PNC Financial Services Group Inc (PNC) 2015 Q3 法說會逐字稿

Good Morning.

My name is Edison, and I will be your conference operator today.

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

(Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the call over to the 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 today's call are PNC's Chairman, President and Chief Executive Officer, Bill Demchak; and Rob Riley, Executive Vice President and Chief Financial Officer.

Today's presentations contain forward-looking information.

Our forward-looking statements regarding PNC 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 anticipating 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, 10-Q and various other SEC filings and investor materials.

These are all available on our corporate website, PNC.com, under investor relations.

These statements speak only as of October 14, 2015, and PNC undertakes no obligation to update them.

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

Thanks, Bill, and good morning, everybody.

I just have a few brief comments this morning before I turn it over to Rob.

You will have seen today that we reported net income of $1.1 billion, or $1.90 per diluted common share, for the third quarter, which compares to $1 billion, or $1.88 per diluted common share, for the second quarter of 2015 and $1 billion, or $1.79 for diluted common share, for the third quarter of 2014.

Importantly, the $1.90 this quarter included $65 million of event tax reserve release, which added about $0.12 to our reported results.

Beyond this line item, it was kind of just an okay quarter for us.

I was pleased to see both quarter and reported of NII off this quarter, but was disappointed at the Fed's decision to leave rates unchanged at the end of September.

This delay and the subsequent dobby statements from various Fed governors will at best delay our ability to grow NII materially in the future.

Importantly, we were able to keep core NIM fairly stable this quarter as loan and security yields held constant.

You'll see that we gave up a couple of basis points on continued liquidity build, but this is largely behind us at this point.

Loan growth was flat, which is reflective of the competitive market but also the fact that we exited over $1 billion of non-LCR-friendly assets during the quarter.

And this runoff was largely offset by continued growth in our specialty segments.

You will also notice that our investment securities increased by $6.7 billion this quarter, largely funded by deposit growth of $5.3 billion.

It's worth pointing out that despite this increase, our duration of equity actually became even more negative given the lower-rate environment.

You will have seen that fee income was softer than we expected this quarter, partly due to the markets and a strong second-quarter comparison.

However, they are up 3% year to date versus the same period of 2014, and we believe that we will be able to continue to grow fee income over time through the ongoing execution of our strategic priorities.

Importantly, expenses were down slightly late quarter, even with the extra day of business.

And I would be remiss if I didn't say how pleased I am to see our employees across the organization respond so well to our efficiency imperative.

We continue to maintain strong capital and liquidity positions and return capital to shareholders through repurchases of 6.2 million common shares during the third quarter.

This was our 10th consecutive quarter of $1 billion or more net income, and I'm proud that we have been able to deliver such consistent performance through time with virtually no wind at our backs.

Now, I know at this point in the year, you are all looking towards 2016.

And while we haven't completed our budget process, I can tell you broadly that we expect our strategic priorities will continue to drive growth and fee income.

And as I mentioned before, net interest income growth is going to be challenging until rates begin to move up.

Because of that, we continue to focus aggressively on managing expenses.

We expect credit costs will gradually return to normal levels.

With all of this, despite the challenges that we and the rest of the industry continue to face in the current environment, I do like how PNC is positioned.

I continue to believe we have the right model of capabilities, culture and people to continue to manage what is in our power to control and to deliver for the customer, shareholders and communities that we serve.

With that, I will turn it over to Rob for a closer look at our third-quarter results, and then we will take your questions.

Rob?

Thanks, Bill, and good morning, everyone.

Overall, our third-quarter results played out largely consistent with our expectations.

Third-quarter net income was $1.1 billion, or $1.90 per diluted common share, with $0.13 of that related to taxes or of activity.

These results also were driven by core growth in net interest income, continued increases in deposits and well-controlled expenses.

Importantly during the quarter, we maintained strong capital levels while delivering significant shareholder capital return.

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

As you can see, total access increased by $5.9 billion, or 2% compared to the second quarter.

Total loans were down slightly linked quarters for reasons I will highlight.

However, compared to the same quarter a year ago, total loans increased approximately $5 billion, or 3%, primarily due to growth in commercial loans and, in particular, large corporate and commercial real estate lending.

During the third quarter, commercial lending was up approximately $100 million as new production -- again, primarily in commercial real estate -- was partially offset by the impact of ongoing capital and liquidity management activities.

Consumer lending decreased approximately $650 million, and about two-thirds of that was due to the runoff in the non-strategic consumer loan portfolio.

Offsetting this decline somewhat in the quarter was growth in credit card and indirect auto loans.

Investment securities were up $2.6 billion, or 4% linked quarter.

On a spot basis, investment securities increased $6.7 billion, or 11% compared to June 30, as we purchased securities near quarter end.

These were primarily agency residential mortgage-backed and U.S. Treasury securities.

Substantially funded by the deposit growth we experienced in the quarter.

Our interest-earning deposits primarily with the Federal Reserve were $37.3 billion, an increase of $15.2 billion, or 69% compared to the same time year ago, in part to comply with the liquidity covered standards, but also reflecting strong deposit growth.

As of September 30, our estimated short-term liquidity coverage ratio exceeded 100% for both the bank and the bank holding company under the month-end calculation methodology.

On the liability side, total deposits increased by $5.6 billion, or 2% when compared to the second quarter.

During the third quarter, we saw continued growth in deposits from consumers.

However, most of the increase was driven by growth in commercial balances.

Compared to the third quarter of last year, total deposits increased by $19.6 billion, or 9%.

Turning to capital, as of September 30, 2015, our pro forma Basel III common equity tier 1 capital ratio, fully phased in and using the standardized approach, was estimated to be 10.1%, up 10 basis points linked quarter primarily due to retained earnings.

During the third quarter, we repurchased 6.2 million common shares for approximately $600 million.

We are on track to meet our repurchase authorization of up to $2.875 billion for the five-quarter period which began April 1, 2015.

Period-end common shares outstanding were 510 million, down 18 million compared to the same time a year ago.

Finally, our tangible book value reached $63.37 per common share as of September 30, a 7% increase compared to the same period a year ago.

Turning to our income statement on slide 5 -- and, again, net income was $1.1 billion and our return on average assets was 1.19%.

Let me highlight a few key components in our third-quarter income statement.

Core net interest income increased by $31 million, driven by increased securities balances and an additional day in the quarter, partially offset by lower purchase accounting accretion.

As a result, total net interest income increased $10 million compared to the second quarter.

Core net interest margin was essentially flat linked quarter at 2.57%.

Total NIM was 2.67% in the third quarter, a decline of 6 basis points for the second quarter primarily due to lower purchase accounting.

Regarding purchase accounting accretion, our estimate for the fourth quarter is approximately $75 million of net interest income.

And if that plays out, we expect full-year PAA to be down approximately $180 million to $200 million compared to 2014.

Total non-interest income decreased by $101 million, or 6% compared to the second quarter, primarily due to higher second-quarter gains on asset sales, including visa shares and loans and securities.

Total fee income declined $41 million, or 3%, as growth in most categories was more than offset by lower fee revenue in asset management and residential mortgage.

Asset management fees decreased by $40 million, or 10% on a linked quarter basis, following an elevated second quarter due to a $30 million trust settlement.

In addition, third-quarter equity market declines contributed to the overall decrease.

As a result, assets under administration were $256 billion at September 30 -- as of September 30, down $3 billion compared to the same period a year ago.

However, net client flows were up both linked quarter and compared to the same quarter a year ago.

Reflecting our strategy of growing share of wallet in retail, consumer services fees were up $7 million, or 2% linked quarter, with all categories posting quarterly increases.

Service charges on deposits grew by $16 million, or 10% linked quarter, due in part to seasonally higher customer activity.

Corporate services fees increased by $15 million, or 4% linked quarter, primarily due to elevated merger and acquisition advisory fees, higher corporate finance fees and increased treasury management activities.

Residential mortgage non-interest income declined by $39 million, or 24% linked quarter, as a result of lower net hedging gains on mortgage servicing rights at lower fair value marks.

However, originations compared to the same quarter a year ago were up 5%.

Other non-interest income decreased $43 million primarily related to lower gains on the sale of visa class V common shares in the third quarter compared to the second quarter.

Non-interest expense declined $14 million, or 1% linked quarter, and was down $5 million compared to the same quarter a year ago.

Both periods reflected our continued focus on expense management.

On a linked-quarter basis, the decrease was primarily the result of lower expenses related to third-party services.

As you know, the goal of our 2015 continuous improvement program is to reduce costs to fund the investments we are making primarily in technology infrastructure and retail transformation.

During the second quarter, we increased our annual fee IP target to $500 million.

We are now nine months into the year, and we've completed actions related to capturing 75% of our annual goal.

And as a result, we remain confident we will achieve our full-year objectives.

Provision in the third quarter was $81 million for reasons I will review when we discuss credit.

Finally, our third-quarter effective tax rate was 20%, down from 28.2% in the second quarter.

Our third-quarter tax expense reflected tax benefits in addition to reserves.

The largest components of which were a benefit of $75 million attributable to effectively settling acquired entity tax contingencies offset by additions to reserves at $10 million for various tax maps.

Looking ahead, we expect our fourth-quarter effective tax rate to be approximately 26%.

Turning to slide 6, overall credit quality remained relatively stable in the third quarter compared to the second quarter.

Non-performing loans were down $75 million, or 3% compared to the second quarter, driven by improvements in the consumer lending portfolio.

Total PATH 2 loans increased by $22 million, or 1% linked quarter, as we saw small upticks in some categories.

Net charge-offs of $96 million increased by $29 million primarily due to elevated recoveries we experienced in the second quarter.

Gross charge-offs levels remain consistent with prior quarters.

In the third quarter, the net charge-off ratio was 19 basis points of average loans, up from 13 basis points in the prior quarter.

Our provision of $81 million was within the expectations we provided for the quarter and reflect higher reserve requirements including oil and gas.

Looking ahead, we expect our provision for the fourth quarter to remain in the $50 million to $100 million range.

The allowance for loan and lease losses to total loans is 1.58% as of September 30.

This compares to 1.59% linked quarter and 1.7% at the same time a year ago.

As disclosed in our second-quarter 10-Q filing, in anticipation of the end of life of our purchasing paired pool consumer loans, we are evaluating our derecognition policies.

These loans now total less than $4 billion with reserves of approximately $750 million at September 30.

In the fourth quarter, we expect to remove from our pool loans that have been paid off, sold, foreclosed or have nominal value.

We estimate this policy change will reduce fourth-quarter 2015 loans -- total loan balances and associated allowance for loan losses each by approximately $475 million.

As all loans to be removed from these loan pools have been fully reserved for, there will be no impact to EPS, the net carrying value of the pools or accretion accounting, nor will this change results in an additional provision for credit losses.

Lastly, a quick update on our oil and gas exposure.

We have a total of $2.6 billion in outstandings, which was down modestly quarter over quarter.

This represents approximately 2% of our total commercial loan book.

Within the oil services portfolio, which totaled approximately $900 million of the $2.6 billion, approximately $225 million of that is not asset based or investment grade, and this is the portion of the portfolio that we are most concerned about.

We did experience some performance deterioration in the quarter and as a result incurred some elevated charge-offs.

During the third quarter, we increased our reserves to reflect the incremental impact of lower oil and gas prices.

And going forward, we continued to actively monitor the portfolio for additional changes.

In summary, DNC posted third-quarter earnings consistent with our expectations.

We continue to believe the domestic economy will expand at a steady pace this year, driven by strong consumer confidence and improvements in the US economy and job market.

Obviously, the Federal Reserve did not raise short-term interest rates in September as we expected.

Our plans now assume an increase in December.

However, we acknowledge that a rate rise in 2015 is a close call.

Given this background, we expect full-year revenues in 2015 to continue to be under pressure, and we expect total expenses to be down approximately 1% compared to full-year 2014.

Looking ahead in the fourth quarter, and when compared to third-quarter reported results, we expect modest loan growth -- we expect net interest income to remain stable.

We expect fee income to be stable as we anticipate continued growth in business activity in the fourth quarter to be somewhat offset by the elevated merger and acquisition advisory fees we reported in the third quarter.

We expect expenses to be stable, and we expect provision to be between $50 million and $100 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) Betsy Graseck, Morgan Stanley.

I just wanted to follow up on your comments around expecting the Fed is going to raise rates potentially in December.

And then maybe you could talk about what you've got baked in for next year's outlook and give us an indication as to what the plans are in the event that they don't come through as you're currently budgeting for.

Sure, Betsy.

This is Rob.

And I should say this straight up for the call, we're going to refrain from 2016 guidance, but I can give you a general sense.

As I mentioned in the prepared comments, we do have built into our plans a rate rise in December.

Admittedly, that's a close call.

The amount -- the revenue impact of what happens in 2015 or doesn't happen in 2015 is pretty insubstantial.

In 2016, it does become substantial, as you know.

And if in fact rates don't rise, it will just make growing revenues that much tougher in 2016 than it would be if rates did in fact rise.

I guess I'm just wondering because I know you do have some investments been going on, and in particular in some of the IT that's coming to fruition in the middle of next year.

I'm just wondering how you think about dropping any of that to the bottom line versus what you've done this year.

I know you spent most of your cost saves reinvesting in the business.

Is that how you are thinking about next year as well?

Or is there any room for dropping some of the expense saves that you've been generating along the way to the bottom line more than you have been?

Yes, well, as you know, just in terms of the expense discussion, expense management has been a focus point for us, and we been doing pretty well.

Our philosophy has been these last couple of years to, in effect, take the expense savings that we are generating to fund the investments that we are making in technology and a retail bank transformation.

We expect those investments to continue into 2016.

We will have a continuous improvement program in 2016.

We're not there yet in terms of the numbers because we haven't done our budgeting, but the philosophy will be the same.

Okay.

The notion of would we drop -- if what you're asking is would we forgo tech spend and slow down our investments because of the near-term environment, the answer is no.

At the margin, we stretch things out a little bit in certain places.

But to make a change in strategic direction technology as a function of near-term rate outlook doesn't make a whole lot of sense to me.

Yes, I get that.

I'm just -- I thought that some of the tech spend will come to fruition over the next 12 to 18 months.

Is that right?

That you've got the --

In the sense that it will be behind us?

In the sense that some of the big projects that have you got will be completed.

Yes, but what happens on the expense side -- so we will -- as we are completing the work, the capital expenditure is turning into ongoing expense through depreciation.

So even though we might be done with the actual work, you're not going to see a drop in our tech spend line because it's going to roll through time on the depreciation line.

Okay.

I got it.

What you will see is a continuation of occupancy down, tech up and people down.

The compensation costs as we kind of go through that transformation.

Yes, all right.

That's great.

Thanks.

Scott Siefers, Sandler O'Neill and Partners.

Bill, was hoping you could spend a second talking -- or expanding upon your comments on the rate situation.

If indeed we're going to be lower for potentially a lot longer, does that change any of the way you've been thinking about managing the balance sheet, for example?

Capital -- it could be less of an issue if rates are going to stay low.

So does that change your thoughts on the securities portfolio?

Could you extend out with swaps, stuff like that?

Yes, there's no immediate thought to change anything.

Obviously if rates were to stay at these levels forever, then we could invest the excess balances both in level one and some capacity we have in level 2 securities.

We don't think that's going to be the case.

We do think it is going to be delayed.

With respect to the issue in a rising rate environment, the capital hit we take in ALCI, we stress for that anyway inside of the CCAR exam and have plenty of capital to absorb that.

So that doesn't really drive our decision as to how much we invest or not.

It's more a function of long-term value against where we expect rates will be through time.

Okay.

All right, that's helpful.

Thanks.

And then maybe just a quick question on the P side, just as you look at things, P momentum has been such an important offset to the tougher NII environment.

If you look at sort of the weaker than expected trends this quarter, to what extent do you consider them transitory versus to what extent do you think that they are sort of controllable such that you can regain the kind of momentum you've had in the past several quarters?

A bunch of it was transitory in the sense that -- against the second-quarter comparison, we had that big trust fee in wealth management which made the comparison tough.

We also, just at the end of the quarter with some volatility and rates dropped some of the valuation benefit we would have had in mortgage.

So that will go away.

The one issue that we don't control is the beta that shows up through not only our wealth management segment but also the BlackRock income that we record.

And obviously that hurt our results this quarter, just the dropout -- drop in equity values.

Beyond that, the court the momentum that we are seeing in consumer and corporate services, which are the biggest drivers remains really strong.

And we think that will continue.

Yes.

Okay, all right.

That sounds great.

Thank you very much.

Matt O'Connor, Deutsche Bank.

If I can follow up on the balance sheet question, honing in both on the liquidity but also just broadening it out, you've got a lot of liquidity, a lot of deposits, a lot of capital, not as many loans relative to your balance sheet as peers.

And I get that you don't want to add $34 billion of securities all at once or even over the next several quarters.

But what are you thinking about on the loan book, what you can do there maybe strategically a little different to deploy some of that liquidity and boost of revenues over time?

It's a fair question.

We -- as I mentioned inside of the what looks like a flat quarter around loan growth, we have been trimming certain exposures that are LCR and capital unfriendly.

That slows through time, and growth will take back over.

I will tell you that we have looked strategically at some of the loan-heavy businesses that have recently been sold.

Unfortunately we haven't been able to execute on any of those.

But the right business with the right risk profile that would be synergistic to what we already do, we would take a look at.

We just haven't been able to do that in a price that makes sense to us.

Beyond that, again, carrying the extra capital and the extra liquidity to the extent that it's not burning a hole in our pocket, causing us to do something stupid with it, doesn't have a lot of -- doesn't cause a lot of long-term value deterioration if there is an option of six change going forward.

Yes, I think that's that upside optionality that I was really kind of trying to get at.

And if you had to rank in terms of why loan growth isn't more, is it weak demand, bad pricing, concern on the terms?

I'm sure it's a combination of all three, but what would the pecking order be?

Interestingly, spreads have kind of stabilized inside the core middle-market commercial space.

We continue to see growth in the specialty segments.

We see growth that's M&A related.

Part of what we're seeing, I think, in loan demand was the general slowdown and sentiment in the third quarter on corporates coming on the back of both the volatility coming out of China and in the markets and then Jerry Allen's statements on the economy.

So I think some of the last quarter's performance was just reflective of the environment in the third quarter versus the second, middle.

That could change through time.

Okay.

All right.

Thank you very much.

Paul Miller, FBR and Company.

You guys have a lot -- was just wondering -- I know you guys have less than 2% in energy exposure.

But in some of these markets that you are seeing, is there any distress in the overall economics of some of these towns that you're in because of the lower commodity prices?

Nothing that's hit.

So, I get where you're going.

We're seeing the lower energy prices hit energy companies directly following through to energy suppliers.

We are not heavy -- I imagine that's the case probably down in parts of Texas.

I don't know that we are seeing that in many in the markets that are a core part of our footprint.

And I would just add that our economist points out that the lower gas prices are a net benefit to PNC in most of the markets on the consumer side.

On the consumer side.

Yes, I'm just worried about some of the derivatives to -- I know parts of Pennsylvania have done really good with the -- with [Recellus], and I was just wondering if this has reversed some of those area's economics.

Interestingly, it hasn't really.

I think partly because a lot of the cuts we saw in capital hit traditional oil as opposed to necessarily what's going on in the natural gas markets.

So while it hasn't increased, they haven't really pulled back so much locally.

I was going to say Pittsburgh, for example, continues to increase its employment rolls in capital spend in our region despite what's going on in energy.

And then can you talk a little bit about the RBC acquisition?

I know that's been for a couple of years now.

I know it still probably doesn't move the needle, but is it still in the double-digit growth phase?

And what type of experience are you seeing down there?

Yes sure, this is Rob.

Continued strong performance, very consistent with the trajectory that we've been on.

We are pleased -- we're up and running in each of those markets with our full model.

Our brand awareness in those markets is approaching our brand awareness in our legacy markets.

And just about in every category and every business, the growth rates are accretive to our legacy businesses by -- in some cases, just by the nature that it's a relatively small base, but also consistent with what we intended to do there.

Okay.

Hey, guys, thank you very much.

Gerard Cassidy, RBC.

Bigger-picture question for you, Bill.

Obviously your return-on-asset number is pretty good in this environment, around 119 basis points.

The return-on-equity number is less than 10%.

Can you give us a view of what you're thinking?

With the return of access capital, none of the banks have been willing to ask for more than earnings in the CCAR process.

Maybe the excess capital could be used for acquisitions once you feel comfortable that when you read what M&T went through and what the Fed said about the application process, what you guys need to view as an industry -- not just PNC, but what everybody needs to be at in terms of getting a big deal done internally in the system, CRA, CCAR, et cetera.

So can you give us a picture of how -- if this environment doesn't change much where you guys are real good on credit, you're not going to overextend yourself on growth, you don't get much benefit from interest rates, how do you take it to the next level with the capital picture acquisitions and return of capital?

In simple form, your question is what do you do with the capital trap that exists in a business or an industry that, in fact, can generate capital at a pace that, at least in my view, we could intelligently deploy it in the core franchise.

Our bias has been and will continue to be and will continue to push on the limit to which you can return capital through the CCAR process.

You've heard me say before that, in some ways, we are restricted because our base-case submission typically has lower total income than we earn because it doesn't count some of the line items that show up in our reported earnings.

But we're going to push on that.

And I would tell you that they have -- there is no explicit -- you can't go beyond 100.

They have been very clear with us on that.

And for various reasons, people have chosen not to push it.

Outside of that, you heard me in one of the prior questions, if we could find asset-generating businesses within our risk profile that are synergistic to the rest of our business, we would pursue those.

I don't know that those are necessarily in the traditional retail bank acquisition space.

But some of the things you've seen come to the market out of one big seller in the headlines recently were appealing to us.

So we think about that a lot.

And you are absolutely right; we are generating capital and have capital beyond a place that we need today to run the Company.

Thank you.

And then a follow-up.

Rob, maybe you can share with us -- you touched on your oil portfolio, and we all recognize it's only 2% of the commercial loan book.

Have you guys done any stress testing?

Yesterday, J.P. Morgan suggested they stress tested their portfolio down to $30 a barrel, and the results were not that bad relative to the size of their book.

Have you guys done anything like that?

Yes, we've done a little bit, Gerard.

Not to the same extent the JP has.

I saw and heard those same comments.

Again, less than 2% of our total commercial loan book, less than 1.5% of our total loan book.

So they are relatively small dollar amounts.

So we've done some stress testing at various price levels, and nothing major in terms of outsized relative to the enterprise.

Thank you.

John Pancari, Evercore ISI.

Just back to the loan growth question again.

I know in the past you've alluded to the focus on some of the loan-only relationships you had.

And accordingly, you were a little bit more cautious in growing your pure mid-market type of relationship if you couldn't secure the fees.

So can you just update us?

Is that conservative posture or that approach at all still impacting your loan growth at all in the commercial bucket?

Sure it is.

By the way, I don't know that that's conservative; I think that's rational.

What we are effectively saying is extend credit on a relationship basis that covers your cost of capital.

So in an environment today where inside the C&I space our net charge-offs are effectively zero and have been for the last couple of years, you can make any loan and it looks good, it drops to the bottom line.

But we don't expect today's charge-off levels and reserve ratios to hold through time.

And once you normalize back to whatever that is supposed to be, 40 or 50 basis points, these marginal loans don't look so good if you are not getting the related fee income that come with them.

By the way, that's nothing -- we've done that since the first day I got here 13 years ago.

That's the model we pursue.

Okay, all right.

And then separately, on the expense side, just want to get a little bit of an update on your expectation on the efficiency ratio.

We are at 62% here.

How should we think about where that can trend through 2016 given the expense areas that you are still focusing on?

Well, as you know, we don't have an explicit target in terms of the efficiency ratio.

We do have a disciplined expense management effort in place which is, in terms of our guidance, going to work our year-over-year expenses down a bit.

So I think generally, we are -- efficiency ratio, we are in the neighborhood that we are now and are likely to be there -- a substantial step down in that we are going to need some help from rates.

Okay.

And then how would you -- not to be nitpicky, but how would you quantify a substantial step down?

Give us a rate environment.

The efficiency ratio runs well into the 50s in a normalized rate curve, so it's -- unfortunately, we just don't see that happening in the near term.

Right.

So if we get a one-and-done or just a modest hike and then it slows, could you see the (multiple speakers)?

I can't (inaudible) those.

Those all help.

If you think about it, we are running at 62 this quarter.

We managed to hold core NIM flat.

We're going to eat purchase accounting in 2016.

I don't know if we put a number on it (multiple speakers).

Never put a number there yet, but less than 200.

200 this year; it will be less next year, so that's a drop in revenue.

We will fight that with fees, try to hold expenses flat.

It's not -- until rates move, our ability to materially grow the Company and therefore improve our efficiency ratio is a struggle.

We do it through expense management, we do it through fee growth and the things that we can control of focus on and that's what we're doing.

Got it.

Okay.

Thank you.

Erika Najarian, Bank of America.

Yes, good morning.

My questions have been asked and answered.

Ken Usdin, Jefferies.

Just a couple quick cleanups if you don't mind.

So, again, staying away from the next year, full year, but just coming back to Bill, your comments about without rates, kind of tough to grow.

NII, assuming you are kind of talking about kind of an all-in basis, Rob, do you just have kind of a -- even to help us out, understand the expected PAA decline next year after the 180 to 200 that you're expecting for this year?

Yes, Ken, what we just said there on the last question, we don't have a 2016 number for you.

But by definition, it will be less than the decline we experienced this year, which is the 180 to 200.

So if we just start -- I guess if we just started ending at 70 and I ran that across 280 versus 300 --

Yes, that's a good approach.

The delta is around the recoveries, as you know, which can be plus or minus $15 million or so.

Okay, that's what I wanted just to clarify.

Okay.

Mortgage gain on sale was -- you always have that bigger number.

Just the way you calculate it, it's back down to 2.8% now.

Has it found a new level here?

Any trends to discern in terms of do we have stability around that kind of upper-2's gain on sale margin?

No, and I don't think so, Ken.

I think we guide to 300, which I think is the number that is the best number going forward.

We see a lot of volatility in terms of those basis points because they are relatively small numbers.

But the prior quarter at 320-ish down to 280-ish was all a result of the combination of the delta between the fair value marks and the RMSR hedge gains that Bill referenced.

Loan production and servicing were actually pretty flat.

Right, yes.

Okay.

And then the last one, just -- you mentioned that corporate services was helped by some pretty big M&A fees in the third quarter, and I think you kind of alluded to that being down in the fourth.

But isn't Harris Williams typically the (technical difficulty) at the end of the year?

And I was just wondering if you could give us kind of a little bit of an update what's happening within the pieces of those major businesses within corporate services.

Has something changed that you wouldn't see that typical year-end strength in Harris Williams?

It's a good question.

We did see the rise in the third-quarter level of Harris Williams, which was a great increase.

Some of the feedback there where some of the needles got pulled in than what typically would have otherwise been the fourth quarter got pulled into the third quarter for timing reasons on the client side.

So it just has us a little bit -- in terms of our projections is more sort of in that stable overall because that -- if in fact that was what would have otherwise been fourth quarter, we don't make up for it.

Okay.

And then last one, I know we'll get some of this in the queue.

But inside asset management, obviously the second to third was affected by that $30 million trust recovery that you mentioned.

Can you just kind of help us understand core PNC asset management versus the BlackRock?

It's flat to downish a bit.

So it's setting the trust settlement aside, down a couple million dollars.

On the core PNC?

On the quarter, yes, yes.

Okay.

Okay, understood.

Thanks, guys.

Matt Burnell, Wells Fargo Securities.

Just a -- first of all, Rob, maybe a question for you.

A question on loan commitments appear to be growing a little bit faster than loans.

I'm curious if there's any specific areas where those are growing faster.

You mentioned commercial real estate being an area where you are making some good momentum in terms of loan growth.

Just curious if I'm right suggesting that commercial real estate is an area where you are growing commitments.

And I guess to Bill's earlier comment about generating fee revenue off that, how successful have you been with those new relationships in terms of driving fee income?

I think, generally speaking, to answer your first question around just where commitments are rising, generally as Bill mentioned in our specialty businesses, within corporate banking.

In answering your second question in terms of how is it going in terms of building out those relationships, we think it's going well.

A big part of that obviously is the growth in the fee income that you see in the corporate services lines.

Not just Harris Williams, but obviously treasury management, corporate finance fees were good in the quarter.

And that's where you see most of those ancillary services sold into those relationships.

Rob -- and then my follow-up really is on the interest-bearing cost.

Those are up a couple of basis points quarter over quarter.

Is there anything you are doing on the deposit side in terms of targeting specific areas or certain products that is pushing that cost of debt -- of interest-bearing liabilities up?

Yes, a couple of things.

First on the deposit-gathering side, we have been, in many of our markets, at the high end of rate paid in order to get ahead of LCR and liquidity needs, particularly if and when rates start to go up.

So some of that shows up there.

The other thing that's happened is the change in Moody's methodology as it relates to how they rate banks has caused us to have to increase our wholesale funding in bank notes at the bank level.

The whole industry has done that, and you have seen spreads gap out pretty aggressively for wholesale funding of banks.

So I'm sure that that is playing in to that number.

So I think it's up 2 basis points quarter on quarter.

I don't know that you will see that -- as I said before, we are pretty far long and done on what we need to do on the liquidity side.

So hopefully that's behind us.

Okay.

Thank you very much.

Bill Carcache, Nomura.

Some of the banks that have reported so far are showing loan growth, outpaced deposit growth.

And, more broadly, we have recently also started seeing that dynamic in the HA data.

However, you guys continue to generate very healthy deposit growth in excess of your loan growth.

Do you have any thoughts on what may be driving that?

Well, our deposit growth is purposeful.

It's largely retail-based, although even our C&I deposits are growing pretty aggressively.

We're doing it to get ahead of it.

As Rob mentioned, we are over the 100% threshold on holding company and bank for LCR, which is ahead of the compliance period.

I don't know if our peers are in fact there yet.

We thought it was important to get in front of that.

On the loan side, so, almost independent of what we do on loans.

Deposit growth was purposeful and accomplished.

On the loan side, we have a bit of a mix shift.

As I mentioned, we -- on the C&I side, we are exiting some things that are LCR-unfriendly and things that are lending-only relationships at tight spreads.

We continue to grow the specialty segments and have been -- even this quarter, offset pretty aggressive runoff on the non-LCR stuff.

I think we dropped $1.2 billion in LCR-unfriendly, and we managed to have a net-positive C&I growth.

If you did the math on that, you would annualized that to about a 4% growth rate in C&I.

Retail, it's a struggle because we are running off educational loans, the discontinued segment kind of treading water and home equity, with some growth coming through in credit card and auto.

And down in education.

And down in education as the government loans run down.

So I don't -- purposely changing our C&I, our retail growth trajectory at this point beyond what you're seeing absent the runoffs, I think we change our risk bucket, and I don't think that's the right thing to do.

Yes, thanks.

By the way, one of the things you would see through time -- if you went and you charted our loan growth through time against peers, you would see that during the crisis and just after the crisis, we grew loans much more aggressively than everybody else.

Kind of the best time to make loans is when nobody else is making them at the highest spreads.

And what we've been focused on as spreads have contracted and competition has gotten more aggressive is retaining relationships and cross-selling relationships, which is why you are seeing the acceleration in our fee income.

So it doesn't mean we're not going to grow loans; it doesn't mean we're not going to pursue new relationships.

But dollars to the bottom line in terms of degree of difficulty, it's easier today to grow fees than it is to pursue economically attractive loans.

Thanks, Bill.

If I could follow up along these lines, you mentioned last quarter that you wouldn't be surprised if you guys were picking up some of the non-operating deposits that some of the larger banks are deemphasizing.

Can you give us an update on where you think some of those non-operating deposits are going and perhaps why you might see value in accepting them?

Well, yes, I'm sure some of the growth we've seen in our C&I deposits reflect that.

We have room inside of our leverage ratio to be able to accept those deposits.

And we accept them and pay a rate on them where we earn a margin even against the excess balances at the Fed.

So maybe it drops our ROA at the margin and NIM at the margin.

But it's riskless dollars to the bottom line, and it doesn't affect our -- like I said, we have room inside of our leverage ratio, so it's fine.

And it's often in the context of a relationship that we have.

Understood.

And then finally, if I can, a related longer-term question, Bill, on competition for deposits.

Some believe that the industry's core loan-to-deposit ratio is higher than what it would appear to be on a reported basis once you factor in deposit outflow risk under LCR.

And with that recent H data dynamic that we talked about showing loan growth now outpacing deposit growth across the large banks, do you think there's a chance that we could actually start to see competition for deposits intensify a bit independent of the Fed raising rates?

I do.

It's one of the reasons we got out ahead of it.

So we are in the camp that when people start to figure out what LCR is in the compliance period, it comes into play.

That retail deposits are going to matter, and there's going to be a tough fight for them.

Great.

That's very helpful.

Thank you.

Mike Mayo, CLSA.

If interest rates stay lower for longer, you made it clear that you will not take extra risk, you will not cut tech spending and you will not cut strategic spending.

So what are your levers to better control expenses if revenues wind up weaker than expected?

First, just the tech spending and the strategic spending are self-funded and, in fact, cause savings on the other side.

So if you think about the spending we are doing like inside of the branch rebuild, we are effectively dropping people.

So people cost -- occupancy cost as we drop branches is being replaced by technology cost.

I think it has a better -- I think it's better for customers long-term.

It has a better long-term growth trend and it's expense neutral.

So if I cut the technology cost, I'm left back with my people cost, if you follow me.

The same thing -- a lot of the tech spend that we're spending in automating systems and applications and core processes that are in many cases manual today on the back of new regulation.

So, again, we are sort of investing into long-term efficiency without a lot of near-term pain.

We have been able to self-fund it as we go forward.

Rob's comment on is there much to do out right on the expense side, is that going to be a driver of longer-term bottom-line change, and the answer is no.

We will stay really focused on it.

We can stretch tech spend out.

We can delay.

We can do some stuff at the margin.

But the real driver ultimately has to come from quality loan growth, cross-sell, and fee income, and hopefully a move in rates.

And by the way, just to go back to your original assumption, if basically we're going to be in this low-rate environment for a long period of time, and we come to that conclusion and that's what is being foreshadowed by the Fed, then we will invest into it.

At this point, we have half of the Fed governors telling us they are going to December -- more than half, and have saying no.

So if they all said no, you would probably have a bit of a rally in the back end.

But we have $34 billion in cash sitting at the Fed at 25 basis points, so there's a lever there that I don't think we should use and need to use, but it's available.

All right.

Thank you.

Eric Wasserstrom, Guggenheim Securities.

Hello?

No Eric.

Operator, do we want to pull again for any other questions that are out there?

(Operator Instructions) Mr. Wasserstrom, your line is open.

Please proceed with your question.

Thanks.

No, my question has been addressed.

Thank you.

Nancy Bush, NAB Research.

Yes, Bill, you've been the only CEO thus far who said we are disappointed with the Fed's failure to raise rates.

I think you said the same thing, as I recall, in Boston about three years ago.

You've been one of the more forthright, I think, in not necessarily criticizing but certainly calling it to everyone's attention.

We know what it's doing to the banking industry.

But could you just give us your perspective on what ZIRP is doing to the rest of the economy?

I'm sorry, on what what is doing?

ZIRP, zero-interest rate policy.

Oh, okay.

Oh, there is (inaudible).

(laughter) That's what I need, a new buzzword.

Look, away from what's happening inside of banking, I think a couple of things.

There is not a single CFO, CEO person that I met anywhere inside of this country who suggests that they are going to change their investment decisions or purchasing behavior as a function of 25-basis-point change in interest rates.

I personally believe that the practical impact on the economy of raising rates back to a more normalized level, figure out what that is, is a lot less similar to what people are assuming it is because I think they were pushing on a string when they drop rates from the 1% level down to zero.

I think that the -- in effect, the destruction of retirement income for retirees -- we've trained people their whole lives that once they retire and they -- they are supposed to change their 401(k) and put it into kind of a less risky fixed-rate investment portfolio, today they can't do it.

They can't live on it.

So we're stretching out the need for people to work.

We are destroying their ability to retire with the savings they have today.

And we are basically, in the extreme, bailing out the younger generation and putting it on the backs of retirees with this interest rate policy.

And I just -- I continue to think it's wrong.

I've been critical of it.

I'm biased because it hurts the banking industry.

But I just think that zero on rates is a different starting point than when rates were at 3% and thinking that you were supposed to tighten from 3%.

And then for some reason, that seems to be lost.

So when they do decide to move -- and let's assume it's 25 basis points, which seems to be the consensus -- does it make any difference?

That's my -- I don't think it does.

At the margin it helps us.

For no other reason, they are going to do it through the interest paid on excess reserves, so we sit with 30 -- whatever, $5 billion sitting there.

But no, I just don't think it has a direct impact on the economy.

People come back and they say it's going to move the dollar more than it has, in turn, hurt exports.

Perhaps.

But is that on a 25-basis-point move?

Is it on a 50-basis-point move?

Is it on a 1.5% move?

It's just not obvious to me.

I think the fact -- I think there was something to this general notion that by choosing not to move rates, they were signaling a real lack of confidence in the economy, which is playing out now in the sentiment you are seeing from surveys with consumers and corporations.

And confidence matters.

All right, thank you.

Thank you.

We are approaching the hour.

So at this point we're going to conclude our call.

We thank all of you for participating in today's call and look forward to talking to you later on.

Take care.

Thanks a lot.

Thank you.

This concludes today's call.

You may now disconnect.