do it well.

All right, thank you.

Kevin Barker, Compass Point.

I noticed the gain on sale margin in the mortgage bank ticked up to 409 bps from 396 bps.

And we're seeing higher margins across all mortgage banks this quarter as the primary secondary spread has been wider.

But you previously guided to about a 3% margin over the long term.

Was there anything that caused the elevated margin outside of wider spreads?

Yes, Kevin, this is Rob.

There is.

We guided to 300, we still guide to 300.

The jump was some fair value marks the we got in the quarter that results in 100 basis points.

But I would just point you in terms of dollar size it's pretty small.

So that's a $15 million number there that changes that from 300 to 400.

Okay.

And then also you purchased and $8 billion servicing portfolio, this is one of the largest servicing acquisitions you've made in recent history.

Do you see this an opportunity to expand the mortgage bank and increase your amount of fee income given the pressure you're seeing on net interest income?

Or do you even see it as attractive now with purchase activities starting to pick back up?

We have been fairly active purchasers of very clean recent vintage servicing.

We've seen good value in that.

We're good at it and we'll continue that.

Part of it is it provides scale into our servicing operation to help lower the average cost per loan serviced.

Part of it is as you know there's a dislocation in the servicing market where certain people because of capital constraints related to Basel III are sellers and we can be a buyer.

Do you see an opportunity to expand your mortgage bank or potentially do acquisitions there?

Our market strategy, so if you go back through time and looked at our balances and our servicing balances they have been largely flat independent of our purchases because our origination volume as we have changed from a strategy that National City pursued to more of a client-centric strategy our origination volumes have declined.

But our servicing balances have stayed constant as we have augmented our origination with purchases.

Our strategy in mortgage is largely around being an extension of a retail bank.

It has to be part of this Company.

We have to be good at it.

We have to cross-sell it and integrate it into our retail offering with all of our customers.

We don't aspire to be a pure transaction focused mortgage only, generate the fee business.

And because of that you will hear us say through time that mortgage is very important to us.

Yet it's never going to be a major contributor to the bottom line of our income statement.

Eric Wasserstrom, Guggenheim.

Thanks very much.

Rob, I just want to understand a few of the puts and takes with respect to provision outlook.

First I notice that the commercial recoveries who have been running typically in sort of the $70 million to $80 million level for the past couple of quarters dipped down to the $45 million-ish level.

Is that an inflection point or was that just a seasonal or some other kind of one-quarter trend?

It's a good question.

There's always some movement in between quarters but in theory through time recovery should go down as we get further into the cycle.

So the jump quarter to quarter part of that is just quarterly timing but the general trend down I think is real.

Okay.

Then in terms of where the release which elements of the reserve constituted the release, I'm calculating that about $11 million of it came out of the PCI portfolio.

Is that correct or am I getting the math wrong?

What do you mean on PCI?

On the purchase credit.

No, there's been some release there so I don't have an exact number for you but that's part of it.

That's correct.

Okay.

So I guess this is really the essence of my question which is if that's the case it looks like the coverage on the non-purchased portfolio, the nonmarket portfolio is getting close to about 1%.

And so if recoveries are also declining does that suggest that perhaps the provision in all likelihood needs to be closer to the top end of the range?

Well, I think your theory is correct in terms of how that works.

In terms of our guidance it's $50 million to $100 million in the second quarter.

Where I pause is at these low levels and Bill sort of alluded to it an individual handful of transactions can swing that in any given quarter.

Your math is right and that's why we for nine quarters in a row have guided to higher provision and for nine quarters and over we've been wrong.

But we're looking at the same stuff you're looking at and that kind of makes sense to us and then it doesn't happen so 50 to 100.

Okay, great.

Thanks very much.

John Pancari, Evercore.

Good morning.

Back to the competitive discussion I think that Ken had brought up around commercial competition I believe you have indicated in the past that you're staying off the fairway to agree in commercial lending around mid-market C&I and CRE given the inability to get compelling enough returns.

Is this still the case and are you continuing to emphasize the specialty businesses in terms of driving growth in your commercial books?

To be clear we emphasize all of it and we have been adding customers and balances in the more commodity-like product.

You do need more cross-sell for that to make economic sense and the competition there almost by definition is more aggressive than what we see in the specialty areas because there's less competitors in the specialty areas.

But we focus on it.

We haven't given up on it.

We continue to grow clients.

We actually do quite well with it.

What causes us to stand out in loan growth, though, versus our peers is the specialty businesses.

Okay.

And then given that and given also what you indicated in auto right now given the competition for your loan growth expectation in the out quarters I get what you say about next quarter but in the out quarters can you give us a little bit of color on how you're thinking about growth?

Is it still something you would call or characterize as modest?

Yes I think we (multiple speakers)

Yes, I think we've announced --

You will see higher growth in C&I and a struggle inside of the retail space to grow.

Part of it we've seen growth some of the growth recently is coming in our corporate finance book on the back of what as you know is a very active M&A market and that seems to continue.

So that surprises to the upside.

We have a little growth and utilization.

We continue to grow asset-based lending, leasing, real estate balances.

So we feel good about that.

We highlight we're saying it is going to be more difficult, we've been an outlier to the upside and growth, we'll probably trend more towards the mean is all we're saying.

But we're still positive on our ability to grow customers and grow balances.

Okay.

And then lastly I know you indicated the concerns around how much in rate hikes we could actually see in 2015.

Have you actually officially adopted a new internal expectation for rate hikes and if so what is that?

So our economist publishes his forecasts which we use for some things and for other things I disregard.

And we make public.

But his forecasts are public and you ought to assume that our comments today are on the back of his forecasts.

Got it, got it.

Okay, good.

Thank you.

Thank you.

That completes the Q&A portion for this call.

We want to thank all of you for participating this morning and have a great day.

With that, operator, this concludes the call.

Thanks everybody.

Bye-bye.

Ladies and gentlemen, this concludes the conference call for today.

Have a great rest of the day everyone.

You may disconnect your lines.