PNC Financial Services Group Inc (PNC) 2021 Q4 法說會逐字稿

Well, good morning, and 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 18, 2022, 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. As you've seen, we had a strong fourth quarter and full year for 2021. We successfully completed the conversion of BBVA USA early in the fourth quarter, and have been running hard as one bank since then. The transaction continues to meet or exceed our deal projections, and Rob will give you some of those details. I'm especially pleased by our ability to announce, close and convert a transaction of this size inside of 11-months.

Challenges notwithstanding, we had the talent, the technology and the strategy to accomplish this and to combine our organizations in a way that will provide growth opportunities for years to come. The acquisition positions us with a coast-to-coast presence and along with our continued organic growth strategies, including our recent expansion into Las Vegas, we now have a presence in all of the top 30 U.S. markets. We're excited about the opportunity this presents, and we are confident in our ability to generate growth by executing on our Main Street relationship-based model.

That said, we recognize that we have a lot of work to do in building out the new and expansion markets, which will be our primary focus in 2022. BBVA obviously impacted our results for the full year, and Rob will walk you through the details. Excluding BBVA, we generated record revenue, highlighted by strong non-interest income with broad-based contributions across our commercial and consumer businesses.

We also maintained outstanding credit quality and a very strong capital position. While we continue to opportunistically deploy some of our excess cash into higher-yielding securities throughout the year, we remain well positioned with substantial excess liquidity to capitalize on a rising interest rate environment.

Our reported results for the fourth quarter reflected the impact of almost $440 million of BBVA integration costs. Excluding these, we generated nearly $1.6 billion of net income and solid returns. Importantly, excluding the impact of PPP loan forgiveness, we saw decent underlying loan growth trends and some uptick in utilization rates, which is very encouraging, as Rob will discuss in more detail.

Critical to our long-term success has been the quality and stability of our talent, and we pride ourselves as being an employer of choice, given the recent dynamics of the substantially increased competition for talent. In part due to the great resignation, we experienced greater wage pressure during the fourth quarter, and I expect that to persist into the coming year.

Naturally, we'll look to offset these increases with our continuous improvement efforts, which include driving further automation and rethinking core processes. We continue to invest in technology to enhance our capabilities in an increasingly digital world. Customers are looking to their financial providers to offer innovative tools that help them manage their money in ways that are faster, smarter and more convenient, whether that be expanded use cases for Zelle where transaction volumes are up 50% or low cash flow. For example, by providing account transparency and control, low cash mode has substantially reduced customer overdraft fees and related complaints.

I'll close by thanking our employees for their hard work and steadfast commitment to our customers and communities. Because of our employees, we had a remarkable year and are well positioned to serve all of our stakeholders in 2022 and beyond.

And with that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions.

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 5 and is presented on an average basis. Overall, year-over-year balance sheet growth was primarily driven by the acquisition of BBVA USA.

Loans grew 18%, investment securities increased 49% and deposits grew 26%. Looking at the linked quarter changes, loans for the fourth quarter were $289 billion, a decline of $2.4 billion or 1%. Excluding $4.7 billion of PPP forgiveness activity, loans grew $2.3 billion or 1%, and I'll cover the drivers in more detail over the next few slides.

Investment securities increased $7 billion or 6% as we maintained higher purchasing activity throughout much of the quarter. Accordingly, cash balances at the Federal Reserve declined by $5 billion.

On the liability side, deposit balances declined $1.6 billion as higher commercial and consumer deposits were offset by runoff deposits related to the strategic repricing of certain BBVA USA portfolios during the third quarter, and that negatively impacted fourth quarter average balances.

However, on a spot basis, total deposits as of December 31 increased $8 billion or 2%, reflecting the continued strong liquidity positions of our customers. At year-end, our tangible book value was $94.11 per common share, and our CET1 ratio was estimated to be 10.2%, which are both substantially above the pro forma levels we anticipated when we announced the deal.

During the quarter, we returned approximately $1.1 billion of capital to shareholders via common dividends of $500 million and share repurchases of $600 million. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility going forward.

Slide 6 shows our average loans and deposits in more detail. In the fourth quarter, loans declined $2.4 billion as growth in commercial and consumer loans was more than offset by a decline in PPP loans of $4.7 billion. Excluding the impact of PPP, commercial loans grew by $2.2 billion or 1%, driven by growth in corporate banking and asset-based lending.

During the fourth quarter, we continue to see a slow and steady increase in utilization rates within our Corporate and Institutional Banking business, and along with that expanded pipelines. Taken together, these factors are driving our expectations for higher loan growth in 2022. Consumer loans increased modestly linked quarter as higher residential real estate balances were mostly offset by lower home equity and auto loans.

Finally, as I mentioned, PPP loans continued to decline due to forgiveness activity. And as of December 31, $3.4 billion of PPP loans remained on our balance sheet. Average deposits of $453 billion declined by $1.6 billion linked quarter for the reasons I previously mentioned. Overall, our rate paid on interest-bearing deposits remained stable at 4 basis points.

Slide 7 details the change in our average securities and federal reserve balances. As rates increased at the end of the third quarter and throughout the fourth quarter, we continue to opportunistically add securities to our portfolio. primarily U.S. treasuries. As a result, securities balances averaged $128 billion in the fourth quarter, an increase of $7.2 billion or 6% compared to the third quarter of 2021 and now represent 26% of interest-earning assets.

We continue to have substantial excess liquidity with Fed cash balances averaging $75 billion during the fourth quarter, which we believe positions us well for a rising rate environment.

As you can see on Slide 8, fourth quarter 2021 reported EPS was $2.86, which included pretax integration costs of $438 million. Excluding integration costs, adjusted EPS was $3.68.

As expected, during the fourth quarter, we incurred essentially half of our total anticipated deal integration costs, which reduced revenue by $47 million and increased expenses by $391 million. Since the announcement of the acquisition, we've now incurred approximately 95% of the total $980 million expected integration costs, including $120 million of write-offs for capitalized items. Excluding the impact of integration costs, linked quarter revenue was down $31 million or 1%.

Expenses increased $48 million or 1% and pretax pre-provision earnings declined $79 million or 4%. The fourth quarter provision recapture was $327 million, reflecting continued improvements in the economic environment. Net income, excluding pretax integration costs of $438 million, was $1.6 billion in the fourth quarter.

Now let's discuss the key drivers of this performance in more detail. Turning to Slide 9. These charts illustrate our diversified business mix. Total revenue for the fourth quarter of $5.1 billion decreased $70 million linked quarter, reflecting lower non-interest income. Net interest income of $2.9 billion was up slightly, primarily a result of higher securities balances. Net interest margin was stable at 2.27%.

As I mentioned, integration costs reduced non-interest income by $47 million, which included $19 million of lease exit costs, $17 million of treasury management fee waivers and $11 million of overdraft waivers. Fourth quarter fee income, excluding integration costs, was $1.9 billion and declined $39 million or 2% linked quarter.

Looking at the detail. Asset management fees increased $3 million or 1%, primarily related to higher average equity markets. Consumer services grew $12 million or 2% due to higher brokerage and credit card revenue. Corporate service fees increased $14 million or 2%, reflecting higher loan syndications activity as well as continued elevated corporate advisory activity. Residential mortgage non-interest income declined $46 million driven by lower RMSR valuation adjustments and loan sales revenue. Service charges on deposits decreased $22 million, primarily a result of converting BBVA USA customers to PNC's product and overdraft pricing structure.

Other non-interest income, excluding integration costs, was stable linked quarter as the impact of a $1 million positive Visa derivative fair value adjustment in the fourth quarter compared to a negative adjustment of $169 million in the third quarter was offset by lower private equity revenue.

Turning to Slide 10. Our fourth quarter expenses were up by $204 million or 6% linked quarter. The growth was primarily driven by $156 million increase in integration expenses. Excluding the impact of integration expenses of $391 million, non-interest expense increased $48 million or 1%. The growth was largely within personnel costs driven by higher employee benefits expense, an increase in our minimum hourly rate of pay as well as elevated incentive compensation related to strong fee activity.

We had a 2021 goal of $300 million in cost savings through our continuous improvement program, and we successfully completed actions to achieve that goal. Looking forward to 2022, our annual CIP goal will once again be $300 million.

Importantly, as of year-end 2021, we completed all of the actions that will drive $900 million of savings related to the BBVA USA acquisition, which we expect to be fully realized in 2022 and is reflected in our expense guidance that I will provide in a few minutes.

Our credit metrics are presented on Slide 11. Non-performing loans of $2.5 billion decreased $48 million or 2% compared to September 30 and continue to represent less than 1% of total loans. Total delinquencies of $2 billion on December 31 increased $516 million or 35%. Obviously, this was a large increase, but it was primarily driven by BBVA USA conversion-related administrative and operational delays, which we expect will largely be resolved within the first half of 2022.

Net charge-offs for loans and leases were $124 million, an increase of $43 million linked quarter. Commercial net charge-offs declined $5 million, offset by an increase of $48 million in consumer. Inside of the higher consumer net charge-offs, auto grew $28 million and other consumer increased $13 million, reflecting conversion-related impacts as well as seasonality. Our annualized net charge-offs to average loans continues to be low and in the fourth quarter was 17 basis points.

And during the fourth quarter, our allowance for credit losses declined $471 million, reflecting continued improvements in the economic environment. At quarter end, our reserves were $5.5 billion, representing 1.92% of loans.

In summary, PNC reported a strong fourth quarter, which concluded a successful 2021, and we're well positioned for 2022 as we continue to realize the potential of our coast-to-coast franchise.

In regard to our view of the overall economy, we expect strong growth over the course of 2022, resulting in 3.5% GDP growth. We also expect four 25 basis point increases in the Fed funds rate in 2022, beginning in May, followed by additional increases in June, September and December.

Looking ahead, our full year guidance for 2022 includes the impact of 12-months of BBVA USA results compared to only 7-months in 2021. Taking that into account, our outlook for full year 2022 compared to 2021 results is as follows. We expect average loan growth of approximately 10% and 5% on a spot basis. We expect total revenue growth to be 8% to 10%. We expect expenses, excluding integration expense, to be up 4% to 6%. And to be clear here, this includes 5 additional months of BBVA USA operating expenses, which equates to a full year increase of approximately $500 million, and we expect our effective tax rate to be approximately 18%.

Based on this guidance, we expect we will generate solid positive operating leverage in 2022. Looking ahead at the first quarter of 2022 compared to the recent fourth quarter 2021 results, we expect average loan balances, excluding PPP, to be up approximately 1% to 2%. We expect NII to be down approximately 1% to 2%, reflecting 2 fewer days in the quarter and a decline of approximately $75 million in PPP-related interest income.

We expect fee income to be down 4% to 6% due to seasonally lower first quarter client activity as well as elevated fourth quarter fees in certain categories. We expect other non-interest income to be between $375 million and $425 million, excluding integration costs as well as net securities and Visa activity.

Taking our guidance for all components of revenue into consideration, we expect total revenue to decline approximately 3% to 5%. We expect total non-interest expense excluding integration costs, to be down approximately 4% to 6%.

And during the quarter, we expect to incur $30 million of integration expense. Finally, we expect first quarter net charge-offs to be between $100 million and $150 million.

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

(Operator Instructions) As a reminder, this conference is being recorded. Our first question comes from the line of Dave George with Baird.

I had a question about capital and capital allocation. You obviously finished the year at 10.2% CET1, which is ahead of kind of your initial targets when you announced BBVA. And your stock is at 2.3, 2.4 of tangible book, and I know you've talked about taking the cash dividend payout up. So just kind of curious, Bill, how you're thinking about capital allocation in the new year? And then I've got one follow-up.

Well, you kind of answered your own question because we're consistent. All else equal in this environment, first focus on the potential of loan growth and using it a good way, a bias, strong bias towards dividend, but we'll still be in the market to repurchase shares. And I think you'll probably see us accelerate some of the things we're doing on the smaller side in terms of product activity, bolt-ons into TM and so forth. None of that -- by the way, those acquisitions won't add up too much, but they've become an important part of just adding core capabilities as we go into a digitized world.

Okay. And then a question on your guidance, in particular, NII. I know you mentioned you've got 4 hikes in there. I assume you're just using the forward curve and the securities as a percentage of earning assets up to 26%. I know, Bill, you've talked about being 25% to 30%. Do you expect continued liquidity deployment? Just kind of curious how much liquidity deployment is embedded in that number.

So our economist expects 4 hikes. I actually think it's going to be more aggressive than that, but I'm an outlier in our committee, and we....

The only one vote.

Yes. And our forecast is, at this point, pretty much on the forward curve at this point. I think the plan, Rob, I don't know if you want to talk to the plan of we're going to gradually add duration throughout the year. There wasn't any magic to it, and we didn't really build in, in Rob's guidance, some assumption that we would go at it even more aggressively for each reacted...

And the range that we have. That 25% to 30% range, Dave, still the range that's in our guidance.

Yes.

And up next, we now have a question from the line of John Pancari with Evercore.

On the revenue guide for the full year of 8% to 10%, I just wanted to see if you could help unpack that a little bit in terms of how you view the NII trajectory for the year and what type of growth we think is reasonable versus the trajectory on the fee income side of things, given some of the dynamics you flagged?

Yes, sure, John. So full revenue -- full year revenue up 8% to 10%. Break down those components, net interest income up low-teens. And that does factor in the rate increases that we spoke about in the comments -- opening comments. And then on the fees, mid-single digits year-over-year. So those 2 together get you to the 8% to 10%.

Got it. All right. That's helpful. And then on the loan growth front, just given the 10% end of period loan growth expectations certainly implies acceleration that you indicated, that you're seeing, could you give us a little more color on the growth trends that you think is achievable on the commercial side versus consumer? And maybe what are you expecting to be the biggest drivers of that acceleration as you look at the loan book?

Yes, sure. So for the full year guide, it's 10% average, but probably a better indicator is the spot just because of the acquisition dynamics on the average number. So spot up from period end 5%. And we see a continuation of what we started to see in the fourth quarter, which was some expanded utilization in the commercial book picking up through 2022, and then a little bit less on the consumer side. Consumer customers are still pretty flush with cash. So loan demand there, certainly in the first half of 2022, we expect to be softer than the commercial side.

Got it. That helps. Yes, I meant to say average on the growth.

Yes. Yes.

And now we have a question from the line of Erika Najarian with UBS.

I wanted to follow up on the questions on what's embedded in the NII guide. Rob, you answered the question on what you're assuming for liquidity deployment. But what are you assuming in your NII guide about the trajectory of deposit beta? And what do you think will actually happen?

Well, in terms of our guidance, Erika, what we apply in terms of beta is what we've seen in past cycles, which, generally speaking, will be a lag on the front end. So my expectation and what we built into the guidance is that we will see some beta increase, but not until the end of 2022 and it will probably be more of a factor in '23, just because of the levels of liquidity and deposits that we have.

Got it. Okay. So if I'm comparing it to your previous deposit beta, in terms of, let's say, in '15 to '16 to '17, actually, the first 100 basis points, your guidance assumes a slower ramp than that.

That's right. That's exactly right.

Got it. And the second follow-up question is for Bill. One of your peers, Jamie, had obviously given a guidance for higher expenses in 2022, pointing to accelerated investment spend. As we think about this 4% to 6%, obviously, some of this is the BBVA baseline. But did you front-load some of the investment spend in 2022? In other words, as your investors start thinking about PNC's profitability in a more -- in a normalized rising rate environment, is 4% to 6% an appropriate guidepost for future growth in expenses going past '22?

No. No. So to unpack the guide for next year, the -- I think the PNC legacy expenses are up maybe 1%.

The non-BBVA USA.

Yes. Yes. And so did we prepack investment? We've said all along that we've had a steady state and actually a fairly high level of investment in our core business. And then you'll remember in the guidance for BBVA that in the $900 million of cost saves, that was a netted number against investments we are going to make to build out those markets. So inside of everything you're seeing there actually has a lot of investment already built into it.

And of course, our continuous improvement of $300 million offsets investments. And that's something that we've been doing for a number of years.

Yes. I also think we've had -- it's worth noting, we've had some debate internally on the continuous improvement number and can it be larger? Because I think we all see opportunities in the operating environment as we move forward with BBVA. The challenge is continuous improvement is something you know you can do, whereas right now, we're still in the process of we know it's there, we just don't know where yet. Once we kind of lock it down and can track it, it shows up in continuous improvement.

Yes. And that won't stop us from going after it.

Exactly.

And we now have a question from the line of Betsy Graseck with Morgan Stanley.

So two questions. One, just on how we're thinking about the reinvestment in the securities portfolio as we think about the NII guide as well. Maybe you could give us a little sense of the pace that you're thinking about reinvesting. I mean what's baked into your NII guide because as we know, the forward curve does suggest we're going to be hitting to pretty soon. So do you wait for that? Or do you start to leg in even at current rates?

We will leg in throughout the course. But remember, what's in our guide on securities doesn't dent our liquidity profile. So what we have in our guide here is kind of steady deployment working towards the 25% to 30% will add balances. It doesn't even dent the potential of what we could do with liquidity.

With the Fed cash balances.

Yes. Yes.

You're still looking for the...

So it's kind of a -- it's a baseline budget boring. The rates do this. We do the following. If there's -- if rates go beyond or even if we get to a place where we think rates have probably gone where they need to go, not as high as I think they'll go, we could increase that, but that's not contemplated in the forecast that we have right now.

Because am I right in thinking your target range of securities to earning assets like 25% to 30%, is that fair?

Yes.

That's right.

And this is follow-up...

And remember inside of that mix, right, that's a big portfolio of securities. Big difference in the yield coming out of buying short-dated treasuries, which has been kind of our recent trade versus going further out the curve and going back towards mortgages once you assume the extension risk is taken out. Massive difference in yields. So it's -- some of it's notional of security. Some of it's what you're actually buying, and both of those will be driven by the speed and outlook for rates over time.

Right. So what I'm hearing is baseline and the expectation, but upside as we approach kind of rates reflecting your view of full extension risk on the RMBS side.

Yes. No, if my individual view is right, there's a lot of upside. But the forecast that we've given you and what's kind of in our plan is steady state, follow the forwards and leg in over time.

The yields on the securities portfolio can change a lot.

Yes.

Right, right, right. I got it. Okay. And then separately, just thinking a little bit longer term, Bill, on the investments that you're doing. Could you just give us a little bit of color as to what are you looking for in these bolt-on acquisitions to enhance your digitization? What pieces of your digitization are you looking to improve? And also, is there a need for reinvestment in branches in the new geographies where maybe you would have had a slightly different skew to the branch mix? Just trying to understand a little more detail there.

Two very different questions. We -- as you've seen, we've done a number of small things, Tempus probably being the most interesting one where we bring in certain payment capabilities that lead to other opportunities. And we see more and more of those. By the way, we're not unique at that. A lot of banks are playing in the space. They're not terribly expensive, but oftentimes, you get modules of technology that can be sort of bought into and then scaled across your broader platform. So that's -- I just think you're going to see more of that as we continue to compete in digital space for both the consumer and the corporate.

On the branch side, we have plans to further, as we always do, kind of build out selectively in the markets where we're underpenetrated. But at the same time, you'll see us continue our practice of consolidating the thicker market. So no real change there and all that's in the numbers we've given you.

And we now have a question from the line of Gerard Cassidy with RBC.

Can you guys give us a little color. I'm trying to figure out what we're going to be talking about in the fourth quarter earnings call for 2022 in January of '23. And I think credit might be a subject that receives more attention then. Can you share with us your underwriting standards, how you compare them today to, let's say, right at the start of the pandemic and then comparing them to 2019? How they look compared to today?

Well, so you got to separate something. Our credit box per se, right? So the type of clients we lend to, the leverage they can have, all the things you would otherwise measure, we really don't change that over time. Having said that, of course, even inside of that box, companies are doing better or they are doing -- trending more poorly.

I think we're going to go into a period of time here as we go towards the end of the year, where all else equal, there will be pressure on credit, not because we changed our underwriting standards, but because the upgrade/downgrade ratio will change. Rob and I were talking before the call, if you actually look at our reserve ratio, particularly when you adjust it for credit cards, I can't think of a period of time where you're kind of going into rising rate environment, which is going to help us, loan growth, which is going to help us and feeling healthy reserves when you compare where we are versus -- I'll just call it that versus the rest of the industry in terms of raw percentages against balance, and you know our book through legacy performance.

And resulting from the unique dynamics of the pandemic. So it's an unusual setup.

Yes. Yes.

Very good. And then as a follow-up, you have some decent loan growth, Rob, that you pointed to for 2022. Within the commercial growth areas, C&I, not real estate but C&I. Can you share with us or give us some more color, are they coming from the newer markets that you guys have entered over the last 5 or 6 years? Or are you seeing early traction with the BBVA customers? Maybe if you could dissect where something that might come from in 2022.

Well, the new money out, right? So the new clients and new money that we are committing, whether it's drawn or not, has accelerated for the last bunch of months and a lot of that is related to the newer markets we're in, including some big wins coming out of the BBVA markets. The utilization part, right? So the money is out, now is somebody borrowing more under what line is broad-based. And if you just think about how many clients we have, it's kind of distributed across everything.

Yes. The other thing that I'd add to that, Gerard, is that the pipelines in our commercial book are strong. And in the new markets, they're up percentage-wise significantly.

We now have a question from the line of Mike Mayo with Wells Fargo Securities.

Bill, you led off saying that BBVA has exceeded expectations, but I didn't -- I don't think I heard any changes to expense savings or synergies or anything like that. So even if you can't quantify it, can you talk about what's going better or worse than expected?

Will look better than expected on initial deal terms, is largely...

(inaudible)

Yes, is largely the economy, right? The assumptions where we marked credit and looked at credit turned out to be wildly conservative. But that's what we saw at that point. That -- better than expected, if I look at it, I think the teams that we've been able to deploy in the market, some of the talent that BBVA had, some of the talent we were able to hire, that the amount of call volume that we're having in the new markets with new products and old clients and with new products and people with new clients, all sort of wildly outpacing what we are able to do with RBC in our newer markets in the past and then just wins, showing up with clients early on.

So that's kind of all in the business momentum side and continues to give us comfort on our ability to build out the markets. The credit is a lot better than we thought. The expense guide, we go out there and we say, take $900 million out, including investment, and we stick to that. But to Rob's point, and you guys know this of us through time, it doesn't mean that we're going to stop looking once we hit our expense guide. And I guess I'd just leave it there.

Why -- where you're leaving is, I guess, was really my question. So why not increase your expense saving target or quantify that? Is that because you're reinvesting it? Or you're just being conservative or you're just waiting longer?

I think the easiest way to answer that is when I was talking about continuous improvement a little while ago, Mike, we kind of know there's stuff there through some metrics and some thought process today. But until we can put an action plan together, quantify it, know how we're going to measure it, I can't -- I'm not just going to throw an expense guide in there that probably is embedded, but I'm not sure.

And I just think -- this is Rob, Mike. I just think it's premature. So we worked hard in 2021 to get that $900 million in savings into that $1.7 billion run rate. So we got to get going, and this is getting [going part].

And then I know part of your -- you're in all top 30 U.S. markets now. And I know you want to expand. And so you did guide for, you said, solid positive operating leverage for the year. I get that. On the other hand, isn't it getting a lot more expensive to hire people to help with that expansion in the new markets?

It is, but we have largely hired them all. We hit the -- you need to understand, when we closed and then converted, we had basically the teams built out in all of these markets, Mike. So they're in our run rate.

I mean how many people did you hire? I mean these are a lot in new markets, [and it's tough], right?

Yes, a lot of people.

But hey, the extension of your question is, are we going to see wage -- do we expect to see wage pressure in 2022? We do, and that is built into our expense guidance.

(Operator Instructions) We have a question from the line of Bill Carcache with Wolfe Research.

Following up on your deposit beta commentary, how are you thinking about the risk that balance sheet runoff, the potential impact it could have in this cycle versus the last one, given that it's expected to play a bit bigger role versus when we exited the last sort of cycle?

It's a great question, and that's obviously going to impact it. And in the extreme, if they shrink their balance sheet dramatically, it obviously would impact betas and make them higher. The offset to that, though, is you got to remember with loan growth, you actually create deposits, right? So if loan growth does pick up, bizarrely as the Fed is dropping their balance sheet, which isn't unlikely, that loan growth actually generates deposits. If you think about just the leverage on the capital you hold for a loan and the money goes everywhere else. So I'm not sure I've iterated my way through exactly how that's going to play out other than it feels like the combination of those 2 things should leave us extremely liquid deposit-wise for the next several years.

Which is our base expectation. We -- you've got to keep an eye on it.

Yes.

Yes. That makes sense. And I guess continuing on that thought process, Bill, do you feel PNC is perhaps a little bit less exposed than some of the larger banks that are primary dealers and more directly involved in the creation of those deposits under the QE process?

I don't think the system works that way. If the Fed shrinks its balance sheet, you will likely see corporate cash -- I don't know that you can think through it that way. I think it transmits through the banking system, and I think it hits everybody largely the same as a function of their corporate and consumer mix, but corporates behave like corporates and consumers behave like consumers.

Got it. And then lastly, I think you touched on this, but just to put a finer point on it, if the pipeline is a strong loan growth trends that you're describing persist? I guess maybe if you can just comment on your willingness to -- or the extent to which that influences your willingness to take your securities portfolio as high as 30%. I guess do you think your liquidity is sufficient to be able to do both, fund that stronger loan growth and [take it pretty] higher or -- I wonder how does that interaction work?

We have plenty of liquidity to do both.

And we now have a question from the line of Ken Usdin with Jefferies.

Just wanted to follow up. Rob, I think you had mentioned when you broke down the revenue guidance that you're looking at mid -- fees in the mid-single digits, and obviously, that also includes the BBVA stuff. Last year, it's ridiculously great year for Corporate Services, especially. I'm just wondering underneath the surface, what do you see as being the underlying growth drivers outside of the BBVA rollover?

Yes. I would just say, if you're taking a look at the full year, Ken, just going through the categories, Asset Management, we would expect to continue to increase in that mid-single-digit range. Consumer, higher than that, in part due to the addition of the BBVA franchise. But as you hit it on Corporate Services, we had such elevated levels in 2021. Our expectations for 2022 are down a bit. Residential mortgage may be up a little bit, and then service charges on deposits down as we get the full year effect of reduced overdraft fees that we expect from low cash mode. So you put all that together, that's how you get to mid-single digits.

Okay. Got it. And then same thing in terms of just how you're thinking about that other category. Is it still within the kind of zone you're thinking about for the first quarter? Is that how you think about it for the full year?

That is, yes.

Okay. One little cleanup just on securities yields, Rob. Last quarter, you had that negative impact from the BBVA, portfolio mark...

We did that. Yes.

And then this quarter, it was flattish even, I would think with the absence of that. So can you kind of just walk us through what was the impact in the fourth quarter, if any? And how are you still -- are you at the point where you're seeing better reinvestment yields?

Yes, we're starting to. I think investment yield was the story, on the premium amortization issue of the third quarter, which was elevated. It went down in the fourth quarter, but it's still elevated over what I would consider normal levels. So that worked against us a little bit as well.

And we now have a question from the line of John McDonald with Autonomous Research.

One more on the expenses. It's pretty impressive for the expense guide for '22. If I look at it relative to kind of the fourth quarter annualized, it implies a quarterly run rate, that's about 5% lower, Rob. So I guess just kind of unpacking that, is the fourth quarter this year a little high because of such strong capital markets revenues? And then how are you eating inflation and still getting cost to be 5% lower year-over-year when other banks are having a lot of inflationary pressures? That would be helpful.

Yes. No, you hit it. It's definitely on the wage side in the fourth quarter. And it just goes back -- as we go into 2022, it goes back to what we were saying earlier in terms of how we laid out the year. We have the cost saves locked in for the BBVA side. We have investments on the non-BBVA side that are largely offset by our continuous improvement numbers. So that's how we put it all together, and that's the plan.

John, just because I know all of our employees are listening. We're going to -- this plan assumes that we are paying people competitively in a competitive market for talented people. We just need to find the dollars elsewhere to be able to do that.

That's right.

Okay. Got it. And then one industry-type question for you guys. You have a lot of reserves relative to peers, mix adjusted on every basis. But we've never seen like CECL working in a loan growth environment. So just kind of your guys' thoughts on as loan growth starts to pick up for the industry, could we start to see some growth math where you need to add provisions and add to reserves just for growth? Or is the 5% growth like contemplated in your reserves today? Or as loan growth picks up, do you have growth-driven provisioning?

Yes, I can answer that one, John. That's complex. And in some instances, I don't know if we know because we haven't run CECL through an environment like that. But academically speaking, we will get to the point where we will need to grow reserves in concert with bigger balance sheets, bigger loan balances. But we're still in this place where we're running high in terms of percentage terms. So there's going to be some offsetting factors there, is my guess, in 2022.

I'll now turn the conference back to Mr. Demchak for your concluding remarks. Thank you, sir.

All right. No concluding remarks. I know you guys are busy. Thank you for dialing and we got a lot of calls today. Look forward to talking to you in the first quarter. Thanks.

Thank you.

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a great day, everyone.