PNC Financial Services Group Inc (PNC) 2018 Q4 法說會逐字稿

Good morning.

My name is Carlos, 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 would now like to turn the call over to the Director of Investor Relations, Mr. Bryan Gill.

Sir, please go ahead.

Well, thank you, and good morning, everyone.

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

Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.

Today's presentation contains forward-looking information.

Cautionary statements about this information as well as reconciliations of non-GAAP financial measures are included in today's earnings release materials as well as our SEC filings and other investor materials.

These materials are available on our corporate website, pnc.com, under Investor Relations.

These statements speak only as of January 16, 2019, and PNC undertakes no obligation to update them.

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

Thanks, Bryan, and good morning, everybody.

Today, we reported full year 2018 results with net income of $5.3 billion or $10.71 per diluted common share.

The strong year for PNC was capped by another solid quarter.

You saw that we reported fourth quarter net income of $1.4 billion or $2.75 per diluted share.

We grew loans, deposits and net interest income in the quarter and we controlled expenses.

And while our provision increased reflecting loan growth, and Rob will talk more about this in a second, credit quality remained very strong for the quarter.

Noninterest income for the quarter was down, but largely due to asset management revenue, driven by lower earnings from our equity investment in BlackRock, and the decline includes a charge that flows through to PNC related to BlackRock's restructuring charge that you -- I'm sure you saw in their call this morning.

Pulling back to look at the year, 2018 was successful for PNC, and I want to thank all of our employees for their continued hard work as well as our clients for their ongoing trust in us.

For the full year, we achieved record total revenue.

Noninterest income and -- sorry, net interest income and noninterest income were up, and we generated positive operating leverage for the year.

We continue to manage expenses well even as we invested pretty heavily into our businesses and our people improve -- even improving our efficiency ratio through the year.

We grew loans and deposits and expanded the reach of our franchise, both through our middle market expansion, you saw we moved into -- in '18 into Denver, Houston and Nashville, but also through our successful launch of our national digital retail strategy.

Finally, we returned $4.4 billion in capital to our shareholders through repurchases and dividends.

And by the way, since we began repurchasing shares in 2014, we've returned more than $16 billion in total capital through dividends and share repurchases, and our total share count has actually decreased 14% from 533 million to 457 million shares.

As we enter '19, despite the recent market volatility, yield curve inversion and political and trade tensions, we don't think we're headed towards a recession.

Consumer confidence remains high and it's going to provide support for consumer spending, which accounts, as you know, for over 65% of domestic GDP.

Both services and manufacturing ISM surveys remain at expansionary levels, although admittedly off the recent highs and our corporate clients, as we talk to them, remain largely bullish.

Of course, all of this could change if, for example, the government shutdown persists for a longer period of time or disagreements with China on trade aren't sorted out and the impact currently being felt by large multinationals starts to trickle down to the broader economy.

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

Instead, we see an economy growing at over 2.5% and healthy loan demand as the repricing of the risk in the capital markets drives business back to the banks.

In this environment, we believe we can continue to establish new customer relationships, particularly as we keep broadening the reach of our brand.

We also believe we can deepen relationships with our existing clients by delivering a superior banking and investing experience alongside the innovative products we've been bringing to market to help our customers achieve their financial goals.

Furthermore, we'll continue the path of risk and expense management that has enabled us to perform through the cycle, creating long-term value for our investors through time.

We've got a lot of opportunities in front of us to grow the company responsibly simply by continuing to execute on our strategic priorities in '19, and we are excited about the year ahead.

And with that, I'm going to turn it over to Rob, who's going to run you through the results in more detail and share our guidance for this year, and then we'll be happy to answer any questions.

Rob?

Yes, great.

Thanks, Bill, and good morning, everyone.

As Bill just mentioned, we reported full year net income of $5.3 billion or $10.71 per diluted common share, and fourth quarter net income was $1.4 billion or $2.75 per diluted common share.

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

Total loans grew $2.6 billion or 1% to $226 billion in the fourth quarter compared to the third quarter.

Growth compared to the fourth quarter of 2017 was $4.8 billion or 2%.

Investment securities of $82.1 billion increased $1.4 billion or 2% linked quarter and $7.9 billion or 11% compared to the same quarter a year ago.

Purchases were primarily U.S. treasuries and residential mortgage-backed securities.

Our cash balances at the Fed averaged $16.4 billion for the fourth quarter, down $2.4 billion linked quarter and $8.9 billion year-over-year.

Spot cash balances at the Fed were $10.5 billion at December 31, as we opportunistically invested cash and resale agreements at year-end.

Deposits were up 2% on both a linked quarter and year-over-year basis.

As of December 31, 2018, our Basel III common equity Tier 1 ratio was estimated to be 9.6%, up from 9.3% at September 30.

For the full year 2018, we returned $4.4 billion of capital to shareholders.

This represented a 22% increase over the prior year and was comprised of $1.6 billion in common dividends and $2.8 billion in share repurchases, which included repurchases under our recently increased authorization.

Our return on average assets for the fourth quarter was 1.4%, our return on average common equity was 11.83% and our return on tangible common equity was 15.09%.

Our tangible book value was $75.42 per common share as of December 31, an increase of 3% compared to September 30.

Slide 5 shows our loans and deposits in more detail.

Average loans grew $2.6 billion or 1% linked quarter and $4.8 billion or 2% compared to the fourth quarter last year.

Average commercial lending balances increased $2.3 billion linked quarter.

This reflects an increase in multi-family agency warehouse lending, corporate banking, business credit and equipment finance businesses.

If we think about our C&IB loan portfolio in 3 categories, secured lending, commercial real estate and traditional cash flow, our growth continues to be driven by the secured lending business, which comprises approximately 1/3 of our portfolio.

During the fourth quarter, the secured lending businesses, which we define as asset-backed, equipment finance and business credit, grew 4% linked quarter and 12% year-over-year.

The second category, commercial real estate, excluding our multi-family agency warehouse lending, declined approximately 1%.

And the third category, traditional cash flow, balances were relatively flat.

On the consumer side, balances increased by approximately $300 million linked quarter and $1.1 billion year-over-year.

This was the sixth consecutive quarter that our average consumer portfolio grew.

We had growth in residential mortgage, credit card, auto and unsecured installment loans, while home equity and education lending continued to decline.

Deposits increased $4 billion or 2% to $267 billion in the fourth quarter compared with the third quarter.

Growth was largely in commercial deposits related to typical seasonality and, as expected, was primarily in interest-bearing accounts.

Consumer deposits remained stable linked quarter.

Compared to the same quarter a year ago, total deposits increased by $5 billion or 2%, reflecting growth in both consumer and commercial balances.

Our overall cumulative deposit beta increased in the fourth quarter, driven by both commercial and consumer.

The cumulative commercial beta is effectively at our stated level, and our cumulative consumer beta increased 1% from the third quarter to 14% and remained below our stated level of 38%.

As you can see on Slide 6, full year 2018 revenue was a record $17.1 billion, up $803 million or 5%.

Net interest income increased by $613 million or 7%, and noninterest income grew by $190 million or 3%, reflecting higher interest rates and overall business growth.

As a reminder, 2017 noninterest expense included significant items totaling approximately $500 million.

Excluding these items, full year noninterest expense increased, reflecting deliberate investment in our businesses, technology and people.

For the fourth quarter, expenses declined linked quarter by $31 million or 1%.

Full year provision of $408 million decreased by $33 million compared to 2017, and provision for credit losses in the fourth quarter increased $60 million to $148 million.

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

Turning to Slide 7, full year 2018 net interest income was $9.7 billion, a record for PNC.

Net interest income for 2018 increased $613 million or 7% compared with 2017, as higher earning asset yields and balances were partially offset by higher funding costs.

Our net interest margin increased in 2018 to 2.97%, up 10 basis points compared to 2017.

For the fourth quarter, our net interest margin was 2.96%, a decline of 3 basis points linked quarter.

The 3-basis-point decline was due to a fourth quarter refinement of the calculation of average other interest-earning assets, which resulted from automating certain operational processes during the quarter.

As a result, average other interest-earning assets increased by an immaterial amount and net interest income was unaffected, impacting NIM accordingly.

Turning to Slide 8. Full year noninterest income was up $190 million or 3% and included a $32 million decline in the fourth quarter compared to the third quarter.

Importantly, we continue to execute on our strategies to grow our fee businesses across our franchise, and those efforts helped to drive record fee income in 2018 of $6.2 billion.

Taking a more detailed look at the performance in each of our fee categories, asset management fees declined $117 million or 6% for the full year.

2017 included a $254 million flow-through benefit from tax legislation as a result of our equity investment in BlackRock.

Excluding this benefit, asset management fees were up $137 million or 8%.

However, on a linked-quarter basis, asset management fees declined $58 million, driven by $47 million in lower earnings from PNC's investment in BlackRock, including a $10 million flow-through impact related to BlackRock's recently announced restructuring charge.

PNC's asset management fees also declined linked quarter, primarily driven by lower average equity markets.

Consumer services fees grew $87 million or 6% for the full year, driven by higher debit card activity, brokerage fees and credit card activity net of rewards.

Compared to the third quarter, consumer services fees increased by $10 million or 3%.

Corporate services fees increased $107 million or 6% for the full year, reflecting higher treasury management and M&A advisory fees.

Linked quarter corporate services fees grew by $3 million or 1%, including higher loan syndication fees.

Residential mortgage noninterest income declined in both full year and linked quarter comparisons as volumes and margins remain challenged.

The linked quarter decline was driven by a $19 million negative adjustment for residential mortgage servicing rights valuation in the fourth quarter compared with no adjustment in the third quarter.

Service charges on deposits increased 3%, both linked quarter and full year, reflecting increased customer activity and product enhancements.

Finally, other noninterest income was $325 million for the fourth quarter and included a $42 million benefit from Visa-derivative adjustments, primarily related to the change in Visa share price during the quarter.

Turning to Slide 9, our full year 2018 expenses were $10.3 billion compared to $10.4 billion in 2017.

As I previously mentioned, 2017 included approximately $500 million of significant items impacting the year-over-year comparison.

Taking a look at the fourth quarter, expenses declined $31 million or 1% compared with the third quarter.

Lower personnel expense and the elimination of the $36 million quarterly FDIC surcharge assessment, more than offset seasonal increases in occupancy and equipment and higher digital marketing expense.

Our efficiency ratio for the fourth quarter was 59% and 60% for the full year 2018, the lowest in several years.

Expense management continues to be a focus for us, and we remain disciplined in our overall approach.

As you know, we had a 2018 goal of $250 million in cost savings through our continuous improvement program, and we successfully completed actions to achieve that goal.

For 2019, we have increased our annual CIP target by $50 million to $300 million.

Our credit quality metrics are presented on Slide 10 and remained strong.

Full year provision for loan losses totaled $408 million, down from $441 million in 2017.

Net charge-offs also declined from $457 million in 2017 to $420 million in 2018.

For 2018, reserves to total loans declined slightly to 1.16% from 1.18%.

On a linked-quarter basis, provision increased $60 million in the fourth quarter due to growth in both commercial and consumer loans as well as the impact of a handful of specific loan reserves in the commercial portfolio.

As we've highlighted in the past, given the absolute low levels of provision relative to the size of the loan portfolios, we're likely to experience some volatility quarter-over-quarter as the timing of specific reserves or specific releases is not uniform, but does tend to level out when viewed on a full year basis.

Importantly, we're not seeing any broad trends within these specific reserves that would indicate potentially significant deterioration.

Nonperforming loans were down $171 million or 9% compared to December 31, 2017, with declines in both commercial and consumer loans.

And year-over-year total delinquencies were down $35 million or 2%.

As you can see on the slide, these credit metrics have continued to improve over the last 5 years to very low levels.

In summary, PNC reported a successful 2018, and we're well positioned for 2019.

Looking ahead to the rest of the year, we expect continued steady growth in GDP.

We now expect one increase of 25 basis points in short-term interest rates this year, occurring in September.

Based on these assumptions, our full year 2019 guidance compared to full year 2018 results is as follows: we expect loan growth to be in the range of 3% to 4%; we expect revenue growth in the upper end of the low single-digit range; we expect expense growth in the lower end of the low single-digit range; and we expect our effective tax rate to be approximately 17%.

Based on this guidance, we believe we will continue to deliver positive operating leverage in 2019.

Looking at the first quarter of 2019 compared to fourth quarter 2018 results, we expect loans to be stable; we expect total net interest income to be stable, reflecting 2 fewer days in the quarter; we expect fee income to be down low single digits; we expect other noninterest income to be between $275 million and $325 million, excluding net securities and Visa activity; we expect expenses to be stable; and we expect provision to be between $125 million and $175 million.

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

(Operator Instructions) And our first question comes from the line of John McDonald with Bernstein.

Just wondering if you could drill down a little bit in terms of what you're seeing in terms of credit quality, understanding, obviously, we're coming off a really good credit performance the last couple of years for you and the industry.

Just kind of wondering what in your models drove the increase in provision this quarter and for a slightly higher rate of provisioning called for in the first quarter?

How much of that is driven by growth and how much by changes in credit quality or the early indicators that you see in your models?

John, this is Rob, yes.

So a couple of things on that.

Again, just to reiterate what I just said, and Bill mentioned, credit quality is really strong.

By virtually every measure, charge-offs down, NPAs down, delinquencies down year-over-year.

So that hasn't changed.

In regard to the provision for the fourth quarter, I'd chalk that up to growth and also some of these specific names -- or these handful of names that we had.

So when you take a look at our total 2018 provision of $400 million, down year-over-year, it's -- we're bouncing off some pretty low levels.

So that explains the fourth quarter of 2018.

For the first quarter of '19 going forward, a couple of things: one, again, credit quality we see is good.

We don't see any broad trends in any asset categories that would suggest substantial deterioration that I mentioned, but we do see growth.

But frankly, any deterioration.

I mean, you used the word substantial, but there's not -- John, we had 4 commercial credits go NPA in the fourth quarter and they were all completely idiosyncratic associated with strange things.

So nothing kind of based on the broader economy.

And even in Consumer, where there's been a slight tick up in auto, that's still going back to hurricane -- to the hurricane damage.

There's really nothing there.

No, I think that is right.

And just to complete that thought on the first quarter, I do -- Bill mentioned, commercial is so low.

Total charge-offs in our commercial portfolio in 2018 were $25 million on a $150 billion portfolio.

So at some point, that's got to come up a bit, but it's gradual...

The short answer to your question on the guidance for the first quarter is it just can't -- we don't see anything.

It just can't stay this -- at that low forever.

That's my point, that's my point.

So we kind of tell you a slightly higher number though on the back of the fact that everybody is talking about a slightly weaker economy, but we don't see anything today that says that's true.

Okay.

Got it.

That's really helpful.

And in terms of the revenue outlook, you've given an outlook on revenues for 2019 upper end of low single digits.

So just kind of wondering what your confidence level in the revenue outlook?

Maybe how you see it split a little bit between NII and fees?

And where do you enter the year with good revenue momentum and tailwinds?

And where might the revenue outlook be a little more challenging?

Sure.

So our guidance calls for revenue at the upper end of low single digits, which is connected to our loan outlook, which is 3% to 4% growth.

And you can sort of do the math in terms of the fee guidance being up low single digit or on the lower end.

We do see, in terms of the contribution of revenue, more of that growth coming from NII versus the fees, but growth in the fees.

We had -- absent the impact of BlackRock, we had a great year this year on fees.

A lot of it in corporate services that depending what market activity is, could be a little bit weaker into next year.

The other thing is, just in the forecast, we have included in effect the market's expectation on BlackRock inside of our fee line.

So that's causing that to be somewhat subdued versus our own internal growth.

Okay.

And in terms of the net interest income, Rob, do you see that growing kind of in line with the loan growth?

Yes.

You've got some puts and takes around the NIM obviously, but pretty much in line with loan growth?

Yes, that's right, John.

Our next question comes from the line of John Pancari with Evercore.

Also on the credit front, the reserve came out around 116 basis points.

Is that a fair level to assume where it holds through the year if we don't see a material change in credit?

And then also I know you indicated a handful of commercial names that impacted the number or your expectation for provisioning here.

Does that mean that, that provision range of $125 million to $175 million could come down beyond the first quarter as we move through 2019?

Or do you think it stays there?

That's why we gave you a range.

That's right.

That's the range, yes.

And they're pretty small ranges in terms of the -- the key word is gradual.

So we don't see major shifts.

But I think in terms of the reserve ratio, I think we're adequately reserved, and I see that as being fairly stable.

Okay.

All right.

Got it.

And then when you look at margin, it was -- excluding the 3-basis-point impact of that process change, it was still flat despite still the ongoing Fed hike.

So can you comment on your asset sensitivity here?

I mean, what do you -- what type of progression does the margin have if we see your rate assumption of 1 hike in '19 play out?

How do we think about the margin through '19?

And if the Fed stops and we don't get that hike, do we get some incremental expansion here in the near term?

Or is it flat to down?

You embedded a whole bunch of different issues into that question.

In terms of asset sensitivity, we remain asset sensitive.

That could play out and will play out in NIIs you see in our guidance, may or may not play out in NIM.

So you're going to have -- you have to kind of separate the 2, and we've never really managed the company to NIM.

All that said, the momentum that we've had on net interest margin and the industry has had on the back of fairly predictable rate hikes is going to slow down.

So my best guess is our NIM, not our net interest income, is going to bounce around current levels through the course of the year.

I would tell you that this quarter doesn't change income, but we had the issue on average earning assets, we had some hedge ineffectiveness that went against us, we had a lower swaps balance, we had a whole bunch of things that have nothing to do with economics that impact that number that could have easily printed the other way.

So I don't think you're going to see a big pickup from us or anybody else going forward.

It's not related to asset sensitivity, it's related to just rise in rates in the short end.

But I'm not worried about that.

I think we'll -- as we said, we'll continue to see growth in NII.

And we don't provide NIM guidance, but just to reiterate Bill's point, we'd expect this to be the range -- where we are now is what our current range expectations are for the short term.

Yes.

The 2.96%.

2.96%, yes.

Our next question comes from the line of Gerard Cassidy with RBC.

I apologize if you touched on this, there's multiple conference calls going on, as you know.

How is the competition on the C&I side?

If you could compare it throughout 2018, did it ease up at all in the fourth quarter as the shadow banking industry, if you will, ran into difficulties or was it as tough as ever?

If you give us some color there on the C&I competition?

Well, I think -- I think what you're going after here is did the crack in credit spreads in the capital markets impact and offer opportunity to the banks.

And the answer to that is, yes.

So what banks are willing to do on the lending side has backed off at this point in terms of where they'd underwrite and syndicate, you've seen some people have run into some hung deals.

That doesn't play into our model that much because we're not really in the leverage lending business.

What has happened though is the clients who are kind of, I call them the 5 Bs, so they use banks and they also use the bond markets.

They're coming back to banks as the price differential has kind of moved in favor of banks and the bond market has at least thus far not really opened up for them.

So we see that benefit.

As it relates to head-to-head bank competition on a traditional bank name in middle market cash flow, it's still brutal.

That hasn't changed.

So maybe the simplest way to answer that question is, bank-to-bank competition is still fierce.

Bank-to-capital market competition has moved in favor of banks.

Very good.

And then to follow-up on that.

If you take recession off the table, I don't think anybody believes we're going to have a recession in 2019.

So if you take that off the table and some episodic global risk, Bill, when you guys look at your business for this year, what are the risks that you're focusing in on to make sure that you're not caught by these risks -- earnings or revenues?

Yes.

So we actually -- we've done a look at who might be impacted by tariffs, both directly and trickle down.

And we actually have specific reserves against that inside of our credit book today.

But by and large, we serve the domestic economy.

And the domestic economy, you've heard me say this before, is really strong and our clients remain strong.

Now they ultimately can be impacted, obviously, by the global economy and by the trickle-down effect of some of the troubles the larger multinationals face because of their global economy.

But thus far, we don't see it.

And at the margin, if the worst case happens, we won't have any concentrated impact as it relates to industries or businesses we cover.

We will simply be impacted as a function of the impact you'd expect from a slower economy broadly defined.

Our next question comes from the line of Ken Usdin with Jefferies.

I guess a question on the deposit side.

Looks -- you continue to have really good overall growth and, obviously, the deposit cost has been going up.

Can you just talk through just the deposit competition side?

And given your view of just 1 hike this year, how does -- how do you anticipate the deposit competition to evolve in this presumably slower-than-previously anticipated rate cycle?

Yes, it's a good question.

And it varies by what we're trying to do.

So on our national digital strategy, we're playing principally against the online banks and we're all paying largely a -- at-market money market rate.

And I think that continues.

Our -- it's interesting, our retail beta this quarter actually was less than it was in the third quarter and that'll kind of bounce around as we go through the year.

But we're not seeing, at least thus far, massive competition for traditional deposits.

We continue to pull deposits from, as does the industry, flows from smaller banks to larger banks and I think that's rate independent, that's services dependent, and I think that trend continues.

And then you have this whole overlay of the continued shrinkage of the Fed balance sheet, which draws cash out of the system.

So there's a lot of factors in there.

I don't see a massive shift through '19 in the trends that we've seen thus far.

Through time, you will see greater portions of our total deposits coming from the online channel, which, of course, will change our beta.

But today, it's such a small number, it doesn't really impact it.

Yes.

And maybe as a follow-up, can you just flush out just the progress you're making on that national strategy and the type of growth that you're seeing from the new markets and the new endeavor?

Yes, sure.

On the consumer side, so we also have expansion markets on the commercial side.

But on the consumer side, it's going well, exceeding our expectations.

We've been at it now just for over 3 months.

Balances continue to grow across a lot of geographies and 85% of those new accounts, which now are getting close to the high-teens in the 10,000 -- 18,000 range or 85% of that is new to PNC.

So we like what we're seeing so far, but it's early.

A couple of things I'd say -- and by the way, we owe you guys a lot of data on this and as soon as we get enough of a track record, we'll start talking about what we're seeing in terms of activity in these accounts and stuff, but a couple of things that we're seeing so far that validates some of our original thoughts.

One is that physical presence matters.

So the solution center we opened in Kansas City continues to draw a disproportionate share in terms of origination versus online channel per capita.

And people are willing to travel to go do it.

Two is, the number of virtual wallet accounts that we are opening that are being used by new customers continues to surprise at least me.

I think it's, I don't know, 1/3 or 25% of...

About 25%, yes.

About 25%.

And totally new clients to PNC who are using us as their primary bank.

And that -- that's quite interesting to us.

And encouraging.

Yes, and we're going to have to do some analysis around that to figure out what types of activity, how sticky deposits are, how deposit trends with these accounts move, so on and so forth.

But so far, we're pretty happy with it.

(Operator Instructions) Our next question is a follow-up from the line of John McDonald of Bernstein.

Just wanted to go over a little bit on -- yes, I'm back -- on the idea of operating leverage.

How you guys are thinking about it in terms of the linguistic gymnastics on the outlook slide.

Revenues up higher end of low single digits, that seems like it could be 3%; and a lower end of single to me is like 1% to 2%.

So it seems like you're saying maybe 100 to 200 basis points of operating leverage.

Is that like a reasonable bogey for us to think about that you guys are kind of shooting for this year?

Yes, yes, yes, that's right.

Can you talk about that a little bit, Rob?

Yes, no, that's right on.

So higher end of low single digits just average, put a little band around 3%, and lower end put a band around 1%.

John, long story short, notwithstanding the performance of our share price, we feel pretty good about '19 and we put it in the guidance.

Yes.

Good.

And that, obviously, mathematically that should grind down your efficiency ratio if you continue to do the operating leverage.

Yes, that's right.

All right.

Thanks, guys.

I won't circle back again.

We did -- John, along those lines, we did hit a 5 handle on the efficiency ratio there in the fourth quarter.

So we're on our way.

Yes.

No, I think that's good to see the improvement.

I think people are kind of -- we're looking for -- hoping that you get below 60%, and I think commitment to continued improvement is also helpful.

Our next question comes from the line of Erika Najarian with Bank of America.

I just wanted to also clarify your full year outlook.

It looks like consensus has a 6% decline in net income expectation for BlackRock in 2019.

Of course, not yet adjusted for this morning.

So it sounds like the revenue momentum for '19 and positive operating leverage is actually better given that, that's all coming through your revenue line.

Is that a good interpretation of how we're thinking about BlackRock versus core trend?

Yes, and we do use the consensus numbers for BlackRock.

Okay, perfect.

And just a follow-up to Ken's question.

The market is also thinking that perhaps the Fed is on a longer pause than the September hike that you're thinking -- embedding in your guide.

But as we think about deposit repricing, particularly for money market strategy, how many quarters until the last hike does deposit pricing stop catching up in your experience?

How many quarters until the last hike?

Do you mean how many quarters after the last hike?

Yes, how many quarters after the last hike?

Through history, there's been a pretty long tail.

The problem today, of course, is you have for the first time since we've grown through this, you have a lot of online accounts at the same time as you have the Fed shrinking its balance sheet.

So -- and you have smaller banks really competing on rate as they have to hold on to clients.

So I -- I don't know how that plays out.

I could sit here and guess for you, but I think those are the factors that are going to impact what happens to deposit rates as we move forward.

I think that for banks such as ourselves, our ability for our core clients to continue to lag at the margin will remain largely on the back of the services we provide them.

Yes, I think that's right.

And commercial, of course, Erika, as you know, has moved, so it's all about the consumer deposits.

Yes.

Got it.

And looking at your CET1 ratios and the potential Fed proposals, I'm wondering if we should expect a continuation of increase in terms of buyback requests from the Fed, particularly given the stock price has lagged a little bit for growth of the peers.

The answer is, yes.

Although remember, the proposals that are out are unlikely to have any impact on this coming CCAR and it's unclear in terms of the new CCAR guidance how much of that will be included in this year's CCAR.

I think they're still sorting through that.

But at the margin, both of those things will give us increased flexibility and we're otherwise biased certainly to share price to be pretty heavy on the buyback.

And, of course, we haven't seen the scenarios yet.

So it's just speculation.

Yes.

Our next question comes from the line of Saul Martinez with UBS.

Can you just give us an update on where you stand on your CECL preparation?

When you think -- when you plan to start with parallel runs or unless you've already done so?

And just when can we -- and just any update on when do you think we can have some sort of estimate of the upfront impact?

Yes.

So we're busy working on it and making good progress.

We had said before, it's our intention to begin the parallel run here in the first half of 2019.

We're on track to do that.

So in regard to being able to provide you with information and insight from that, sometime in the second half.

Our next question comes from the line of Kevin Barker of Piper Jaffray.

In regards to just following up on some of the credit comments, there was a particular pickup in equipment lease financing on the 30-day delinquency rate.

Is there anything in particular there that you're seeing that you can expand upon?

No -- yes, Kevin, there was a tick up there and it was in the 30-day category there.

Equipment leasing -- some of those delinquencies are elevated relative to a software change that we made that created some administrative delinquencies.

So there's some elevation that's coming from that, that's part of that, otherwise it's just seasonal.

Put differently, it's not really a change in credit conditions there.

The system is processing certain payments in a way that cause us to book them as delinquent whereas the old system didn't do that.

Yes, administrative.

And we'll clear those up.

So did you make a broad administrative change in your systems that impact your calculation for NIM on top of this?

No, no, no, it's completely separate, completely separate thing.

It is a totally separate thing.

But I mean, we are -- look, we've put in a completely new leasing system that has a couple bumps that are causing us this issue you see on delinquencies.

The automation inside of the balance sheet calculations is a good thing.

We're just automating manual processes and in the process of doing that, we found a calculation difference that historically had been off in a de minimis amount on the balance sheet.

All these things are good.

We're basically getting rid of manual stuff and putting in new systems and we find things every time we do it.

Okay.

And so no deterioration in credit and is just showing (multiple speakers)

No, I mean, all the way back to the beginning, there is nothing that we see in any of these books that is suggesting anything but the continuation of the trend.

We've always hedged that with the basic notion that it just can't stay this good forever.

Got it.

Okay.

And then in regards to your loan growth of 3% to 4% and with commercial competition, I guess, easing from the nonbanks and potentially giving a little bit of a tailwind possibly from there, absent a slowdown in the broader economy, are you seeing any of the pickup in the consumer side as well given some of the changes that you've been making over the last, I'd say, a year or 2 in order to focus more on the consumer?

That work continues, and you've seen for, I don't know, 5 or 6 quarters in a row.

6 quarters.

We've managed to grow consumer and we ought to be able to continue to do that despite the runoff that we continue to see in home equity and our student lending.

I'd like to think that would accelerate, that you're running against a pretty big headwind in terms of those runoffs, but we're doing it without changing the credit risk that we're taking simply by executing on good products and getting good -- better penetration into our existing client base.

So I don't know if it accelerates, but it ought to continue.

Yes, certainly continue, but in terms of our guidance for 3% to 4%, we do see more growth on the commercial side than consumer, but to Bill's point, growth in both portfolios.

By the way, some of the growth in commercial -- we'll continue to see growth as we have in our secured businesses, specialty businesses, absent real estate.

But the other thing is, we're unlikely to have some of the purposeful runoff we saw in '18 repeat itself in certain segments that just weren't kind of paying the freight.

So we feel pretty good about that number.

Next question comes from the line of Matt O'Connor with Deutsche Bank.

This is Rob on for Matt.

I was just curious, on your new expansion markets, I was just curious if you can provide an update on the progress you're making there?

Just how things are tracking versus your expectations.

Yes, so a good report there in terms of -- again, these are relatively new.

But in each one of those markets, we're growing loans faster than the legacy book.

And then I think what we're most encouraged about is the composition of the business, which is relationship oriented and I think close to half of our sales are a noncredit.

So it's not just blind participations in credit.

It's what we intended to do was to build out our model in these markets, so so far very good.

Okay, and then just on your liquidity position, you mentioned you invested in some resale agreements at year-end.

Yes, yes.

Does that correspond to the increase in other assets on a period-end basis?

And then maybe just an update on your thinking about continued deployment from here.

Yes, sure.

No, it does.

And again, that's just at year-end.

So that was just for a short period of time.

Going forward in terms of our liquidity, we feel good about it in terms of where we are.

We're satisfying our current LCR obligation north of 100%.

There is a proposal for us to go lower, but that won't likely occur substantially in 2019.

So we're good.

We have balances roughly in the $16 billion range at the Fed.

We could redeploy those into other level 1 securities -- higher-yielding securities and we may do that as the year plays out.

Our next question comes from the line of Brian Klock with Keefe, Bruyette & Woods.

I just had a quick question on -- you talked about some of the loan growth earlier from the line of business and collateral-type perspectives.

I was looking at Table 6 in your subpack that's just on the end of period.

On the C&I, you had pretty good growth that drove a lot of the C&I growth in retail, wholesale trade and then the other sort of catch-all industries that was up by $2 billion sequentially.

Is there anything that jumps out within that growth?

Anything that's a little bit -- like I said, just from the fourth quarter it was much more significant than you've seen in other quarters and was that (multiple speakers)?

I don't have the table in front of me, but if it's inclusive of our asset-based lending, a lot of that will come from year-end inventory build for retailers that were otherwise clients, but basically draw down pretty heavy as they get ready for the Christmas season.

Brian, I'm aware of the table, but there's nothing unusual there.

I think that probably came from asset-based lending and a traditional drawdown on the lines as they build inventory.

Got it.

Okay, that's helpful.

And, I guess, a follow-up on the liquidity discussion and, Bill, you mentioned earlier, I guess, obviously with the Fed pulling liquidity out of the system, I guess when it was on autopilot, I guess we'll see if they remain on autopilot, but your DDA balances have been declining and like the industry has throughout the year.

And it seems like, obviously, a lot of that's in your C&IB segments, the retail growth in DDA has been pretty good.

So I guess, is there any visibility into -- like when could that stabilize?

Or when do you think that DDA runoff in the C&IB might kind of abate?

I don't know that I have any modeled insight into it.

I think the simple notion that rates are higher than 0 and have been for some period of time now has caused corporates to get smart about lazy money.

My guess is that they've -- that they're already doing that.

They don't choose to do it 50% of the way and then wait because they're giving up money every day.

So my guess is, we're probably where we're going to be.

Yes.

And to that point, time will tell, but if you take a look just on the commercial side in terms of noninterest-bearing accounts, they did decline in the fourth quarter, but they declined at a much lower rate than what we saw at the beginning of the year, to your point.

There are no further questions on the phone line.

Turning the call back (multiple speakers)

Well, thank you.

Thank you, everybody.

Yes, thank you.

Thanks.

This concludes today's conference call.

You may now disconnect.