PNC Financial Services Group Inc (PNC) 2016 Q2 法說會逐字稿

Good morning, my name is Silvana 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.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session.

(Operator Instructions)

As a reminder this call is being recorded. I will now turn the call over to Director of Investor Relations Mr. Bryan Gill. Sir, please go ahead.

Thank you, operator, and good morning. Welcome to today's conference call for The PNC Financial Services Group. Participating on the call this morning 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 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 historical performance due to a variety of risks and other factors.

Information about such factors, as well as GAAP reconciliations 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 July 15, 2016 and PNC undertakes no obligation to update them.

Now I would like to turn the call over to Bill Demchak.

Thanks, Bryan, and good morning, everybody. You have seen this morning that we reported net income of $989 million or $1.82 per diluted common share in the second quarter. We continued to execute on our strategic priorities with overall performance you will have seen consistent with our prior guidance.

Now Rob is going to take you through the numbers in a couple of minutes but I will call your attention to just a few highlights. Specifically in the second quarter we saw revenue growth on the back of strong fee income, expenses that were again well managed, stable credit quality and growth in average loans and deposits. We maintained our strong capital position and you have likely seen the announcement that the regulators did not object to our capital plan submitted as part of the 2016 CCAR process.

And as such we are pleased to be able to announce that the dividend will increase to $0.55 per share beginning in the third quarter. We also announced plans to repurchase up to $2 billion of common shares over the next four quarters. So all in all it was a pretty good second quarter for PNC.

As we look forward in regards to interest rates the Fed appears to be back in a holding pattern on further target fed fund rate increases, at least according to the market. And post the Brexit vote we have seen long-term rates rally as global investors reach for basically any positive yield. And the combination of a strong dollar and positive yields in the US makes the US rate market preferable to virtually all others, and we have seen the impact of that.

Now the impact of these two issues, which are part economic and part technical, will result in more pressure on NII and NIM over time for PNC and most of the industry. In our case this is largely going to be a function of our securities books as higher yielding securities give way to lower yielding securities going forward. That being said, we know how to navigate in this environment.

And as always I can commit to you that we are very focused on those things that are within our power to control. We have opportunities to continue to grow fee income as we execute on our strategic priorities and we are also in a good position relative to our ongoing expense management efforts.

And we have the ability to enhance those efforts to some extent as we continue to drive multiyear transformation within our lines of business in order to create efficiencies and deliver superior customer experience.

Equally important is what we are not going to do. Now while we won't speculate on the future path of rates, that doesn't mean that we don't have a view on value. We are not going to respond to market uncertainty by suddenly changing our risk profile and/or stretching on credit or by significantly leveraging our balance sheet at what is arguably the worst possible time in the cycle.

Now PNC and its investors have long benefited from our disciplined commitment to well managed risk, well-run businesses and well served customers. And that is the approach that we will continue to take as we work to grow long-term relationships and create long-term value for all of our constituencies.

You have heard me say this before but banking is a cyclical business and you can't beat the cycle. Our job is to mute the impact and to add to rather than detract from long-term value in the process.

And with that I will turn it over to Rob for a closer look at our second-quarter results. And then we will take your questions.

Great, thanks, Bill, and good morning, everyone. PNC second-quarter net income was $989 million or $1.82 per diluted common share. Second-quarter results reflected solid revenue growth driven by our focus on generating fee income.

We grew average loans and deposits, expenses remained well managed and overall credit quality was stable as broad improvements in our consumer portfolio essentially offset a modest deterioration in our energy book.

Balance sheet information is on slide 4 and is presented on an average basis. Commercial loans were up $1.7 billion or 1% from the first quarter, reflecting growth in large corporate and real estate lending. Average consumer loans declined by $619 million or less than 1% linked quarter due to decreases in home equity and education lending, partially offset by growth in auto and credit card.

Investment securities declined slightly linked quarter as our reinvestments essentially matched repayments. Our interest-earning deposits with banks, mostly at the Federal Reserve, averaged $26.5 billion for the second quarter, up $930 million from the first quarter primarily due to deposit growth.

Average total deposits increased by $1.5 billion compared to the first quarter driven by growth in interest-bearing deposits. On a year-to-date basis an increase in savings deposits has been somewhat offset by a decline in money market accounts, a shift in mix that reflects our strategy to grow relationship-based savings products.

Total equity increased more than $400 million linked quarter due to increased retained earnings and higher AOCI primarily related to net unrealized securities gains. As of June 30, 2016 our pro forma Basel III common equity Tier 1 capital ratio, fully phased-in and using the standardized approach, was estimated to be 10.2%, up from 10.1% linked quarter.

Our return on average assets as of June 30 was 1.11%, an increase of 4 basis points linked quarter. And finally, our tangible book value reached $66.89 per common share as of June 30, an 8% increase compared to the same time a year ago.

Turning to slide 5, our strong capital position has enabled us to continue to return substantial capital to shareholders. We completed our five-quarter common stock repurchase programs in the second quarter. During the period we repurchased 29.9 million shares for $2.7 billion.

And when you combine that with the $1.3 billion in common dividends paid during the same period we returned a total of $4 billion to shareholders, resulting in a payout ratio of approximately 83%.

As you have seen -- as you definitely have seen since last month following the results of this year's CCAR process we announced plans to repurchase an additional $2 billion of shares over the next four quarters, beginning and the third quarter of this year. And earlier this month, our Board of Directors approved an 8% increase in the quarterly common stock dividend affective with the upcoming August dividend.

As I have already mentioned, and as you can see on slide 6, net income was $989 million. Highlights include the following.

Total revenue was up by $129 million or 4% compared to the first quarter. Net interest income declined by $30 million linked quarter primarily due to lower purchase accounting accretion. Year to date, net interest income is up $42 million or 1% over the same period a year ago.

Total noninterest income increased by $159 million or 10% linked quarter primarily due to strong customer-driven activity in all our fee categories. Noninterest expense increased by $79 million or 3% compared to the first quarter as expenses continued to be well managed.

Provisions for credit losses in the second quarter was $127 million, down $25 million compared with the first quarter as we continued to see some impact from our energy book but to a lesser extent than we saw in the first quarter. Finally, our effective tax rate in the second quarter was 24.3%. For the full-year 2016 we continue to expect the effective tax rate to be a approximately 25%.

Now let's discuss the key drivers of this performance in more detail. Turning to slide 7, net interest income declined by $30 million compared to the first quarter primarily driven by a $22 million decline in purchase accounting accretion. Core NII decreased by $8 million linked quarter as lower securities yields and higher borrowing costs were partially offset by loan growth.

Compared to the same quarter a year ago core net interest income increased $63 million or 3% primarily due to higher loan and securities balances and higher loan yields. Core net interest margin declined by 2 basis points linked quarter, reflecting a lower interest rate environment. Total net interest margin was 2.7% which included an additional decline of 3 basis point due to lower purchase accounting accretion.

For the full-year 2016 we continue to expect purchase accounting accretion to be down approximately $175 million compared to 2015.

Turning to slide 8, fee income increased by $201 million or 16% compared to the first quarter driven by strong growth across all of our customer categories. Total noninterest income grew by $159 million or 10% compared to the first quarter as other noninterest income declined.

Asset Management fees increased by $36 million or 11% linked quarter, reflecting higher earnings from our equity investment in BlackRock as stronger equity markets benefited both BlackRock in our Asset Management business. Asset Management fees were down there over year primarily related to a $30 million trust settlement in the second quarter of 2015.

Consumer services fees were up $17 million or 5% compared to the first quarter as a result of higher client activity and seasonal increases in debit card, credit card and merchant services. Compared to the second quarter of last year, consumer services fees grew by $20 million or 6% consistent with our success in expanding relationships and growing share of wallet with our customers.

Corporate services fees increased by $78 million or 24% compared to the first quarter, primarily due to higher merger and acquisition advisory fees and higher loan syndication fees, which in part represented some delayed deals from the first quarter. Compared to the second quarter of last year corporate services fees grew by $34 million or 9% with the same primary drivers.

Residential mortgage noninterest income grew by $65 million linked quarter with most of the increase driven by net hedging gains of $35 million compared with a net hedging loss of $8 million in the first quarter. Production revenue also increased as mortgage originations were up 35% linked quarter.

Compared to the same quarter a year ago residential mortgage noninterest income was essentially flat as higher servicing fees were offset by lower production revenue. Other noninterest income of $264 million declined $42 million or 14% linked quarter and included negative valuation adjustments of $51 million primarily associated with nonconforming investments under the Volcker Rule provisions.

We also realized $31 million in net gains on the sale of Visa during the quarter. Overall our fee income results this quarter reflect our emphasis on our strategic initiatives and our efforts to grow fees across our businesses.

Turning to expenses on slide 9. As you can see in the chart expenses have remained relatively stable and we continue to invest in technology and infrastructure.

Second-quarter expenses increased by $79 million or 3%, primarily reflecting higher variable compensation associated with business activity and higher marketing costs, partially offset by the release of residential mortgage foreclosure-related reserves of $24 million. Looking at the first six months of the year, expenses are down $74 million or 2% compared to the first half of last year.

As we've previously stated our Continuous Improvement Program has a goal to reduce costs by $400 million in 2016. We are halfway through the year and we are already completed actions to capture more than two-thirds of our annual goal. We remain confident we will achieve our full-year target.

Through this program we intend to help fund the significant investments we are continuing to make in our technology and business infrastructure throughout the year. As a result, we continue to expect that our full-year 2016 expenses will remain stable with 2015 levels.

Turning to slide 10, overall credit quality was stable compared to the first quarter. The graphs on this slide depict the impact of both energy-related and non-energy-related loans on our credit metric.

In the second quarter we continued to see some deterioration from our energy book but to a lesser extent than we saw in the first quarter. And I will have more to say about that in a moment.

Total nonperforming loans decreased by $17 million or 1% linked quarter primarily due to lower consumer NPLs. Provision for credit losses of $127 million decreased by $25 million linked quarter. However, our total provision, excluding energy, increased modestly compared to the first quarter, reflecting the continuing normalization over the historically and, in our view, unsustainably low levels we experienced last year.

Net charge-offs decreased to $134 million in the second quarter resulting in an annualized net charge-off ratio of 26 basis points, down 3 basis points from the first quarter. In addition, total delinquencies declined by $36 million or 2% compared to the first quarter.

Turning to our energy book on slide 11. Overall not much has changed from the information we provided last quarter other than a slight decrease in exposures. At the end of the second quarter our oil, gas and coal portfolios represented approximately 1.5% of our total outstanding loans and we view this book as properly reserved.

We did see an increase in net charge-offs in our coal portfolio in the second quarter. And this really relates to the small size of the portfolio, which by definition had some lumpiness as we highlighted during our first-quarter call. And as we have already stated we continue to monitor market conditions as well as impacts to other businesses.

In summary, PNC posted a strong second quarter driven by growth in fee income, reflecting progress we are making on our strategic priorities along with well managed expenses. We grew average loans and deposits and continued significant shareholder return.

Looking ahead we believe the US economy will continue to grow at a steady pace. However, given the uncertainty of the global economy we also acknowledge short-term interest rate increases by the Federal Reserve are unlikely to occur before December.

As a result, our full-year 2016 guidance now calls for stable revenue, down from our previous guidance of modest revenue growth. And consistent with our previous guidance we continue to expect modest loan growth and stable expenses for the full-year 2016.

Looking at ahead at the upcoming quarter, we expect it will look a lot like the most recently completed second quarter. We expect modest growth in loans, we expect stable net interest income, we expect fee income to be stable as we anticipate continued growth in business activity in the third quarter to be somewhat offset by the elevated corporate services and residential mortgage fees we recorded in the second quarter.

We expect expenses to be stable as we continue to invest in our technology and infrastructure. And we expect provision to be between $100 million and $150 million.

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

(Operator Instructions) Betsy Graseck, Morgan Stanley.

Hey, a couple of questions. So part of the investment thesis in PNC is the excess liquidity that you have that can get put to work over time.

And what I heard you say, Bill, is that, look, you are not going to do anything that doesn't make sense from a balance sheet perspective. So does that mean that you are going to continue to hoard liquidity for the moment? How do you think about using it and what are the trigger points for unlocking some of that potential earnings?

Hoard sound like such a bad word. We have what is a $26 billion, I guess, at the Fed right now earning 50 basis points. And if we equal risk to our existing book absent LCR we are probably giving up $250 million total, rough numbers, if we replaced it at today's rates.

If we did it in a way that was LCR equivalent, it is probably closer to $100 million to $150 million. And I continue -- look, I wish six months ago we had done it and then taken it off but we are not bond traders.

And where rates are today the downside, the downside tail risk to trying to do that in today's rate environment just doesn't make sense to us. We will continue to invest rolloff as things mature here. Unfortunately, it is getting reinvested at rates lower than what it is rolling off from and that is what my comments were about when I said that we are going to face NIM pressure going forward as the securities book rolls down.

But we are not going to put that money to work on the rate side versus where we currently are. We will put it to work on good loan growth when we see the opportunity for real economic returns inside the loan books.

So I could just a follow up on that is on loan spreads and what are you seeing there? And does that incent you to do more at this stage or not?

Yes, so the spreads have largely flattened. They didn't really go out when the bond markets blew out but they kind of stabilized and they have stayed there. Now higher yielding leverage loans have come way back in with a high-yield market itself but we don't play in that space.

Our issue with loans is more about total return across the relationship than it is about where the actual spread is on a loan. And that, of course, relates to how much of the fee wallet we can get from the client, at least on the C&I side.

On the retail side there is opportunity. And to be honest with you in parts of it we have been executing less well than we otherwise could. Some of that is related to in mortgage on Fed regulations and some of it is related to things we can do to improve customer experience.

So we want to grow loans but we want to do it in a way where we are getting a return on capital that is suitable for shareholders. And lending a loan, particularly on the C&I side, does not do that. It is a lousy return on equity and it drops our ROE.

Right. So we should look more for the consumer to drive the bus there on loan growth?

While, we are going to -- it is a strategic focus of ours as we kind of revamp what we are doing in consumer. We will continue to have growth in C&I. You have seen our growth in our real estate segment, much of that coming on the permanent lending side as the CMBS market remains in disruption.

We continue to have growth in large corporate and ABL. Less robust growth but some in middle market. So there is growth there, it is just, to be honest I was somewhat surprised by some of the non-real estate related C&I growth numbers we saw from competitors.

And my best guess on that is simply our focus towards the smaller end of large corporate as opposed to some other competitors naturally playing in the upper end where they (multiple speakers) growth. Yes.

Okay, got it. Yes, okay, note just one last one on mortgage.

So the Q on Q growth in mortgage going forward, how should we think about that? Because you have got some put takes between hedging gains that were large this quarter in the mortgage services line versus what we are seeing in pipeline build.

Sure. Hey, Betsy, it is Rob. I think in the third quarter, particularly in where terms of where rates are just on the production and the origination side, we will see some modest increase and we are positioned for that.

On the MSRs that is not something that we manage, that is an outcome. We did have a strong quarter in MSRs in the second quarter following losses in the first quarter. So that is really what I had to say about that for the third quarter.

So when we are looking at 3Q, start with 2Q minus MSR hedging gains and then up from there due to production?

Yes, that is where I sort of get into our guidance for the third quarter where I call it stable. I do think by and large net net the residential mortgage was elevated because of those MSRs.

Yes, I got it. Okay, thank you.

Paul Miller, FPR & Co.

Can you talk a little bit about your different geographic expenses with loan growth? I know you have been down in the South now for about two or three years and how that is going relative to that Northern franchise?

It is Bill. The Southeast continues to outperform the rest of the legacy franchise by a fair margin in terms of not just low growth but fee growth and overall client growth.

And that is pretty consistent across everything in C&I and in retail. So we continue to execute on that and we are pleased with the progress we are making there.

Is there geographically are you seeing different economic behaviors between the Southeast and your core areas in Pennsylvania?

In terms of just competition from other banks you mean?

No, just overall economic demand for loans and whatnot.

No, I would suggest to you that at the margin the Southeast is a bit better. But having said that our legacy markets we have high market share. And so it is kind of easier to grow off a base of nothing in raw numbers and obviously in percentages than it is to find the next new client in Pittsburgh. So I think it is more of that than anything else.

Yes well I would add to that. I agree with that.

The other distinction is in the Southeast as we get now four years into it we are seeing some growth in terms of the maturity of some of the relationships that take that long. So we are seeing a bit of a left there that is just a function of the time that we have been there.

Okay, hey, guys, thank you very much.

John Pancari, Evercore.

On the -- back to the expense side, are you seeing anything, particularly I guess what we're seeing here with the long end of the curve or any of the other top-line headwinds or the competitive issues that you flagged, that are making you consider getting more constructive on realizing some of the benefits from the expense efforts you have underway now? Like I know you are obviously you are investing in your back office as well as the mortgage platform and everything and you have savings coming from that.

But you have been reinvesting a lot of that prudently. But also given the top-line headwinds and the curve and post-Brexit, what are your thoughts there about potentially getting more aggressive and letting that fall to the bottom line?

Well, they are kind of linked in the following sense. A lot of the investment we are making in technology is what is allowing us to take costs out of back office and processing.

If you look at the drop in our retail expense base as we consolidate branches and automate we are investing in technology to be able to do that but ultimately getting the run rate savings. So we say we are not going to slow down on our investments but partly because we don't want to slow down on our cost saves.

Yes, right, right.

I think a better answer to your question or kind of where you are going is, and I know it will come up in Q&A here somewhere is, in our annual Continuous Improvement exercise we are continuing to push on that, we are kind of ahead of the game on that. We will keep pushing on that.

But importantly we have identified, particularly in the retail space, opportunities over the next couple of years, and we will talk about this further when we get more details on it. But basic opportunities to fairly dramatically increase the efficiency and productivity of what we do on the consumer lending side.

You have heard us talk about that in terms of the consolidation of home lending but there is more to it than that. And sort of rather than slow down our investment priorities and save nickels and dimes, which we have already done, long-term expense saves come through structural change in the Company and that is going to take as a period of time. But we have got a team on it and we are after it and we are going to work through that over the next couple of years and see that fall to the bottom line.

Thanks, Bill, that is helpful. And I guess would part of that be any potential acceleration of your modernization of your branches to the newer models? I believe you indicated about 400 or so branches are already on that model, I mean is there a way that that effort could be accelerated?

No, I think we are going at the right pace. Part of -- that is less about how much money you are willing to spend or want to save and more about executing in a way where you don't disrupt customers.

If you think through that we need to train employees to operate in that environment, we need to acclimate clients to be able to use that environment. The teams of people we have who go out and do that training and so forth are kind of fully deployed and probably at the right pace.

So my guess is it will accelerate as we go simply because we get better at it. But there is no magic to let's just do it faster --

Flipping a switch, right.

Got it, okay. Thanks for taking my questions.

Scott Siefers, Sandler O'Neil & Partners.

Rob, I had a quick question for you. You spoke a little about the mortgage outlook for the third quarter but wondered if you could expand upon those comments and just sort of give us a sense for where you see kind of the major pros and cons in that overall stable fee income outlook for the 3Q?

Yes, I would just say -- to expand on where I left off with Betsy's question was I do think we will see an increase, modest increase in originations in the third quarter reflecting some seasonal but also the lower rates on the available through the anticipated increase in refis. Don't see a huge step change there because we are, as we have mentioned before, we are working through TRID implementations and some processing issues that we have around the origination. So I do see some pick up there but not necessarily dramatic.

But I think the question is stable fees overall, so he branched off.

In terms of just overall how we --?

Yes. (multiple speakers)

Yes, so I would say in terms of the total fee guidance, in terms of the stables we would see a continuation in each of those categories on the run rates that we have been in offset by the elevated levels in residential mortgage and also corporate services in the second quarter.

Okay, perfect, thank you. And then just one separate question, kind of a ticky tack one.

I noticed the CRE yield came under it looks like a little more pressure than is typical. I wonder if you could just sort of expand upon that from 351 down to in the 1Q down to 316 in the 2Q. Just any kind of comments you have?

Yes, that is virtually all (technical difficulty) accounting accretion. So no big differences there.

(multiple speakers)

Yes.

Yes, perfect. I think that is it, so thank you very much.

Gerard Cassidy, RBC.

I have got a quick question, Bill, you talked about at this point in the credit cycle, of course, you don't want to be making crazy loans, which I think everybody agrees with you on. And you are going to try to offset it with better fee revenue growth. Can you give us some color on some of the initiatives you have underway that could drive that fee revenue even better in the next 12 to 18 months?

Sure, and Rob can jump in here. But the fee growth we have been after and have succeeded at for however many quarters in a row, and we get there through pretty heavy investments inside of our treasury management business on the C&I side. As you know that is the bulk of our -- most consistent bucket of our fees inside of C&I.

New product rollout we are putting in place a new wire system and real-time capability. So lots of things at the margin that kind of add to our opportunity inside of TM.

In retail it is just the continuation of kind of what we have done seeing growth from retail to card to merchant to debit to straight through the categories and we just continue to pursue that. I think depending what happens here with rates through time we also have an opportunity inside of retail to raise revenue as a function of what I am going to call in-the-moment fees. And I think you have heard me talk about this before, but not a standard fee where we are just charging somebody more for some particular item, but rather offer products and services that a consumer can choose in the moment to pay for because it has particular value to them.

For example, ready access to money real-time in cashing a check or other things like that. So we have got a list pages long as to what we are going to do on fee initiatives to continue to drive growth. And we think the risk return and cost of that relative to simply adding loans without commensurate share of wallet from clients it is a much better trade-off and longer-term opportunity for the Company.

Yes, hey, Gerard, this is Rob. What I would add to that is, and then on the Asset Management side, we continue to grow clients and expand relationships.

Very good. And just staying on this fee same, can you give us an update, Bill, on the clear exchange?

Obviously you are one of the owners of this new rollout that is going to come and just what you think when it is going to hit, where customers will be using it and then what your thoughts are on possibly charging something for it?

Yes, so, you have seen the announcements where -- and if I get this wrong I'll apologize. But Cap One is now on it to some extent, USB, Wells, JP. We will roll out in the third quarter at some point to go live with it.

I think it is incredibly important long term because in effect it creates a new payment rail. It will be when it is fully formed and launched in formal fashion probably in the first quarter it will be a real-time, ubiquitous P2P payment platform that offers alternatives to traditional ACH and debit and credit grails and the implications of that I will leave to your imagination but potentially are quite power.

The issue of charging for traditional P2P as it is used today if you think in the context of [inmo] where it is small payments between individuals, that is I think rightly or wrongly we have seen the standard set at zero with first BofA and then U.S. Bank revision to go to zero pricing. I think there is opportunities, in fact I know there as opportunities as the use case of that product exchanges either for larger dollar amounts or for P to small B and so on and so forth. So I do think there is revenue opportunities associated with the pure P2P, but I think a bigger implication is the strategic importance of creating what in effect is an entirely new payment rail.

Great. And then finally, if you guys could give us a little more color on the Volcker Rule ineligible investments, were those private equity or real estate? And in second to that, why was the mark taken this quarter versus next quarter or last quarter?

Yes, go ahead, Rob.

Okay, yes, well it is a broad bucket, Gerard, as you know the Volcker Rules go into effect this time next year. So we have a number of investments, the largest component of which is our private equity portfolio. So we are just positioning to be in compliance by this time next year.

I mean in effect, we make a decision that says, all right, we know we have to sell this thing, what's it worth it worth once you sell it versus holding it? You get a mark and you mark it and through time we will take a look at the related securities that are involved in that bucket and move them out before we get to the end of the Volcker window.

Great, thank you for all of the help.

(Operator Instructions) Bill Carcache, Nomura.

If we go down a path where say the Fed concludes that the risk of raising rates at any point over the next, say, 12 months and possibly pushing the economy into recession outweighs the potential benefits can you speak to what happens to PNC's NII and earnings in that environment? And more broadly everyone is a little different but how should we think about PNC's ability to grow earnings in the absence of higher rates?

There are so many variables inside of that question. We model them all. You could have a scenario where the Fed actually raises the frontend and the backend rallies simply because of what is going on globally.

But independent of all of that I think the simplest way to think about the direct impact of rates on our near-term income, all else equal, is a rolloff of our securities book which is at a 269 book yield plus or minus today and a replacement equal risk at about 169 over the course of a bunch of years that that would play out.

Now if we really got into an environment where we believed that we were stuck here a la Japan, which I don't think is the case, we could put liquidity to work and raise our duration of equity if we got stuck into that. So there is offsets to it. That also obviously assumes that we don't grow loans or do many other things we do, grow fee and so on and so forth.

Look, it is a simple statement to make that it is tougher to get to positive operating leverage without help or at least without pain from interest rates. But we are focused on being able to accomplish that.

Thank you. If I may as a follow up, could you remind us what you view as the appropriate level of CET1 at which you can run the business?

For at least the last couple of CCAR exams you would have passed had you run with CET1 of around 9%. You are obviously north of 10%, is there anything that we saw in this year's -- or that you guys saw in this year's CCAR results that give you greater comfort in perhaps becoming a little bit more aggressive in your ask and maybe moving that down closer to 9% range, is that something that you guys are actively focused on?

Rob can chip in here, but just I will remind you that we don't set a top target number, we set a bottom target number which is a level by which we want to pass CCAR. And, of course, the unknown inside of that is the variance around our own modeling results and wherever the Fed would model and notwithstanding that we came quite close to there and number we got there, as did most of the industry by the way, with fairly different line items to solve to that number.

And that gives me pause as it relates to our willingness to be aggressive in the sense that , I guess we could always take the mulligan, but in the sense that we think we know what the Fed is going to do and they don't I don't want to be caught in that position. Now this year, just as an aside, the test was a little bit tougher than last year, even our own run of our own numbers, the implementation and the add-on of operating risk into our results and then finally the fully phased-in aspects and some of the impacts we have that we didn't have last year impacted our ask this year.

Yes, and this is Rob, I just would chip in just to reiterate what Bill said that the binding constraint is our post-stress ratio, not the preprint.

The final little sound bite, just to concur with your observation, we are running higher than we need to be. And at some point in time we can deploy that capital and would look to do so.

But I would tell you that if we wait until some of the rules are a little bit clearer and there is new rules still coming out that will impact us and others next year, the cost of carrying that little bit of extra capital isn't so much as long as ,again we don't do something silly with it, which we won't.

Right.

(multiple speakers) sensible approach.

Yes.

Thank you, that is really helpful. If you guys will kindly allow me, maybe I can just ask one more follow-up to the initial question.

So there are some folks, some banks that will talk about their ability to kind of still be able to grow NII through faster loan growth kind of offsetting NIM compression. And, of course, with you guys we are dealing with the purchase accounting accretion issues.

But if you were to set that aside and you kind of move forward in time to the point where the purchase accounting accretion headwinds are completely gone, do you think that, is there like a structural difference between PNC's model versus other banks that are saying they can still grow NII even in an environment where rates don't grow or don't rise? Or would you guys be able to, as well?

No, look, we could grow NII. At issue is whether you think it is a good return to do it in the near term. So simple, look, go look at the growth in whole loan mortgages showing up on peers' balance sheets as they steer mortgage production out of their balance sheet versus putting it out into the market.

We could do more of that, that would grow our NII. You are putting on a asset that has only 1.5 year average life at today's rates, it goes to 13 years and a 50 basis point move. So my choice is that that is a lousy risk.

(multiple speakers) That is very helpful color.

Yes, so it is not -- we could do it, we could go out and participate in all of the loans that are getting done on the corporate side and simply book a 100% risk weight BBB rated corporate loan at LIBOR plus 150 with no cross-sell and take (multiple speakers)

That will help our NII.

And that will help our NII and -- but it is -- that is a lovely way to go through life. It is not a good return on equity, not near term and not long term.

Excellent, thanks, guys. Appreciate it.

Ladies and gentlemen, that does conclude the question-and-answer session.

Okay, thank you all for participating on the call this quarter.

Thank you, everybody.

Thank you very much.

This concludes today's conference call. You may now disconnect your lines.