PNC Financial Services Group Inc (PNC) 2016 Q4 法說會逐字稿

Good morning.

My name is Nelson 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 call is being recorded.

I will now turn the call over to Director of Investor Relations, Mr. Bryan Gill.

Please go ahead, sir.

Okay, thank you, Nelson, and good morning.

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

Participating on the 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 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-Qs 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 January 13, 2017, and PNC undertakes no obligation to update them.

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

Thanks, Bryan.

Good morning, everybody.

As you've seen today, we reported full-year 2016 results with net income of $4 billion or $7.30 per diluted common share.

You should have also seen our tangible book value at year-and was $67.41 per common share.

All in, 2016 was a pretty solid year for PNC.

We grew net interest and fee income.

We kept expenses essentially flat and we returned more than $3 billion in capital to shareholders.

And, importantly, we grew our customer franchise.

Now all that said, our net income finished slightly below 2015 in part due to our disciplined risk management efforts throughout the year to best position PNC in the current credit and interest rate environment.

As we've learned over and over again through time, our business offers very attractive returns and growth opportunities by effectively managing through the cycles that are inherent to the banking industry.

In our view for the most part in 2016, neither the credit and certainly not the rate markets offered us an attractive risk/reward opportunity.

So we maintained higher-than-usual cash balances and our loan growth trailed peers.

Now as I discussed in depth at a number of investor conferences in the last few months, we continue to invest and make important progress against our strategic priorities.

We are particularly pleased with the progress that we've made on modernizing our core technology infrastructure and building a leading banking franchise in the Southeast.

As we look ahead, current indicators suggest improving confidence amongst consumers and business leaders about the direction of the economy, which could bode well for our industry.

There is also growing sentiment that we're entering a period of rising interest rates.

In addition, we've all heard that the new administration in Washington supports tax reform, regulatory relief and other pro-growth policies.

But, so far, a move in interest rates is the only thing that has actually happened with the apparent likelihood of more of this to come this year.

But should some or all of these things come to pass, it would certainly benefit us and the industry as a whole.

Now, as always, though, we remain focused on the things that are actually in our power to control and I'm confident that the actions that we took in 2016 position us for further growth and to continue to create long-term value for our shareholders.

2017 is an important year for us as we execute on a number of initiatives, including the home lending transformation, the ongoing digitization of our retail capabilities, stronger growth in consumer lending and the national expansion of our middle-market lending franchise.

And with that, I'm going to hand it over to Rob who will run you through the numbers and share with you some guidance for 2017 and then we'd be happy to take your questions.

Rob?

Thanks, Bill, and good morning, everyone.

Overall, our full-year and fourth-quarter results were largely consistent with our expectations.

As Bill just mentioned, our full-year net income was $4 billion or $7.30 per diluted common share and fourth-quarter net income was $1 billion or $1.97 per diluted common share.

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

Total loans grew by $2 billion or 1% linked quarter.

Commercial lending was up $1.7 billion or 1% from the third quarter, primarily in our corporate banking and real estate businesses.

Consumer lending increased approximately $300 million compared to the third quarter and by approximately $800 million, excluding our consumer runoff portfolios.

Our consumer loan growth was in auto, residential mortgage and credit card.

For the full year-over-year quarter, we had total loan growth of $4.9 billion or 2%.

Commercial lending increased by $6.1 billion or 5% from growth in large corporate and commercial real estate loans.

And consumer lending was down $1.2 billion or 2% year-over-year, primarily due to the continued decline in our consumer runoff portfolios.

Investment securities were up $4.4 billion or 6% linked quarter, primarily in US treasuries, and increased $8.2 billion or 12% compared to the same quarter a year ago as we continue to grow balances in conjunction with higher rates.

On a spot basis, investment securities decreased $2.6 billion or 3% compared to September 30 as securities purchased in the fourth quarter were more than offset by repayments and negative valuation adjustments due to rising rates.

Importantly, about half of the securities purchased in the fourth quarter were forward-settling and will be reflected in the first quarter of 2017.

On the liability side, total deposits increased by $4.5 billion or 2% when compared to the third quarter, primarily driven by seasonally higher commercial deposits and continued growth in consumer savings products.

Compared to the fourth quarter of last year, total deposits increased by $10.1 billion or 4% as we continued to see strong growth in demand and savings deposits.

Average common shareholders' equity decreased by approximately $100 million linked quarter, primarily due to a decline in accumulated other comprehensive income as a result of a change in the value of our available-for-sale securities book from the rising rate environment.

At December 31, 2016, AOCI was down $837 million compared to September 30, 2016.

Compared to the same quarter a year ago, average common shareholders' equity increased $700 million, even after continued capital returned to shareholders and the impact of AOCI.

For full year 2016, our capital return totaled $3.1 billion, comprised of $2 billion in share repurchases and $1.1 billion in common dividends.

This resulted in a payout ratio of approximately 85%.

Period-end common shares outstanding were 485 million, down 19 million or 4% compared to year-end 2015.

As of December 31, 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%, a decline of 20 basis points from September 30, 2016, primarily due to the decline in AOCI.

Our tangible book value was $67.41 per common share as of December 31 and, although this declined on a linked-quarter basis reflecting the impact of AOCI, it was up 6% compared to the same date a year ago.

And our return on average assets for the fourth quarter was 1.13%.

As I've already mentioned and as you can see on slide 5, net income was $4 billion for the full year and $1 billion for the fourth quarter.

Highlights include the following.

Fourth-quarter revenue was up $45 million or 1% compared to the third quarter.

This was driven by higher net interest income, which increased $35 million or 2% primarily due to higher average securities and loan balances, as well as higher loan yields.

Noninterest income was up $10 million or 1% as lower fee income was offset by higher other income.

Full-year revenue was stable as higher net interest income was offset by lower noninterest income, principally due to the decline in net Visa activity.

Of note, we did not sell any Visa shares in the second half of 2016.

Expenses continued to be well-managed in the fourth quarter.

Noninterest expense was up $47 million or 2% compared to the third quarter and included a $55 million contribution to the PNC Foundation.

For full year 2016, expenses were stable compared with 2015.

Provision for credit losses in the fourth quarter was $67 million, down $20 million linked quarter as overall credit quality remained stable.

Full-year provision of $433 million increased by $178 million compared to 2015, largely reflecting the impact of energy-related loans, primarily during the first half of the year.

Finally, our fourth-quarter effective tax rate was 23.4% and our full-year effective tax rate was 24.1%.

Both periods were impacted by the tax favorability of the contribution to the PNC Foundation.

Looking ahead, we expect our 2017 effective tax rate to be approximately 25% to 26%, which doesn't take into account any tax reform.

Now I will discuss the key drivers of our performance in more detail.

Turning to slide 6, full-year 2016 net interest income increased by $113 million or 1% compared to 2015, reflecting higher core NII.

Core net interest income grew by $254 million or 3% in 2016, primarily driven by increased loan and securities balances and higher loan yields.

Core NII increased to $2.1 billion in the fourth quarter, which was the highest quarterly level we've generated in three years.

In 2016, purchase accounting accretion decreased $141 million.

In 2017, we expect PAA will be down by $75 million compared to 2016.

Net interest margin stabilized in 2016 and NIM improved slightly in the fourth quarter compared to the third quarter due to higher loan yields.

As you can see on slide 7, we have successfully grown fee income in each of the past five years and our diversified businesses continue to produce substantial fee income throughout 2016.

Three of our business activities -- asset management, corporate and consumer services -- each generate well in excess of $1 billion annually, and we continue to execute on our strategies to grow these fee businesses across our franchise.

For the full year, asset management fees, which include our equity investment in BlackRock, declined $46 million or 3% as net new business activity was more than offset by a $30 million trust settlement in 2015 and the impact of volatile equity markets in the first quarter of 2016.

On a linked-quarter basis, asset management fees declined slightly as the impact of higher equity markets was offset by lower fixed income markets and lower net new business activity.

Consumer services fees grew $53 million or 4% for the full year as a result of higher and increasingly broad customer activity with growth in credit and debit card as well as increased brokerage fees.

On a linked-quarter basis, Consumer services fees increased modestly, reflecting slightly higher credit card activity.

Corporate Services fees increased by $13 million or 1% in 2016 and included higher treasury management fees, partially offset by lower merger and acquisition advisory fees.

Treasury management is one of our largest Corporate Services fees components and we see long-term growth opportunities as we continue to develop innovative solutions in the corporate payment space.

On a linked-quarter basis, Corporate Services fees were relatively flat as lower merger and acquisition advisory fees offset a higher benefit from commercial mortgage servicing rights valuation.

Residential mortgage noninterest income was stable for the full year 2016 -- I'm sorry -- it was stable for the full year as 2016 originations slightly exceeded 2015 levels.

On a linked-quarter basis, residential mortgage fees were down $18 million or 11% as loan sales revenue declined due to higher rates and seasonally lower loan application and origination volumes in the fourth quarter.

Service charges on deposits for the full year increased by $16 million or 2% driven by higher customer activity.

On a linked-quarter basis, service charges on deposits declined seasonally by 1%.

Lastly, full-year other noninterest income decreased by $213 million or 16%, primarily due to lower asset sales compared to 2015.

The largest component was net Visa sales activity, which declined by $134 million year-over-year.

On a linked-quarter basis, other noninterest income increased by $36 million or 14%, primarily driven by higher gains on asset dispositions and higher revenue from private equity and other investments.

In 2017, we expect the quarterly run rate for other noninterest income to be in the range of $250 million to $275 million, excluding net securities gains and net Visa activity.

Turning to slide 8, as you know, expense management has been a particular focus area for us for several years.

Since 2012, we have successfully reduced annual expenses by more than $1 billion, even as we made significant investments in our technology infrastructure and our retail bank transformation.

These results were due in part to our Continuous Improvement Program, or CIP.

During 2016, we completed actions that achieved our full-year goal of $400 million in cost savings.

Looking forward to 2017, we have targeted an additional $350 million in cost savings through CIP, which we again expect to fund a significant portion of our business and technology investments.

Turning to slide 9, overall credit quality remained stable in the fourth quarter.

Total nonperforming loans were essentially flat linked quarter as improvements in commercial NPLs were mostly offset by increases on the consumer side.

Total delinquencies increased by $120 million or 8%, primarily in the 30 to 59-day period, which was due to some seasonal factors that have since been resolved.

Provision for credit losses of $67 million decreased by $20 million linked quarter.

The provision was slightly lower than our expectations due in part to a reserve release related to better-than-expected performance of home equity lines of credit that are reaching their draw period end dates.

As many of you are aware, and as we've expected for some time, the home equity end of draws will peak in 2017.

Net charge-offs declined $48 million to $106 million in the fourth quarter as our energy-related net charge-offs decreased.

In the fourth quarter, the annualized net charge-off ratio was 20 basis points, down 9 basis points linked quarter.

In summary, PNC reported fourth-quarter and full-year earnings consistent with our expectations.

Turning to 2017, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates twice this year, in June and December, with each increase being 25 basis points.

Based on these assumptions, our full-year 2017 guidance compared to 2016 results is as follows.

We expect mid-single digit loan growth.

We expect revenue growth in the mid-single digits and we expect a low single digit increase in expenses.

Based on this guidance, we believe we will deliver positive operating leverage in 2017 and believe we can do so absent our expectations for short-term interest rate increases.

Looking ahead at the first quarter of 2017 compared to the fourth quarter of 2016 reported results, we expect modest loan growth.

We expect total net interest income to remain stable.

We expect fee income to be down mid-single digits due to seasonality and typically lower first-quarter client activity.

We expect expenses to be down low single digits and we expect provision to be between $75 million and $125 million.

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

Operator, could you please poll for questions?

(Operator Instructions).

Scott Siefers, Sandler O'Neill & Partners.

Morning, guys.

Let's see.

Either Bill or Rob, I was hoping you could just sort of address the idea of the pace at which you would anticipate deploying liquidity say over the course of the year.

I guess I can get a directional sense for what you've been doing in the earning asset base, but just curious philosophically how are you thinking about [legging] into higher interest rates as we look throughout 2017?

I mean, look, there is no magical answer to that.

Through the course of the last bunch of years, even with rates largely flat inside of up-and-down cycles, we invest opportunistically small bits.

We remain very short today, so we have a big opportunity, but we're not going to bet on red all in one rate move.

So you'll see us through the course of the year, if rates continue their path and what we expect, to deploy liquidity and reduce our asset sensitivity, but there's no perfect answer to that and it certainly isn't programmatic.

Okay, thanks.

And then maybe skipping over to the volume side of the NII equation.

I think the first-quarter guidance is still for more modest growth, but then you've got the stronger growth outlook for the full year on overall loan growth.

Just curious how you see things building as it relates to overall loan growth and some of the actual favorable impact of some of these newer initiatives on both the consumer and commercial side.

Yes, as it relates to the first-quarter issue on NII, that's largely a day count issue.

What are we?

Two days?

On the NII, yes, they are stable -- the loans are --.

So back that out.

I mean loans, just in terms of our guidance, we assume flat across the year, but I would tell you, inside of that, we have continued fourth-quarter pace for C&I and we have continued fourth-quarter pace for what we had in consumer.

Inside of consumer, as you know, we've got a number of initiatives that ought to allow us to accelerate that through time, not changing our credit box so much, it's just improving our process.

And inside of C&I, a couple of soundbites.

December was the highest sales month ever for our corporate bank.

The fourth quarter inside of middle market is the first quarter in multiple quarters where we actually had growth in plain-vanilla middle-market loans.

And so maybe we're doing a great job, but maybe some of the sentiment you're hearing and feeling coming out of corporate America actually plays out and what we have in our forecast didn't really build in that impact.

So there's probably upside to that.

In the consumer piece, there is upside, too, but that plays out over the course of years, frankly, as we change technology operations and some of the way we go about approving things.

And that consumer lift probably being more, just in the spirit of your question, more on the back half of 2017 than in the first quarter.

Yes, yes.

Yes, makes sense.

Okay, terrific.

Thanks, guys, very much.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

A couple of questions, one on expenses.

I see the 350 CIP target.

Could you just talk about whether or not there's an opportunity to drop any of that to the bottom line?

I saw the guidance for next year with expense expectation in the low single digits, but wondered if that includes the CIP and so the result is that you are not dropping it to the bottom line or am I misunderstanding something?

No, no, I think you're -- hi, Betsy; this is Rob.

No, you are doing it correctly.

Our full-year guidance were up a bit on expenses, incorporates the 350 CIP.

And what we're looking to do in 2017 is what we've been doing these last couple of years, specific lifts of cost saves that, in effect, will fund the investment that we will continue to make.

On top of that, with some growth that we have on some variable expenses around growth in fee businesses would be part of that as well.

Yes, the other thing is that 2017 takes the full impact of the FDIC rolling charge, so some of it is just carryforward from what we were taking through 2016 and there is a little bit of imbalance in there as it relates to some of our longer-term initiatives, for example, the savings we'll get out of home lending and the savings we will get out of decommissioning data centers, which will start to show up in 2017, but carry forward into later years.

But all of that's --.

It's all embedded in the expense guidance, but I think my point is a simple one, which is we haven't, nor will we ever, lose sight of the goal of holding expenses as tightly controlled as we can.

And in check.

Yes.

Okay, but what I'm also hearing is a little bit of back-end improvement expected.

It depends what happens to volumes and the comp side of that.

Yes.

I mean I think the best way to think of it, Betsy -- I think that's partially true.

As you know, our goal is positive operating leverage.

We're definitively in a position where we feel we'll deliver that and that's what we're going to manage to.

And then just secondly on the tax question, there has obviously been a lot of chatter around potentially having a lower tax rate.

I know there's a tremendous amount of puts and takes until we get to the end state, but could you just speak broadly to whether or not changes in tax policy would impact how you are thinking about the stake you have in BlackRock?

Well, look -- so we'll go back and restate what we've said 25 times, which is we're rational stewards of your capital as it relates to our holding in BlackRock.

Obviously a lower tax burden on disposition changes the economics on that.

Without knowing tax rate or any other things that may play through, it's hard to predict how that plays out, but, look, it changes the economics and we're conscious of that and we'll take that into account if and when we get to something that's actually made law (multiple speakers).

(multiple speakers)

Yes, yes.

Okay, got it.

Thanks.

Erika Najarian, Bank of America.

Hi, good morning.

As I take a step back, clearly a lot has changed since we've talked to you all last.

Can you give us a sense of how much regulatory costs have increased over the past few years for PNC?

And what you think the natural trajectory is of those regulatory costs and how that trajectory could potentially change if we do have some regulatory relief.

Sure, well, I can start.

Erika, this is Rob.

I don't have a definitive number to throw out at you in terms of what the regulatory costs are.

I know they are a lot, but we gave up a few years ago just because -- counting it -- because it became so ingrained in everything that we did.

To answer your question in terms of if that were to change would we be able to reduce expenses.

I suppose, although there are a lot of things that we're doing that are sensible that we would continue to do.

My mind, when you asked that question, my mind just jumps to the opportunity cost of it all.

The regulatory work that we do is very time-consuming in terms of management's time, calories, etc.

that in theory could be applied to other endeavors.

Bill, do you have anything to add to that?

No, the only other thing I'd say is that the regulatory burden as it relates to -- if you are thinking CCAR or heightened expectations or three lines of defense, there is certainly a lot of that, much of which, by the way, we would keep and go through the exercise anyway, but there's also a lot of regulatory costs that probably were missing from the industry historically.

I'm thinking about the build in AML costs as we put bodies in operations and invest in technology as it relates to AML.

I'm thinking about general compliance with consumer laws.

Independent of where and what happens to the CFPB, it's clear that we all had work to do on that.

We're done investing in that, by and large, but I don't think those costs go away, nor should they, no matter what really happens (multiple speakers).

In a material (multiple speakers).

Yes.

Got it.

And just a follow-up to clarify the guidance on revenues.

The up mid-single digit, what is the backdrop from a rate perspective, Rob, that you're assuming?

Yes, so on the revenue side, up mid-single digits, again, around the loan growth that we have there.

The rate backdrop, as I had mentioned, we have built into our plans two rate increases in 2017, one in June and one in December, both 25 basis points.

Now clearly the one in June is the only one that matters, but what also matters is we're assuming a rational forward curve off of rates today in the sense that our reinvestment of our securities book assumes continued higher five through seven year part of the curve.

Where that's flattened substantially, then the impact wouldn't be as great.

Yes, that's right.

And, of course, both rate increases matter.

June matters more to 2017.

Yes.

Right.

Thanks so much; I appreciate it.

Gerard Cassidy, RBC.

Good morning, guys.

Rob, coming back to your comments about the technology infrastructure spending that you've been doing for a number of years now, is there a period where you think that that extra spending, if there is extra spending going on, that that ends and you start to see that flatten out and maybe even come down in total technology spending?

We're looking at each other here.

So the infrastructure spend most definitely falls off substantially and I would see a technology plan given to me that would suggest total tech costs would fall.

Having said that, my expectation is that it's not true.

Instead what will happen is you'll see a mix shift such that we're spending much more on the front end towards consumers and applications and ease of doing business and automation and real-time payments and less worrying about the infrastructure.

The infrastructure we've built supports our capability to do the second-order effect, but I think banking, both on the corporate and retail side, is increasingly becoming a technology-related business and I just don't know that you're going to see that drop off if you intend to remain competitive with what customers expect today.

Yes, hey, Gerard; this is Rob.

I'll add to that.

That's the key point.

It's a shift from the buildout in the infrastructure to actually using the infrastructure and we have a lot of investments planned around various customer applications.

I see.

And is the infrastructure spend, does that finish up end of this year into next year or any timetable?

No, it's pretty much done this year.

We'll have some trailing effects and we'll obviously continuously be investing in cyber and then we'll have a roll forward of the -- takedown of the old data centers, which actually take some period of time as you decommission and clean old servers.

So some of the expense save rolls into 2018.

But the infrastructure side apps in cyber, which will be continuous, is largely behind us.

Very good.

And then, Bill, maybe can you give us any color on where we stand on [Zell] being rolled out this quarter, what your expectations are for this year and how business -- the PDP spending could help your consumer business?

So I'm cognizant of not wanting to front-run public announcements from Zell themselves --

Okay.

-- but assume that sometime early in 2017 that the collective banks that have signed up early on, which include the ownership structure, as well as a number of other large banks and many other banks through third-party service providers, will be online with Zell.

It will be ubiquitous.

You will be able to use it on PNC's mobile app or BofA's, or Citigroup's or Morgan's or anybody else's.

And I think -- it does a couple of things.

One is it puts our consumers back in our hands, right?

The whole idea behind it is we don't want our customers using third-party application, particularly in what potentially is an insecure -- unsecure fashion.

So it solves that issue and then it gives us mind share; it's not a revenue opportunity out of the gate as it relates to the product specifically, but I think it is another part of the customer relationship that makes it more sticky.

And I think through time, the concept of real-time payments, whether P2P or business to consumer or on the corporate side, as we are rolling out real-time payments through the clearinghouses as an alternative to ACH, I think it becomes table stakes.

I think there's revenue opportunities against it.

I think the US is behind and I think it's a trend you're going to continue to see build.

And on the back of it, you will see -- I know we have many product applications that we are developing on the back of that basic capability, which will be revenue-driven.

Great.

I appreciate all the color.

John Pancari, Evercore ISI.

Good morning.

Just on the BlackRock stake, just given the potential corporate tax reform here, wanted to see if you can give us your updated thoughts on how you are thinking about the stake and if you could look at a potential sale here, and if so, if you could just talk about the capital deployment opportunities, how you would view that.

Thanks.

Well, the rude answer would be asked and answered, but I will answer it again quickly.

Our thoughts on BlackRock remain the same, which is we'll be an intelligent owner of a valuable position, a company that we've done very well with through time and has been a good partner.

We look for ways, if there are ways to monetize that stake, we recognize the concentration of it, we would do so.

A lower tax rate changes the economics of a potential sale, but there's nothing on a sheet of paper, no law, no new rate that allows us to run any numbers to suggest what we would or wouldn't do, other than we will be rational actors in the right environment.

Okay, thank you.

Yes, sorry, I just realized Betsy had asked that.

And then on that, in terms of the -- your thoughts on M&A as you look at things.

I know you've been reserved in terms of your outlook there.

Are you feeling any different here as you look into next year or this year?

Thanks.

Not on the bank side, for all the reasons mentioned before.

That we don't want to buy yesterday's bank model and we don't have a need for scale.

Having said that, we continue to look at, I'll call them portfolio purchases, but asset generators that would make sense inside of our franchise and would add another product or service to an existing client base.

We look at those all the time.

We haven't hit on any, but it wouldn't shock me if we did.

Okay, and if I could throw one more in there.

On the HELOC loans coming in better than expected in terms of their performance, is that something that you expect to continue through the year?

Premature, John.

I mean that's going to be an issue for us in 2017; premature to conclude that.

This is something, as I mentioned in the opening comments, we pointed to for some time.

2017 was the peak year, so we'll obviously keep a close eye on it, but premature to conclude anything yet.

All right, Rob.

All right, thank you.

Matthew O'Connor, Deutsche Bank.

Hey, guys.

This is Rob from Matt's team.

Just a follow-up on your full-year revenue growth guidance in the mid-single digits.

Asked another way, any sense of what that would look like ex any rate increases through the year?

And then looking at the components of that, any sense of growth expectations for fee revenues and then net interest income for the year?

Do you want me --?

Yes, I think the simplest way to answer that, Rob, would be what's the value in terms of our revenue guidance of effectively the June rate increase that we've built into our plan.

There's the December too, but as we just mentioned, that won't have as big of an impact.

And all else being equal, which not all else will be equal, but just for math purposes, we value that around $170 million to $200 million of revenue.

So if you wanted to put that into your model or back that out, that answers your fundamental question.

In terms of just mid-single digit growth, I think you just take a look in terms of what we would reasonably expect in terms of our securities balances, the loans that we talked about and continued fee growth, and they all converge at that mid-single digit level.

Okay, thanks very much.

Ken Usdin, Jefferies.

Thanks a lot.

Good morning.

Hey, Rob, can I just ask one more on the cost side?

Yes, sure.

You mentioned that inside the 350 CIP for the year, you're now contemplating some of these -- the multiple ongoing initiatives you guys have got.

So is it fair to say that as we do roll forward that whether it's the data center stuff or the tech rationalization, branches, etc., home equity, that's all contemplated in your annual CIP as we now move forward?

You at one point at a conference had laid out a lot of individual pieces, but I just want to make sure that I understand it.

No, that's right.

No, no, no -- yes, yes, no, that's right, Ken.

So the 350 captures everything that we plan to do in 2017.

Bill mentioned there could be upside in the back half of the year.

I think it's an important point, though, on the consumer lending transformation that we talked about, which is really a multiyear process.

So most of the savings that we talked about and pointed out there kick in post-2017 but we're working on it now.

Okay, great.

Thank you for that.

And then just on the fee side, if you're in that mid-single digit zone in your outlook for fees, I'm wondering just what you -- if you could parse out -- what do you think is going to lead that this year?

Last year was a bit of a mixed year with asset management having the charge and then the resi mortgage.

So what do you think steps back out this year?

Well, I think it's largely the same trends.

If you just go through the components, I would still say asset management in the mid to high single digits, consumer services mid to high single digits, Corporate Services mid-single digits and residential mortgage probably lower than that.

And that's how I -- don't add all that up and say that doesn't add up, but that's generally the trend that we've been on and that's why I'd point to mid-single digits.

Okay, and just one quick one.

Can you quantify just how much forward purchases of the securities you did that will settle in 1Q?

I don't know the answer to that.

Yes, it's just over $3 billion.

Okay, thanks, guys.

Matt Burnell, Wells Fargo Securities.

Good morning, guys.

Thanks for taking my question.

Maybe a question -- a couple of related questions for you, Rob.

First of all, and I apologize if I missed any comments you may have said about this early on, but any change to your thinking about managing the AOCI risk as rates rise now that it at least appears at this point that we could get a little bit greater of a rate increase than we've seen in the past few years.

And then just on a related question in terms of any change in your thinking about deposit beta, I noticed in the fourth quarter there was a little -- there was a 1 basis point increase in your overall deposit costs, which was actually -- last fourth quarter when we had the 25 basis point hike, there was a 1 basis point decline.

So I was just curious if you -- any changes in your thinking about deposit beta?

Okay, so why don't I do the deposit beta one first?

And I'm not sure I understand the AOCI question, but --.

I'll answer that.

On the deposit beta, obviously we keep a close eye on it.

We break it down between the commercial and the consumer.

On the consumer side, we've made some moves in 2016; we've backed off promos a little bit, so I don't expect a beta move on the consumer side soon.

Commercial is a little bit more fluid.

You can see we're still trending below what the average is, so we may see some movement in 2017 on the commercial, but I would definitely expect to see sequence wise commercial before consumer, not sure --.

Commercial has been running maybe 45% and part of that is driven by the dynamics inside the changing rules in the money fund industry where the yields we're offering are still attractive relative to a treasury-only fund.

On the consumer side, there is some noise in there because what happened was as we got ready for LCR in 2016, we had promo rates which were a large portion of our production and, obviously, higher than straight Fed funds rates.

And we basically have weaned ourselves off of that today and we go with our base savings account.

So what you saw in terms of that basis point drop was getting out of promo and into something else and then --.

That's right.

It's probably random noise that you see a basis point increase because we haven't changed and effectively haven't passed through on the consumer side any change in rates.

Which is why it's pretty steady.

Yes.

The AOCI issues, real quickly, we've used -- and you'll see it -- our held to maturity account appropriately.

This quarter I think total AOCI is a function, a hit to capital, is maybe 0.25 point.

We stress it inside of our own internally run stress tests.

We don't think that is a constraint on us as we go forward.

I would tell you that the move that we've had -- think about the move that we've had in the back end or just the 10-year part of the curve through the fourth quarter is largely 80 basis points, which effectively has extended any mortgages or mortgage-backed securities you had in that book as far as they are going to go.

So the negative convexity in terms of the size of the move or the markets you're going to have, my guess for us and everybody else is probably highest this quarter than what you're going to see going forward.

Yes, and I would just add to that, that's right, 20 basis points, so capital ratio went from 10.2 to 10 on that hit.

Right.

Guys, thanks for the color.

I appreciate it.

Terry McEvoy, Stephens.

I do believe the line has disconnected; we shall proceed with the next question.

(Operator Instructions).

Michael Rose, Raymond James.

Hey, everyone.

Most of my questions have been answered.

I just wanted to ask a question on energy.

It looked like the oil and gas loans were up a little bit.

I just wanted to get a sense for -- is that draws on existing lines?

Or are you actually starting to see opportunities to grow that portfolio?

I know it's small.

And then as a follow-up, you had cited throughout the year that oil and gas was a driver of the provision.

How much was the contribution to energy this year from provision and how does that relate to your outlook for 2017?

Thanks.

Okay, well, I can take that down a little bit there.

Energy loans did actually rise a little bit.

We're still -- in terms of outstandings in that $2.5 billion -- $2.4 billion, $2.5 billion range.

And to answer your question, it was more -- the growth was more just good, solid deals, so not anything in terms of draw.

I don't have handy the exact breakout.

We did that in the slides last quarter for you in terms of the total provision that was energy-related.

Well, part of the issue -- if you think about our provision this year and even some of our charge-offs, a lot of it was not direct energy, but rather industries impacted by energy.

That's right, yes, that's right.

So some of the charge-offs we've had in our asset-based book and our services book were not directly energy, but basically companies that lost demand because of it.

The issue we have as we go forward, provision guidance, and we're going to say this every time somebody asks us, is provisions have been low, particularly when you back out the spike that we saw in energy or energy-related early in the year and at some point, they are going to normalize.

What do we run a 20 basis points to charge-offs this quarter; it ought to be through the cycle 50.

And so we always tell you watch for the 50 even though I don't necessarily expect it next quarter and you'll ask me again next quarter and we'll see what we think about the second.

That's been the issue for the last couple of years, but the bulk of the increase in the provision was energy-related.

We can get you that exact number.

Yes, I'll get you offline, Michael.

Okay.

Thanks a lot.

I appreciate the color.

Terry McEvoy, Stephens.

Hi, thank you.

Sorry about that.

I guess a question for Bill.

At this point in the credit cycle, PNC's loan growth would lag the industry and you've talked about that for a while now, but if we think about accelerating economic growth, are you willing to take more credit risk to show loan growth?

So is this a different playbook given the backdrop that's emerged since the elections?

Well, I think it's a different opportunity book.

So our loan growth, if you think -- if you tracked all the categories through time, we had reasonable growth in asset-based lending, equipment finance, large growth in real estate.

We've seen, particularly in real estate, that trend continue to drop as we've seen the heat that's hit multifamily and some other things.

Other people continue to accelerate and continue to grow that book at high rates.

We've basically backed off that.

I don't know that that changes.

What the bullishness in the economy, infrastructure spend, if corporates get back to capital, what that causes is growth in middle-market and continued activity.

We've also had growth in large corporate, mostly on the back of M&A-related activity, but those two things probably accelerate.

If the buzz in the air becomes real, if people -- if we really do get infrastructure spend at the state and local level, if we really do get companies feeling confident about their ability to invest in core durables in a profitable way.

We don't have that in any of our guidance, but the bullish side of me suggests that that opportunity sits out there.

Great, and then just a follow-up question for Rob.

The seasonal increase in commercial deposits in the fourth quarter, has that left the balance sheet by the end of the year or do you expect some seasonality to decline in the first quarter?

Yes, no, it did.

So you can see on the spot commercial, deposits were down.

Perfect.

Thanks so much.

Kevin Barker, Piper Jaffray.

Good morning.

Thanks for taking my questions.

I just wanted to follow up on the question that was just asked about loan growth, and you're saying that C&I loan growth is going to accelerate given the backdrop that we're seeing right now.

But at the same time, we have corporate leverage, which is very high compared to what we saw post-crisis and we have interest rates moving higher.

How do you think about the balance between corporate leverage being high and rates moving higher while also seeing growth in Company spending?

So you've got to remember who our core clients are, which -- while investment-grade corporate leverage I think is at an all-time high and will, on a coverage ratio basis, get worse as rates rise, assuming they are not 100% hedged, which I think is a safe assumption, they still have debt capacity.

So the way we think about it is it wouldn't be unlikely that you would see, at least in our internal ratings, downgrades in provision, but it wouldn't stop us from lending into an economically profitable relationship, albeit at a higher spread and hopefully more cross-sell associated with it.

So if there is loan demand out there coming from the BB+, BBB sweet spot client for us, we'll lend into that.

The issue in middle market, for the last two or three years, is they just haven't borrowed.

The borrowings you have seen have been largely large corporate and that's been M&A related and/or share repurchase, which has driven leverage.

I think there is a big opportunity for this country for middle to small, large size corporate to start investing in themselves and to grow.

And, like I said, we saw -- we had a record sales month in the corporate bank in December and we saw growth in middle-market balances for the first time in a lot of quarters in the fourth quarter.

We had a record quarter in our Southeast markets, particularly in Chicago, so there's a lot of good momentum out there.

What I'm cautious about is -- nothing has actually happened yet other than there has been a move in rates and a change in sentiment and I think we need to start seeing some of the confirmations get through.

We need to see real progress on tax reform.

We need to see real progress on infrastructure spending bills at state and local, and then all of a sudden, this thing takes flight, but right now it's just people talking about it.

Okay.

And then onto another topic.

I noticed that you marked up your MSR by about 43% this quarter, but it appears that the gain was entirely offset by hedging.

Could you help us understand how that changed this quarter and how it flowed through the income statement?

Well, the markup -- I'll accept your percentage -- I haven't looked at it, but just the rise in rates is -- the MSR is a big IO strip, so the value of that goes up.

We hedge it as effectively as we can.

Our hedges outperformed the valuation move in the MSR so we had a net gain in MSR hedging.

I don't know, Rob, what the net was this quarter, $30 million?

$30 million on residential and $20 million on commercial.

Okay, all right, thanks.

But there is nothing inherently magical about this quarter other than the rate move itself.

Again, if you go from Sep.

30 to December 30, then you've got 80 basis points plus on the 10-year.

That causes a big swing in the value of that asset.

Right.

Was there a change in accounting regarding the MSR or was that just a -- Rob, I'm not sure (multiple speakers).

No, it's effectively a mark-to-market asset as a function of rates and prepay and a whole bunch of other assumptions, but none of that's -- what changed was the inputs, not anything with the model or the accounting; that's it.

Okay, thank you.

Brian Klock, Keefe, Bruyette & Woods.

Thank you and good morning.

Bill, I had a follow-up question again, I guess on the commercial loan side.

You talked about how strong December was.

I wanted to, I guess, follow up and think about, if we're looking at the linked quarter, it does look like loan growth was down a little bit from the linked quarter.

Actually it was a little softer in the retail, wholesale and the manufacturing side of things.

Overall, on a year-over-year basis, it's only up 2.8%, so I guess are you seeing more extensions of lines of credit?

Maybe the utilization rates have gone down?

And is there any --?

Utilization hasn't changed.

I'm not sure -- if I think of our mix -- I'm not exactly sure what table you're looking at -- but if I think of our mix, we've seen real estate slow down.

We've seen large corporate continue at a decent pace.

We saw middle market finally turn positive.

We've seen continued slow run-off in our smaller commercial book, largely related to just running off old acquired books as opposed to new activity.

We've seen growth in utilities as we've begun an aggressive cross-sell campaign against that book of business.

We've seen stabilization finally in our asset-based finance business.

We did a lot of work there around LCR a year ago, and we saw a big quarter in equipment finance, largely just on the back of good cross-sell of that product into our traditional corporate clients.

So I don't -- you know, I -- the momentum feels right.

Probably the one thing that has changed through the course of 2016 is a slowdown in the balances of our asset-based lending book, as refis continue to head towards cash flow lending on some of that and some of the utilization on that book, particularly related to energy-related credits has in fact declined.

But core middle market, to me, the broader economy was driving our GDP.

I get excited about when I see core middle-market businesses manufacturer start to borrow and they did that in the fourth quarter.

And that's our biggest customer segment.

Yes.

Got you.

And I guess thinking about the way your commercial loan growth, you continue to have run-off in the nonstrategic and some of those consumer books, which weighed on the overall consumer.

Do you think that -- I guess would it be a 5% plus growth you would get from commercial and maybe the consumer would be a positive this quarter or maybe just less of a negative that gets you to that overall mid-single?

Well, consumer was a positive this quarter.

We planned it to be so into 2017 and I guess if you trend line what we had in C&I, I know there might be a mix shift -- would be a little bit higher.

Mix shift, that's right.

But the point is will we see some more momentum around consumer.

The answer is, yes, we are expecting that.

Yes.

All right.

Thanks for your time.

Thank you.

There are no further questions.

Thank you very much for joining the call and we look forward to working with you.

Thanks, everybody.

Thank you.

This concludes today's conference call.

You may now disconnect.