PNC Financial Services Group Inc (PNC) 2019 Q4 法說會逐字稿

Good morning.

My name is Dina, and I will be your conference operator for 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, Wednesday, January 15, 2020.

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

Sir, please go ahead.

Oh, 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 measures are included in today's earnings release materials as well as our SEC filings and other investor materials.

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

These statements speak only as of January 15, 2020, and PNC undertakes no obligation to update them.

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

Thanks, Bryan, and good morning, everybody.

You saw today that we reported full year 2019 results with net income of $5.4 billion or $11.39 per diluted common share.

For the full year, we increased earnings per share, achieved record revenue, improved our efficiency ratio and generated positive operating leverage.

Overall, it was an excellent year for PNC, capped by another solid quarter.

We reported fourth quarter net income of $1.4 billion or $2.97 diluted per share.

During the quarter, we grew loans, deposits and revenue.

And while our provision increased, overall credit quality remains strong.

Rob's going to take you through the full details of our financial results in just a second.

And we remain dedicated and diligent in our continued investment in our businesses and technology to drive long-term growth.

Along these lines, I was very pleased with the continued progress we made this quarter on our key strategic initiatives, including the national expansion of our middle market and retail banking efforts.

We remain committed to growing our business but also maintaining an efficient organization capable of achieving positive operating leverage.

I'd like to spend just a minute to thank our employees for all their efforts to make 2019 a successful year.

We achieved a great deal this past year for our customers, shareholders and the communities we serve, and none of it would have been possible without the combined efforts of our more than 51,000 employees working toward our common goals.

As 2020 begins, we expect to face uncertainty in the year to come from the economic environment to the ramifications of international trade disputes, the geopolitical situation and a presidential election -- election campaign in the U.S., but we're excited about the momentum with which we've entered the year and along with our increased capital flexibility as a result of the tailoring rules, we believe our strategy, focus on -- our strategy and focus on our customers positions us well to continue to deliver for all of our constituencies.

And with that, I'll turn it over to Rob, and then we'll be happy to take your questions.

Great.

Thanks, Bill, and good morning, everyone.

As Bill just mentioned, we reported full year net income of $5.4 billion or $11.39 per diluted common share.

And fourth quarter net income was $1.4 billion or $2.97 per diluted common share.

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

Total loans grew $1.2 billion to $239 billion linked quarter.

Compared to the fourth quarter of 2018, growth was $13 billion or 6%.

Investment securities of $83.5 billion decreased $1.7 billion or 2% linked quarter due to portfolio runoff primarily in treasuries.

Year-over-year, total security balances increased $1.4 billion or 2%.

Our cash balances at the Federal Reserve averaged $23 billion for the fourth quarter, up $7.7 billion linked quarter and $6.6 billion year-over-year, primarily as a result of strong deposit growth.

Deposits grew $8.7 billion or 3% linked quarter and $21.3 billion or 8% year-over-year.

As of December 31, 2019, our Basel III common equity Tier 1 ratio was estimated to be 9.5% compared to 9.6% at September 30.

For the full year 2019, we returned $5.4 billion of capital to shareholders.

This represented a 22% increase over 2018 and was comprised of $1.9 billion in common dividends and $3.5 billion in share repurchases.

Of note, the tailoring rules became effective January 1, 2020, and as a result, will provide us increased flexibility in managing both our capital and liquidity levels going forward.

As we announced earlier this morning, we've received approval from the Federal Reserve to repurchase up to $1 billion in common shares through the end of the second quarter of 2020, which is in addition to the share repurchase programs of up to $4.3 billion, approved by the Fed as part of PNC's 2019 capital plan.

This will provide us the ability to repurchase additional shares over the next 2 quarters, the level of which will depend on market conditions.

Our return on average assets for the fourth quarter was 1.3%.

Our return on average common equity was 11.5%, and our return on tangible common equity was 14.5%.

Our tangible book value was $83.30 per common share as of December 31, an increase of 10% compared to a year ago.

Slide 5 shows our average loans and deposits in more detail.

Average loan balances of $239 billion in the fourth quarter were up $1.2 billion compared to the third quarter.

The growth was driven by consumer lending, which increased $1.9 billion or 3%, reflecting higher residential mortgage, auto and credit card loan balances.

Commercial lending decreased $738 million linked quarter as growth in our corporate banking business was more than offset by declines in our real estate business, primarily due to a $1.1 billion decrease in our multifamily warehouse balances.

Compared to the same period a year ago, average loans grew 6% or $13 billion.

Commercial lending balances increased $8.6 billion, and consumer lending balances increased $4.4 billion, each growing by 6%.

As the slide shows, the yield on our loan balances declined in the fourth quarter, primarily the result of lower LIBOR rates.

Importantly, the rate paid on our deposits also declined 15 basis points linked quarter, an acceleration in the pace of the decline from the third quarter of 2019.

Deposits of $288 billion increased in both the year-over-year and linked quarter comparisons.

The year-over-year increase of $21.3 billion or 8% reflected strong customer growth.

Linked quarter deposits increased $8.7 billion or 3%, due, in part, to seasonal growth in commercial deposits.

Notably, noninterest-bearing deposits grew $1.5 billion or 2% in the fourth quarter.

Both comparisons benefited by a $3.4 billion increase related to the new Sweep deposit product program we began offering our asset management clients in September.

As you can see on Slide 6, full year 2019 revenue was a record $17.8 billion, up $695 million or approximately 4% driven by both higher net interest income and noninterest income.

Expenses increased $278 million or 2.7% and remained well controlled.

Importantly, we generated positive operating leverage of 1.4% in 2019.

Our full year provision was $773 million, an increase of $365 million compared to 2018, which was driven by strong loan growth and continued credit normalization in our loan portfolio.

Our effective tax rate in the fourth quarter was 15.1%, down from the third quarter as a result of lower state income taxes and tax credit benefits.

For the full year, our 2019 effective tax rate was 16.4% and reflected the lower fourth quarter tax rate.

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

Turning to Slide 7, you can see our total revenue has grown consistently over the past several years driven by our diverse business mix.

Full year 2019 net interest income was approximately $10 billion, a record for PNC and an increase of $244 million or 3% compared with 2018 as higher loan balances and yields were partially offset by higher funding costs.

Our net interest margin decreased in 2019 to 2.89%, down 8 basis points compared to 2018 driven by the declining rate environment throughout the year.

For the fourth quarter, net interest income of $2.5 billion was down $16 million or 1% from the third quarter.

Lower loan and securities yields were substantially offset by lower funding costs.

Net interest margin decreased 6 basis points to 2.78% in the fourth quarter, mostly due to the effect of lower interest rates, primarily LIBOR.

Although lower rates reduced our borrowing costs, that benefit was more than offset by the downward impact of LIBOR in our commercial loan yields.

Full year 2019 noninterest income was up $451 million or 6% and increased $132 million or 7% in the fourth quarter compared to the third quarter.

Importantly, we continue to execute on our strategy to grow our fee businesses across our franchise, and those efforts helped to drive record fee income of $6.4 billion in 2019.

During 2019, fee income increased $183 million or 3%, reflecting strong customer growth in our legacy and new markets.

Growth was across all categories, except service charges on deposits.

The $12 million or 2% decline in service charges on deposits was reflective of our ongoing efforts to simplify products and reduce transaction fees for our customers.

Fourth quarter fee income of $1.7 billion increased $18 million or 1% compared to the third quarter.

Taking a more detailed look at the performance in each of our fee categories.

Asset management fees increased $40 million driven by higher earnings from PNC's investment in BlackRock.

Consumer service fees declined $12 million or 3%, reflecting seasonally higher credit card activity that was more than offset by a full year true-up of credit card rewards.

Corporate service fees grew $30 million or 6% across various categories and included growth in our treasury management product revenue.

Residential mortgage noninterest income decreased 47 -- decreased by $47 million, driven by a lower benefit from RMSR hedge gains as well as lower loan sales revenue.

Service charges on deposits increased $7 million or 4%, reflecting seasonally higher customer activity.

The final component of our revenue, other noninterest income, increased $114 million compared with the third quarter.

The growth was primarily driven by higher revenue from private equity investments and a gain of $57 million related to the sale of our proprietary mutual funds.

Partially offsetting this was a negative Visa derivative valuation adjustment of $45 million.

Turning to Slide 8. Our full year 2019 expenses were $10.6 billion, an increase of $278 million or 2.7% compared with 2018 as we continue to invest in our strategies, technology and employees.

Taking a look at the fourth quarter, expenses grew by $139 million or 5% linked quarter.

Personnel increased $68 million due to higher benefits, including a special year-end grant to more than 51,000 of our employees mainly in the form of health savings account contributions, totaling $25 million.

Personnel also reflected higher incentive compensation associated with business activity in the fourth quarter.

Equipment expense increased $57 million largely due to $50 million of technology-related write-offs.

These write-offs primarily resulted from the benefit of the tailoring rule, which now allows us to decommission compliance and regulatory systems that are no longer required.

Our efficiency ratio for the full year 2019 was 59%, improving from 60% last year.

As you know, expense management continues to be a focus for us.

We had a 2019 goal of $300 million in cost saving through our continuous improvement program, and we successfully completed actions to achieve that goal.

Looking forward to 2020, our annual CIP will once again be $300 million, which we expect to contribute to the funding of our business and technology investments.

Our credit quality metrics are presented on Slide 9 and remain historically strong.

Full year provision for loan losses totaled $773 million, and net charge-offs were $642 million in 2019, reflecting our strong loan growth and some credit normalization in our portfolio.

On a linked-quarter basis, provision increased $38 million in the fourth quarter due to both consumer lending and reserves attributable to certain commercial credits.

Net charge-offs increased $54 million to $209 million in the fourth quarter compared with the third quarter.

Commercial charge-offs accounted for $24 million of the increase driven primarily by a few specific credits.

And consumer charge-offs grew $30 million, mostly related to our credit card and auto portfolios.

Reserves to total loans remained stable year-over-year at 1.14% compared to 1.16% at year-end 2018.

Annualized net charge-offs to total loans was 35 basis points in the fourth quarter.

And while up, this is still well below our through-the-cycle average.

Notably, the leading indicators for credit quality continue to perform well.

Nonperforming loans were down $59 million or 3% compared to year-end 2018.

And year-over-year, total delinquencies were up $19 million or 1%.

As you know, we adopted CECL, the new accounting standard for credit losses, effective January 1, 2020.

Based on our expectation of forecasted economic conditions and portfolio balances as of December 31, 2019, the adoption will result in an overall increase of approximately $650 million or 21% to our allowance for credit losses at December 31, 2019.

The increase is driven by the consumer loan portfolio as longer-duration assets require more reserves under the CECL methodology.

Our consumer reserve will increase approximately $900 million or 95%, and our commercial reserve will decrease approximately $250 million or 12%.

These metrics include reserves for unfunded commitments.

We plan to include a full description and transition details in our upcoming 10-K disclosure.

As we move forward under CECL, it is a new accounting standard with many variables.

And as a result, we expect more volatility in our quarterly provisioning.

Our allowance for credit losses will be determined using various models and estimation techniques, utilizing, for example, historical losses, borrower characteristics, economic conditions, reasonable and supportable forecasts as well as other relevant factors.

For expected losses in our reasonable and supportable forecast period of 3 years, we will use 4 macroeconomic scenarios and their estimated probabilities.

Given the multiple variables impacting provision expense under CECL, during 2020, we'll shift from our current practice of providing a quarterly provision guidance range to providing forecasted charge-off levels.

However, in order to establish a context for the level of change in provision expense under CECL, for this upcoming quarter, we'll provide a range for expected provision expense, based simply on expected charge-off levels plus CECL reserve rates for net new loans.

This guidance will assume our economic scenarios and weights remain constant.

And should any of these variables change, either favorably or unfavorably, our actual provision expense may also vary possibly materially.

In summary, PNC reported a successful 2019, and we're well positioned for 2020.

Throughout 2020, we expect continued steady growth in GDP, and we expect interest rates to remain relatively stable.

Taking these assumptions into consideration, our full year 2020 guidance compared to full year 2019 results is as follows.

We expect loan growth to be in the range of 4% to 5%.

We expect total revenue growth to be in the low end of the low single-digit range, which includes approximately 1% of net interest income growth.

We expect expenses to be stable, and we expect our effective tax rate to be approximately 17.5%.

Based on this guidance, we believe we'll generate positive operating leverage of approximately 1% in 2020.

Looking at first quarter 2020 compared to fourth quarter 2019 results, we expect average loans to be up approximately 1%.

We expect total net interest income to decline approximately 1%, reflecting 1 less day in the quarter.

We expect fee income to be down approximately 3%.

We expect other noninterest income to be between $300 million and $350 million, excluding net securities and Visa activity.

We expect expenses to be down in the mid-single-digit range.

And we expect provision to be between $225 million and $300 million.

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

(Operator Instructions) Your first question comes from the line of John Pancari with Evercore.

On the provision guidance, the $225 million to $300 million for the quarter.

Can you give us a little bit more color?

I know going forward, you're going to guide more on charge-offs, as you said.

Yes.

But regarding the quarter, can you give us a little bit more color behind that $225 million to $300 million?

How much of that is the CECL day 2 component?

And then how much of that is reflecting underlying credit trends?

Yes.

Sure.

Yes.

Sure, John.

So for the first quarter guidance, I kept it simple.

And we're just going to take forecasted charge-offs, which we expect to be at the same level that we experienced in the fourth quarter of 2019, and then add to that the CECL loan loss rate for the fourth quarter of '19 to our projected loan growth.

And that's the simple math.

Okay.

Okay.

So -- and that is carrying forward, like you said, or assuming that fourth quarter charge-off level of 35 basis points, which was up a fair amount from last quarter and from the year ago.

So that's the normalization you're talking about.

Yes.

Where -- can you give us a little bit more detail around that normalization?

I know you mentioned card and auto, but also, you've had several commercial credits come up over the past several quarters that have been impacting?

Yes.

Is there a trend that you're seeing on the commercial side as well?

John, it's Bill.

We talk about normalization, and we have for years where our charge-off rate is below what we would expect to see through the cycle.

But I would tell you our near-term pressure on charge-offs is more related to card and auto than anything else.

And it's not really related to change in the economy.

We dipped our toe into some -- the lower end of our credit bucket, probably a year ago.

And those vintages are starting to play through.

We've subsequently shut that down 6 months ago.

So it's going to work its way through the snake here.

But I don't actually see, personally, that charge-offs are so much normalizing because of the economy per se as we have some elevated consumer stuff that will reverse through time.

The other thing, we had a big debate internally just on what to guide as it related to provision going forward because CECL and the impact of CECL has so many variables on what provision will be.

We can reasonably forecast charge-offs.

But of course, outlook on economy, mix of loan growth, pace of loan growth, many other factors ultimately impact how that provision is going to behave beyond charge-offs.

So we're giving it our best shot.

It could be high or low, and we'll see.

Right.

Well, it's new.

CECL is new.

And it's been a lot of work, as you know, both in terms of what we've done as we ran through parallel in 2019 to establish our transition amount.

But going forward, we feel good about our framework.

We've got a 3-year reasonable and supportable forecast.

We've got the 4 macroeconomic scenarios that we'll detail in our 2020 disclosures.

But to Bill's point, and what I said in my opening comments, there's just a lot of factors.

And then on top of that, it's new.

Yes.

So there's just going to be some learning curve aspects to sort of the practical application of CECL real time.

Yes.

And on the C&I side, John, we really haven't seen anything.

You'll see some specific credits we're adding to.

By the way, we've been doing this for 5 years.

What's changed is the recoveries that we've gotten through time...

Yes, that's right.

Way back from the crisis are gone.

So it's not so much that our new stuff is elevated at any given point...

Changing.

As our recoveries have dropped.

Got it.

Okay.

That's helpful.

And if I could just ask one more on the margin side.

Yes.

The -- I know you gave the spread income guidance for the linked quarter and for the full year expectation.

But how do you think the margin will traject from here?

Should we see some stabilization now that we have the pause?

Yes.

Yes, I think so.

I think so, John.

We expect rates to be stable.

We don't have NIM guidance officially.

That's more of an outcome.

But I think we'll spend most of the -- if everything stays constant, we'll spend the next year pretty much in this range.

We could actually go up in a particular quarter as deposit costs are continuing to come down.

But not a lot in either direction.

Yes.

One of the things that hit us this quarter was just elevated amortization expense...

M&A amortization.

On our premium mortgage securities, which we think has probably hit its peak.

But I think we'll be in this range.

Yes.

Up or down.

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

Just wanted to ask a little bit more detail, Rob, about on the previous question.

So how should we think about, one, the opportunity to deploy what seems like an extra $6 billion to $7 billion of cash.

What opportunities you see for that cash going forward?

And also, deposit costs trending down, sort of, balancing what has been a really successful initiative to go beyond your legacy footprint with reflecting lower rates.

Okay.

Well, so the first part about that in terms of the new LCR requirements.

We have and we will continue to work down our cash balances to the new requirement of 85%.

The first step is -- we talked about this on the third quarter call, is to pay down some short-term debt and then take a look going forward in terms of where we would deploy that.

Unfortunately, securities yields aren't terrific.

So I don't think we're going to move quickly in that direction but...

But the simplest thing to do is to let some of our wholesale borrowings run off, and that's what we've been doing.

Which is what we're doing, and we'll continue to do it.

That's right.

Yes.

And, on the deposits.

Yes.

I was just going to say, on the deposit side, we have been reasonably aggressive in dropping rates and have still been able to grow balances, both interest bearing and noninterest bearing so we're going to continue to pursue that.

One of the things that's happening in the background here, of course, is the Fed over the last 2 or 3 months has been injecting cash back into the system through their repo activities, which means the fight for deposits that was pretty intense is letting up somewhat as cash comes back into the system.

And I'm not exactly sure how that's going to play out.

Got it.

And just taking a step back, is there a difference in terms of stickiness in terms of the deposits that you raise through, let's say, a high-yield savings account versus a checking account that you are offering a cash incentive to open?

So the national deposits have been much more sticky than we expected because, at least as an individual, Erika, I kind of assume that unless you converted it to a full-time account, which we've had some success at doing, I assume people would shop those rates and move.

We actually haven't seen that be the case, even though we have dropped pretty far below the competitive band on what we're offering.

Now I'm sure there's elasticity to that.

But thus far, we haven't seen much movement.

The upfront money on checking accounts, which all of us do, where you open the account and you swipe your debit card 5 times and so forth...

A couple hundred bucks.

There's a lot of mischief in that.

So we've had the percentage of people who basically are taking the cash going through the motions and never using the account, have made that option less attractive to us than some other things we're doing.

Oh, that's interesting.

Okay.

But I would say -- I would just add to that the deposits -- as we worked rates down across the board, deposits have been stickier than what we would have expected.

Yes.

And you see it in the numbers.

Yes.

Yes.

Your next question comes from the line of Scott Siefers with Piper Sandler.

I just wanted to ask on the $1 billion supplemental authorization, was definitely glad to see that.

But just in terms of how you came up with the $1 billion.

I imagine it ended up, given the timing in the CCAR cycle being as much art as science, but just given where you sort of fleshed out, what does it say about, sort of, dry powder for the next cycle and/or other preferences for capital use at this point?

I mean Rob can jump in here.

But the -- as we -- as I mentioned at the Goldman Conference, the ask that we put in, had nothing to do with tailoring.

So it was basically capital that we had in excess from '19 independent of rule change.

As to the amount, beyond the fact that $1 billion is a nice round number, you have to remember that our existing program is a pretty big program.

Yes.

So adding to our existing program by much more than we asked for just didn't seem to make a lot of sense.

Okay.

All right.

That sounds good.

That was the art of it rather than the science of it.

Yes.

Yes.

Fair enough.

Fair enough.

And then just separately, I guess I can, sort of, back into it, but Bill, I think you had noted back in, I think, it was December when you, sort of, switched the NII outlook for 2020, given the changing ROIC profile and had suggested maybe up 1% in 2020.

Yes.

I imagine that that still holds true.

But any update on how you're thinking there?

Yes.

And then just overall balance, which becomes more self-explanatory between NII and fees as the year progresses.

Yes.

No, I think it still holds.

What's helping us there is we are forecasting pretty good loan growth for 2020.

Our pipelines look good.

So when we do that, we see up approximately 1% is achievable.

Okay.

Perfect.

And then maybe main fee drivers as you see them for the year?

Well, I think on the fees, we're in good shape.

We -- and our fee businesses are big.

They're all growing.

So I think we'll see a consistent trajectory that we've seen in 2019.

Just going through the broad categories, asset management.

Asset management, BlackRock -- the component -- the BlackRock component, they'll do what they do.

The P&C component will have a little bit of -- will have same-store sales growth but will have a little bit of a challenge in 2019 numbers because we divested those businesses, and in fact, sold some revenue.

But corporate services, consumer services, we see staying on the trajectory that they've been on.

Residential mortgage could be off a little bit, but that's pretty small for us.

And then service charges on deposit, we see as being kind of flat because -- we'll see more client activity.

But as I mentioned in my comments, we are working toward eliminating a lot of those nuisance fees that our customers have experienced, and we want to get ahead of that.

So that'll kind of offset one another.

So fees are good.

Your next question comes from the line of John McDonald with Autonomous Research.

Two follow-ups.

In terms of consumer lending, I know you have a long-term goal to remix towards a little bit higher contribution from consumer lending.

Does the CECL or the experience dipping your toe in the auto and card that you mentioned in some of the lower spectrum, does either of those change your appetite or the degree to which you might be growing consumer loans?

No.

I would -- I mean a couple of comments.

The issue we had by going a little bit down our risk bucket.

By the way, that's not a huge amount, it's kind of flowing through.

I -- our team is supposed to do that, test and learn and see.

And we learned.

We didn't like it.

We move on.

But we're growing independent of that if you just look at the balances that we've grown in card, in auto and in resi and even home equity, I guess, has grew...

First time.

First time in a while.

Yes.

They're executing really well, and that'll continue.

The issue for CECL, of course, is in today's environment, it's an easier answer to say, yes, we'll keep growing home equity and resi on the balance sheet because the loss rates, the loss content is so low even in the CECL reserve.

The challenge will be in a more pressed economy and environment where charge-offs and losses are higher.

Will you be booking loans that effectively cause negative income in the year you booked them?

And that's a discussion we'll have at that period of time.

I do think, as I've always said, that CECL in general will hurt consumer lending, particularly when it's needed most as people pull back because of the financial pain from the reserves.

But in today's environment, I don't see it.

Yes.

And to your question, John, we have no change in terms of our strategies for growth because of CECL.

Yes.

Great.

And the experience like you had, you're just fine-tuning where you're targeting based on the experience of what you had last year?

Yes.

That's right.

Yes.

That's right.

Okay.

And then in terms of the CET1 that you ultimately target.

Does tailoring effect how you think about what you should run at over time, have you made any kind of fine-tuning on that?

And just, kind of, remind us that target range, Rob?

Yes.

Sure.

The -- so tailoring is obviously going to add some flexibility to our capital ratios.

In terms of tailoring alone, we see our capital -- CET1 ratio going up about 60 bps.

That's including opting out of AOCI, which hurts by about 20 basis points.

And then with CECL, CECL effect, CET1, that's another 19, 20 basis points.

So net-net-net, tailoring CECL, we see our capital ratio going up about 40%.

That's where we are today.

So that adds a lot of flexibility -- basis points.

I'm sorry, 40 basis points, 9.9-ish.

From 9.5 to 9.9-ish.

So that's a lot of flexibility.

We talked about a target in the 8% to 8.5% range.

So yes, we've got room.

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

Can you guys give us some color?

I jumped on the call late, so I apologize if you touched on this.

Rob, you mentioned the outlook for loan growth this year is actually one of the better numbers that we've heard from your peers.

Yes.

Right.

Can you share with us, some of your peers have told us that there seemed to be a change in business confidence, if you will, or sentiment in the fourth quarter with these trade deals looking like they're coming together.

Can you guys share with us what your customers are telling -- your commercial customers are telling you about how they feel about business for 2020?

Well, as it relates to trade, I think there's a lot of wait and see as to what's really there and how it impacts people.

So I don't know that people have really changed.

They've been -- and you've seen it in manufacturing and CapEx, they've been a bit on the sidelines.

Eventually, they're going to have to spend, simply to replace dated stuff.

But I don't know that we've seen that yet.

Our growth on the C&I side continues to come from specialty businesses and our geographic expansion.

And probably one of the things that makes us a bit of an outlier just in terms of growth is once we turn consumer-positive, which we've done, the totality that the loan book is growing, and we just haven't had that in the past.

Yes.

Yes.

In the past, here.

Yes, that's right.

And it's pretty balanced in terms of our outlook.

And the pipelines look good.

Very good.

In fact, that was going to be my second question, Bill.

Can you guys kind of share with us how much of the projected growth over what you think you'll see in 2020 is coming from your existing footprint versus what's coming from these new markets that you've penetrated?

I've seen that statistic.

I don't remember it.

Well, it's -- I mean, the new markets are accretive to our loan growth in terms of percentages, but they're working off pretty small bases.

They are a healthy percentage of our growth.

Yes.

Yes.

Far outpacing the legacy books and they add -- I'm not going to guess a percentage, but I've seen it.

They add to the total.

They do.

No question.

Yes.

And I guess, lastly on the -- other than you guys being handsome good guys, what's getting -- how are you guys winning these customers in these new markets?

Is it just better products that you have that the -- that your competitors don't have for the customers that you're targeting?

It's a number of factors that start with really good people.

It includes bringing to our new markets our -- the totality of PNC with a regional president model, with our community involvement, and yes, it's dependent on our products.

We show up in a market, we get embedded in the community and centers of influence.

We go in with our foundation and grow grade.

We pick the clients we want to cover and bank long term, and we're very patient.

We will call on them for 2 and 3 years.

But -- before we get a shot on goal.

And when we get that, our products are very good, particularly in comparison to some of the smaller in-market players.

We've been doing this going all the way back to the RBC acquisition, and it works.

We use the same playbook in each market that we go into.

We talk about breaking even inside of 3 years.

We've been able to do that with all the vintages and we'll keep going.

Yes.

And Gerard, I would just add to that.

I've said that before.

There's just great receptivity of these corporate clients and prospects for the PNC calling effort.

And once that dialogue goes, as Bill said, then we compete well.

The other thing that I would just remind you, and this is important.

The potential criticism that somehow we are out just participating in other loans is not at all accurate.

When you look at our cross-sell rates in those markets, they're pushing 50% fees of total revenue, which is not wildly off what we do in our legacy markets.

And signifies a relationship rather than just purchasing loans.

Yes.

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

So just a question on the expense side.

Rob, we heard you say that you're, kind of, re-upping the $300 million CIP.

Yes.

And also kind of continuing to move that overall expense growth down to flattish, right?

Yes.

Which is a nice change over the last couple of years.

And I'm just wondering underneath that, are some other things also starting to taper down in terms of -- I wouldn't dare say that you guys are changing your investment pace, but what else is helping underneath the surface, kind of, clamp down on that overall rate of expense growth that gets you closer to flattish?

Well, sure.

I mean it is that.

No, we're not backing off of our investments or anything along those lines.

We just think that the continuous improvement program that we have in place is a strength of the company that we can achieve, in essence, 3% cost savings to fund these investments on an annual basis.

And that's something that we've been very good at, and that will continue.

So I don't think there's a whole lot that's changing under that.

Okay.

Got it.

And then just one more follow-up on the, kind of, balance sheet mix sense.

So you mentioned that the low rate environment doesn't have a lot of, right now, interest in the...

Yes.

Securities portfolio, right?

So you're growing loans a lot, which -- and you're able to pay down wholesale debt.

So does the mix of earning assets continue to push more towards higher-yielding loans, and you just kind of keep the portfolio in check?

How do you balance the left side of the balance sheet?

A little bit, but that's -- a little bit in that direction, but it's not that dramatic.

Yes.

The -- I mean at the end of the day, we're underinvested today.

We're certainly going to invest runoff.

We'll probably grow.

One of the things going on in the background here is on the receive fixed swap side because the curve steepened out while we had largely gotten out of or lowered our position, we're back into that.

So you can't just look at the securities book in terms of the way we're actually investing against the yield curve.

You can think about it in terms of cash, but it's not necessarily the sole tool used to manage the balance sheet.

Okay.

And that means that you're back into it, meaning that you're more protected against lower from here, right?

Given those -- getting back into it?

Yes.

Yes.

(Operator Instructions) And your next question comes from the line of Matt O'Connor with Deutsche Bank.

There was obviously a lot of commentary just on the strong capital and you generate a lot of capital.

Just as we think about like various uses of that capital besides buybacks, dividends, maybe you could talk about some of other potential uses?

I mean, really been pretty clear how you feel on bank deals, but what about loan portfolios?

We've seen some branch divestitures from other people doing deals, acquiring technology, fee deal opportunities, just kind of the whole portfolio of options.

I mean, it's a fair question.

And you should assume that we look at loan portfolios.

We continue to do so.

We look at a lot of stuff.

We look at product add-ons, and you've seen us do that in small size in terms of capabilities in the C&I space, things we would do in retail.

And we'll continue to be rational actors in terms of how we spend the capital.

We have been pretty clear on our thoughts on depository institutions, and that hasn't really changed.

So we'll let this play out.

It's nice.

If you think about the environment that we are going into, notwithstanding the strength of the economy, the volatility of, kind of, what comes in an election year, I think having a lot of capital and being able to generate a lot of capital is a really good thing, simply because of the opportunities that are likely to present themselves here.

And then just long term, I mean, you've talked about trying to boost growth on the consumer side.

And obviously, over the years, there've been either asset generators available or big credit card portfolios, and you haven't done any of those.

But if you look out kind of next 5-plus years, I mean, it does seem like that could be an opportunity for you.

You've got all these deposits.

I know you're not a huge fan of holding a ton of securities, if there's other options, but any change in thinking of that?

Again, like looking out long term, maybe now is not the right time in the cycle, but that is how -- one big difference between your balance sheet and say, USB's or...

Yes.

Look, you never say never.

But my experience is the consumer asset generators that come up for sale are broken, number one.

And number two, we aren't the house to fix them, right?

We are a prime lender in consumer that's focused on customer experience.

We aren't a subprime lender, which typically, most of these people play in.

We don't understand it.

We don't want to be that person.

The fact that if they're for sale, they blew up, they didn't understand it either suggests to me that all else equal, you won't see us -- you won't ever see us do that.

Now, you never say never, but that is my likely guess.

We've said that for some time.

That's not a new view.

Yes.

The flipside of that, by the way, on the C&I side, we're really good at fixing busted C&I, right?

So big portfolios that are troubled or lenders that are troubled show up with big portfolios, that is something we pursue.

That's in our wheelhouse.

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

Question on provisioning and CECL.

So your -- I think your reserve ratio is about -- I think, ended the quarter at about [115] or [116], I think.

And with CECL, that true -- on January 1, that gets trued up what will show up in the first quarter results, but it will get trued up based on the fourth quarter to 1.4%.

As I think about provisioning going forward and some of the dynamics around that reserve ratio, how do I think about growth and sort of the marginal growth of your portfolio versus that 1.4%.

Are you growing in loans that have materially high -- on average, have materially higher loss content than 1.4%?

And how do we think about that mix change in terms of how to think about provisioning versus charge-offs in ALLL ratio evolution?

You'll drive yourself insane.

I mean, I can tell you, think through all...

All else equal.

Yes.

Right.

Yes.

An issue is if we grow to the -- in the same categories today, you wouldn't necessarily have the same loss content because, for example, we shut off the lower FICO scored consumer.

If we shift to secured products in C&I versus unsecured products, it shifts.

If we do more card than we do resi mortgage, it's -- this thing is going to be really hard to predict.

And what we have to do and we will do is give you an effect, a provision attribution each quarter, so that you understand clearly where it's coming.

The quarterly disclosures, yes, which is part of the disclosures.

That's right.

Right.

And look, how do you think, like, the loss content...

A thing to remember is we have more reserves right here day 1, so you're deploying in terms...

Yes, so 1.14% is now going to 1%.

Yes.

Yes.

So, yes, we've got a lot of reserves.

Got it.

No.

Fair.

But like to the extent mix is changing, and there's no change in your strategy and the trajectory, which has seen auto, cards grow disproportionately, albeit from a lower base, I would think that if that trend continues, your loss content and your expected losses over time, assuming all else equal, which I know is unrealistic, I mean, shouldn't we assume that your ALLL ratio, given current trends, should move higher from here?

Well, the challenge with that is the assumption that the absolute growth in consumer will somehow keep pace with the absolute growth in C&I, which it won't, simply because C&I is disproportionately larger.

So yes, consumer will grow, but you've got to remember that that's balanced by a larger C&I book growing just as fast.

Right.

Right.

That's right.

Right.

So the balance growth is much bigger just from -- Okay.

Got it, makes sense.

Yes.

There are no further questions.

All right.

Well, thank you, everybody, and we'll see you in the first quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.