PNC Financial Services Group Inc (PNC) 2021 Q1 法說會逐字稿

Good morning.

My name is Frank, and I will be your conference operator today.

At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference call.

(Operator Instructions) As a reminder, this call is being recorded.

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

Please go ahead, sir.

Well, thank you, and good morning, everybody.

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 CEO -- 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 April 16, 2021, and P&C 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 saw, we had a solid start to the year as we grew revenue and controlled our expenses to generate positive operating leverage in the linked quarter comparison.

Our first quarter results also benefited from our provision recapture, driven largely by an improving economic outlook.

Despite this recapture, our reserves remain at over 2% of loans as we continue to work through the COVID fallout and work to understand potential secular changes on certain asset classes.

Our capital and liquidity levels also remain at record highs.

With a rise in term yields, we've been deploying some of this excess liquidity and increased our investment securities by $9 billion at period end.

You'll notice they didn't change much on an average basis as we bought later in the quarter.

We also actually added another $9 billion in TBAs that are going to settle early in the second quarter here.

Now -- and finally, we've continued our purchase activity into the second quarter, and we continue to operate, notwithstanding this at very high levels of cash at the fed that can be deployed over time in loans or securities-based on market opportunities.

While not a surprise, the quarter was impacted by continued weak loan demand in the face of strong bond market issuance levels, paydowns and competition resulting in historically low utilization levels.

Based on the strength of the U.S. economy, we would expect to see loan demand improve and ultimately drive utilization rates higher over time.

We continue to execute well against our strategic priorities, including our national expansion, which will significantly accelerate through our pending acquisition of BBVA USA.

We're making good progress on BBVA integration planning and are on track for a midyear close pending regulatory approval.

We haven't found any significant surprises regarding the quality or nature of BBVA's business, and our employees are working effectively with their BBVA counterparts on everything, including the technology conversion.

But the quality of BBVA markets, especially in their largest market in Texas -- and the quality of their largest markets, especially in Texas, is proving to be everything we hoped it would be.

As we plan for the integration of BBVA U.S.A., we continue to invest in and leverage our own technology so that we can better serve our customers.

Earlier this week, PNC launched low cash mode, which fundamentally changes the banking experience for our virtual wallet customers by allowing them to avoid overdraft fees through unprecedented account transparency and control.

Low cash mode represents a shift away from the industry's widely used overdraft approach, which drives customer dissatisfaction and which we believe is unsustainable.

We firmly believe this differentiated approach will drive significant growth in new and existing customer relationships over time as we execute our national expansion strategy.

Low cash mode allows our virtual wallet customers to see and control what's happening in their checking accounts in real time.

If a customer's balance is negative or about to go negative, they have at least 24 hours to cure their negative balance by determining whether certain payments are processed that otherwise might result in overdrafts.

This payment control is a significant differentiator that we believe will help customers avoid overdraft fees of approximately $125 million to $150 million annually.

PNC's full '21 -- full year '21 revenue outlook anticipated this fee reduction, as did our estimate of a contribution to PNC as a result -- and as a result is not impacted by this change.

I'd like to close by thanking our employees who continue to support our clients and communities through the various COVID challenges by executing on our value-added relationship-based model.

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

Thanks, Bill, and good morning, everyone.

As you've seen, we reported first quarter net income of $1.8 billion or $4.1 per diluted common share.

Our balance sheet is on Slide 3 and is presented on an average basis.

During the quarter, loans declined by $8 billion or 3% due to lower utilization and continued soft loan demand.

Investment securities grew approximately $700 million or 1% linked quarter.

However, on a spot basis, balances increased $9 billion or 11% as we accelerated our purchase activity near the end of the quarter due to the steepening yield curve.

Our average cash balances at the Federal Reserve grew to $85 billion in the first quarter, driven by continued deposit growth and lower loan balance.

On the liability side, deposit balances averaged $365 billion and were up $6 billion or 2% linked quarter.

Borrowed funds decreased $3 billion compared to the fourth quarter due to the runoff and redemption of debt obligations.

Our tangible book value was $96.57 per common share as of March 31, a decrease on a linked-quarter basis primarily due to a decline in AOCI.

Year-over-year, tangible book value increased 14%.

And as of March 31, 2021, our CET1 ratio was estimated to be 12.6%.

Regarding capital return, our Board recently approved a quarterly cash dividend on common stock of $1.15 per share or approximately $500 million.

And as you know, we continue to suspend our share repurchases during the first quarter as we await regulatory approval for our pending BBVA USA acquisition.

Assuming a midyear close, we expect to resume share repurchases in the second half of the year.

Slide 4 shows our average loans and deposits in more detail.

Average loan balances of $238 billion in the first quarter were down $8 billion or 3% compared to the fourth quarter.

Commercial loan balances declined $5.4 billion or 3% as overall utilization rates decline to historically low levels.

Beyond that, Paycheck Protection Program balances remained flat as originations were offset by loans forgiven.

And within our commercial real estate business, multifamily warehouse lending declined seasonally by $2 billion.

Consumer loans were down $2.3 billion with lower balances across all consumer categories as loan demand continued to soften due to the higher consumer cash levels.

The yield on loan balances was 3.38%, a 3 basis point increase compared to the fourth quarter.

However, the increase reflected elevated commercial real estate prepayment fees and higher PPP loan forgiveness during the quarter.

The rate paid on our interest-bearing deposits is now 6 basis points, a 2 basis point decline linked quarter.

Average deposits increased $6 billion or 2% driven by enhanced consumer liquidity, primarily related to government stimulus payments.

In the year-over-year comparison, total average loans decreased 2% or $5 billion, primarily due to the elevated drawdowns that occurred during the first quarter of 2020.

Deposits increased $76 billion or 26% and, again, were driven by the high cash balances of our customers.

As a point of context, consumer checking account balances are, on average, roughly 40% higher than this time a year ago.

As a result, our period-end loan to deposit ratio has declined to a historic low of 63% at the end of the first quarter compared to 87% in the same period in 2020.

Slide 5 details of a change in our average securities and federal reserve balances over the past year.

Security balances of $86 billion in the first quarter increased $2 billion or 2% compared to the same period a year ago.

Over the same time, our Fed balances have increased nearly fivefold driven by significant government stimulus as well as the proceeds from the sale of our equity investment in BlackRock.

As most of you know, during 2020, we were patient in deploying this excess liquidity, while interest rates remained at historically low levels.

However, with the recent yield curve steepening, we accelerated our rate of purchasing increasing our spot balances by $9 billion, with another $9 billion of forward settling securities as of March 31.

Average security balances now represent approximately 20% of interest-earning assets.

And our expectation is to build these balances to approximately 25% to 30% by year-end.

As you can see on Slide 6, net income of $1.8 billion grew 25% compared to the fourth quarter reflecting strong pretax pre-provision earnings and a substantial provision recapture.

First quarter revenue was $4.2 billion, up slightly compared with the fourth quarter driven by higher noninterest income, which was 44% of total revenue in the first quarter.

Expenses declined $134 million or 5% and remained well controlled.

The provision recapture of $551 million reflected improved forecasted economic conditions and lower loan balances.

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

Turning to Slide 7. This chart illustrates our diversified business mix.

Total revenue increased $12 million compared to the fourth quarter of 2020.

Net interest income of $2.3 billion was down $76 million or 3%, primarily due to lower loan balances and 2 fewer days.

Net interest margin of 2.27% declined 5 basis points, reflecting the impact of higher fed cash balances.

Importantly, we think NIM has bottomed this quarter and expect it to slowly rise throughout 2021.

Noninterest income grew $88 million compared with the fourth quarter.

Fee income of $1.4 billion decreased $102 million or 7%.

Most of the decline was driven by lower corporate service fees related to elevated fourth quarter merger and acquisition advisory activity.

Additionally, consumer services and service charges on deposits were down slightly, reflecting seasonally lower activity and higher consumer cash balances.

And growth in both asset management fees and residential mortgage revenue partially offset some of the decline.

Other noninterest income of $483 million grew $190 million and included higher revenue from both private equity and underwriting.

Linked quarter growth also reflected the impact of the $173 million negative visa derivative adjustment in the fourth quarter.

Compared to the same period a year ago, total revenue declined $116 million, as a decrease in net interest income from lower interest rates and volumes was partially offset by growth in our broad-based fee businesses.

Turning to Slide 8. Expenses were down by $134 million or 5% linked quarter across all categories primarily due to disciplined expense management and seasonality.

Year-over-year expenses increased $31 million or 1% and remained well controlled.

During the first quarter, we generated 5% linked quarter positive operating leverage.

And as a result, our efficiency ratio for the first quarter was 61%.

We remain deliberate around our expense management.

And as we've previously stated, we have a goal to reduce costs by $300 million in 2021 through our continuous improvement program, and we're confident we'll achieve our full year target.

As you know, this program funds a significant portion of our ongoing business in technology investments.

Our credit metrics are presented on Slide 9 and reflect improvement in all these 3 major categories.

Nonperforming loans decreased $148 million or 6% compared to December 31.

Commercial nonperforming loans declined by $174 million or 19%, which reflected portfolio activity as well as improved credit performance.

Consumer nonperforming loans increased $26 million related to residential real estate and home equity loans as a result of borrowers exiting forbearance.

Total delinquencies of $1.1 billion at March 31 decreased $217 million or 16%.

Consumer loan delinquencies declined $203 million primarily due to lower auto and residential real estate, and commercial loan delinquencies decreased by $14 million.

Net charge-offs for loans and leases were $146 million, a decline of $83 million linked quarter.

Commercial net charge-offs of $51 million decreased by $58 million, driven by lower gross charge-offs.

And consumer net charge-offs of $95 million declined by $25 million, primarily in our auto and credit card portfolios.

Annualized net charge-offs to total loans in the first quarter was 25 basis points, a decrease of 10 basis points compared to the same period last year.

Slide 10 shows the $724 million reduction in our allowance for credit losses during the first quarter.

Portfolio changes represented $251 million of the decline, primarily driven by lower loan balances.

$473 million of the release in reserves was related to economic and qualitative factors.

Improvement in our economic outlook was partially offset by increased reserves within our CRE portfolio, particularly in the areas directly impacted by COVID.

In total, our quarter end reserves were $5.2 billion, representing 2.2% of our loans.

Turning to Slide 11.

I want to highlight the progress we've made towards completing the acquisition of BBVA USA.

Notably, we filed all major regulatory applications and have completed a number of our key pre-close objectives.

We're on track to close the acquisition midyear and remain confident in our ability to achieve the financial objectives we laid out at the time that we announced the deal.

In summary, PNC reported a strong first quarter.

In regard to our view of the overall economy, our current expectations are for GDP to surpass prerecession levels sometime during the third quarter and for the Fed funds rate to remain near 0 throughout 2021.

Looking at the second quarter of 2021, compared to the first quarter of 2021, we expect total average loan balances to be stable.

We expect NII to be up approximately 2%.

We expect fee income to be up approximately 3% to 5%.

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

We expect total noninterest expense to be stable, and we expect second quarter net charge-offs to be between $150 million and $200 million.

Looking at the full year 2021 guidance, we expect PNC stand-alone to remain stable year-over-year in regard to both revenue and expenses.

We do expect revenue benefits from a higher rate environment and increased securities balances.

However, average loans will continue to be a drag through at least the first half of 2021.

We acknowledge some upside exists in spot loan growth during the second half of the year.

But that remains to be seen and, as a result, is not included in our guidance.

Regarding the pending acquisition of BBVA U.S.A., we're increasing our expectations for the full year benefit to PNC's 2021 pre-provision net revenue from $600 million to $700 million, primarily driven by refinements to interest rate assumptions.

Consistent with last quarter, this expectation excludes integration costs and assumes a midyear close.

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

(Operator Instructions) Our first question comes from Betsy Graseck with Morgan Stanley.

Okay.

So 2 questions.

One, on your NII guide.

You mentioned up approximately 2%, that's for the first quarter.

But then in the commentary around...

Second quarter.

Second quarter, sorry.

Yes.

That's right.

Right.

And then in the commentary around your securities book, you were highlighting that you're planning to raise securities book to what, 20% to 25 -- 25% to 30% by year-end.

So I just wanted to kind of get your sense as you're building towards your goal by year-end, should we be anticipating that this rate of change of improvement in second quarter NII is something that we should be expecting could persist if the forward curve sticks around where it is in 3Q and 4Q as well?

Sure.

So yes, again, that was for the second quarter on the NII guide.

When we take a look at the full year, and this is part of our guidance in terms of revenue being stable for the full year.

We do expect some more NII from our securities book as we increase the balances, and that's going to be offset by a little bit less loan growth than what we were expecting at the beginning of the year.

So that's where we come out in terms of stable.

In regard to the building up of the securities book, I mean, it's 3 things, really.

One, we have put more money to work because the curve has deepened.

Second, we're going to continue to do that in a measured way.

And then third, for the foreseeable future, we'll be running as a percentage of our interest-earning assets securities balances at a higher level.

So historically, we've been approximately in the 20% range.

We're guiding toward more of the 25% to 30% range.

Yes.

And Betsy, the only thing I would add is, you said it's kind of a goal.

It's not really a goal.

It's just our expectation that given the carry right now and how much cash we're sitting on that -- the reason we put that in there is that our security balances and, frankly, for the whole industry are likely to run higher as a percentage of our total assets than they have historically.

And we'll keep adding to them throughout the year opportunistically as we've done.

You see that in the actions we took late in the fourth quarter -- or sorry, late in the first quarter.

If we were simply trying to drive NII, we could have front-loaded those purchases at lower yields and had NII flat.

We didn't do that.

We waited.

Waiting turns out to have been the right thing.

And you'll see us do that.

You've seen us do that, but you'll see us continue to do that through the course of the year.

I totally get it.

It's such an unusual environment here with the loan-to-deposit ratio is so low and what's going on with the liquidity in your books, so that makes a lot of sense.

And the revenue being stable for the full year with the loan commentary you just made, I mean part of that is a function of the PPP roll off that's expected.

Is that fair?

Yes.

In part.

Yes, that's all part.

That's all built in.

And then on your -- yes.

Go ahead.

Just say, look, the biggest unknown on loan growth specifically is when the inventory start -- the inventory build starts for our corporate customers.

Utilization is running as much as 11 points below the peak, maybe 5 points below sort of historic averages.

And even though the economy is really kind of taken off here, for whatever reason, we haven't seen the typical inventory build and CapEx that you would see in this economy, I guess just hesitancy waiting for more certainty on the pandemic.

But when that happens, and it will happen, it almost mechanically has to happen, you're going to see pretty appreciable loan growth.

We just don't know when that's going to be.

Particularly as it relates to 2021.

Yes.

Got it.

All right.

And then just separately on the BBVA USA projected PPNR, that $700 million, up $100 million from your prior guide.

What's driving that delta?

Yes.

As I said in my comments, Betsy, this is Rob.

It's largely refinements in our assumptions around interest rates and some general true-ups relative to the assumptions that we had at the time that we announced the deal.

But just based on our prior conversation, is it more that you're expecting they have more asset sensitivity in their book than you thought in the quarter?

Not necessarily.

No.

We had -- there's so many little things.

Rates moved in our favor.

We're doing really well on expense opportunities, a whole variety of things, and they ended up...

Yes.

That's right.

True-ups from assumptions that we made last November, and the environment has changed a lot.

And our knowledge.

And our knowledge.

That's right.

That's right.

Our next question comes from John McDonald with Autonomous Research.

Bill, I wanted to follow-up on the loan growth thoughts.

And we're all just kind of thinking out loud here.

But could we see the inventory and the CapEx pickup but still not kind of see loan demand because corporates have a lot of cash and other alternatives in supply?

How much is that a factor too do you think going on right now?

That will obviously impact our large corporate book, which I think at the moment, has its lowest utilization rate ever.

But the bulk of our book, remember, some 90-plus-percent of our clients are private companies.

And so our middle market and commercial book really doesn't have access to the public markets and that cash build that you're seeing in large corporate.

So I do think you'll see utilization there increase.

By the way, we've seen utilization increases in our asset-based lending book but they're small.

That's kind of the first place you would expect to see it.

So that's encouraging.

Got it.

And Rob, did you say that you're not building in a second half pickup too much in your expectation?

Yes.

That is what I said, John.

Yes.

Because at this point it's conjecture.

Yes.

And Rob, a follow-up for you.

Obviously, your capital ratios have gone quite high.

Is it fair?

And I know you don't want to get into deal assumptions and all that.

But is it fair to us to think that you'll end -- close the deal higher capital than the 9.3% pro forma just given where you're starting from now.

And could you remind us to just what CET1 ratio feels appropriate as a target for you guys longer term?

Yes.

Sure.

Sure.

No.

On the BBVA, I would say, on everything, we'll have a whole bunch of numbers for you once we close the deal.

But for today's purposes, we're tracking at or above all of our assumptions including the CET1 ratio.

So yes, my estimations are that it will be higher than that 9.3%, but we'll get into that detail once we own the bank.

In regard to our targets, we've always said around 8.5%.

That's been sort of the level that we felt comfortable with.

Obviously, we've been a lot higher than that.

So the relevance of that number isn't as strong as it was a few years ago.

John, you're asking the question are we going to have excess capital that can be deployed in share buybacks and other things.

And the answer is yes.

Yes.

That's right.

Yes.

And the deal doesn't change or how you think about the right capital level for the company?

No.

No.

No.

Our next question comes from Scott Siefers with Piper Sandler.

And maybe to revisit the loan growth thing.

So I mean you guys are seeing same trends as everybody else, but you guys are a bit unique in terms of how much of the country you see.

Are there any geographic differences on utilization or sort of hesitancy on inventories?

I mean, certain parts of the country just didn't necessarily shut down.

They reopened earlier, more quickly, et cetera.

I guess I'm just curious if there's any differences either geographically or anywhere?

Not particularly, no.

We haven't seen geographic differences.

Utilization is low across the board.

I think one of the issues is supply chains have been so disrupted that people actually can't build inventory.

And we're strangely being held back by demand and production capacity.

Yes.

Yes, that definitely makes sense.

It's just such an unusual phenomenon, but I appreciate the appreciate the thoughts there.

And then maybe just more of a ticky tack one.

The other fee expectation, so it was a very, very strong quarter this quarter.

I think the guide is a bit higher than is typical in the second quarter.

Just maybe sort of the nuance, Rob, on just sort of how you're thinking about that line going forward.

Yes.

That's -- we get some volatility on that quarter-to-quarter because there's a lot of elements there.

But the guide is a $300 million, and the $350 million is what we expect to occur in the second quarter.

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

During this earnings season, we've asked a lot of questions as analysts of when loan growth is going to recover from a cyclical standpoint.

But I'm wondering, given the deal expected to close in midyear.

And as we think about how this could potentially help, maybe, Bill, talk through how these newer markets could potentially give you an even better opportunity to capture loan growth recovery once that come?

I think that's going to be the case.

But I think one of the things we've been careful to do in sort of framing our expectations for you guys around BBVA was we recognize that there are parts of their balance sheet that we would likely shrink both because of concentrations across the combined firm but also because there are some sectors they don't want to be in offset by our growth in these new markets.

So in the out years, I get really bullish about our growth potential.

But for the first year or so, we're going to -- and we've -- this is all in sort of the numbers we gave you.

There's going to be a little trade-off of we'll be growing the business we want as we shrink some of the business we won't.

So the real acceleration is probably a couple of years down the road.

Got it.

And as you have made more progress on -- towards closing the deal, can you give us a sense of you still feel like there's not going to be a significant amount of investment that you have to put into the combined franchise in terms of technology and other things.

So obviously, some investors are thinking about another deal that had closed prior where there was a lot of investment spend that was a little bit of a surprise.

That's the question.

I won't talk about what other people are doing, but we pretty much have this nailed down.

We know -- and it's all in the numbers we've given you.

We are going to invest in certain capacity for their branches, for example, on connectivity, faster routers.

We're going to expand some of the compute capacity we have in our cloud.

But all of that we've given you, and it's not a big deal.

It was all on the deal assumptions and all those things are proving to be correct.

Our next question comes from Ken Usdin with Jefferies.

I just wanted to follow-up on the fee side, 3% to 5% growth in the second.

It was pretty good numbers to begin in the first.

Just wondering if you could help us understand just where your expected growth is coming from and what do you think is going to lead that forward?

Sure, Ken.

Yes, I would say on the fees, as we look forward to the second quarter relative to the guide, corporate services and consumer services will be up.

We'd expect in sort of that mid- single-digit range.

And then the other fee categories, asset management, mortgage and service charges on deposits, probably low single digits.

So that's sort of how we get to that range.

Okay.

Great.

And then just as a follow-up on mortgage, obviously, not a bigger line for you guys.

But just given some changes in the business you guys have been making and the relatively new platform, just do you see share gain opportunities?

And is the fight just against gain-on-sale margins in terms of just how resi can continue to build over time?

Yes.

I mean, hey, mortgage isn't as big as a percentage of our businesses as others, but we're very excited about what we've built and the opportunities that we have.

Particularly, the market will do what the market will do.

But particularly around building out the purchase side in terms of our consumer customers, which will be expanded with the BBVA acquisition.

Okay.

Last little follow up.

Just, Rob, I know you guys don't really give us a number on just premium inside the bond book.

But can you just help us understand, has it been a drag?

Is it -- you're buying a lot of bonds, you're probably still buying some premium bonds, too.

Just how should we just think about that big picture?

Yes.

It's come down a little bit, and we'd expect it to continue to come down a bit.

Even with purchases?

And it is in the numbers.

Yes, even with the purchases.

Our next question comes from Mike Mayo with Wells Fargo Securities.

In terms of the guidance for the acquisition, so from $600 million to $700 million, look, the bank index is up 40% since November 15 when you announced the deal.

So I guess, it seems logical that your benefits are going to be greater, especially with fixed price.

So what does that mean for 2022 and the ultimate savings?

I mean, mathematically, it's -- if you look at the industry and you look at BBVA, of course, it should be higher at this point.

It was -- it's good timing.

Can you say what it means for the next kind of couple of years?

I'm trying to figure out where you're going with that, Mike.

I mean we're going to -- once we once we close the deal, we'll give you some updates on numbers and so forth.

I guess what I would say to you is we remain -- I remain and also even to a greater extent really excited by the out year growth potential of this deal.

We tend -- when you do a deal, you give kind of 1.5 years worth of guidance when all the marvels are thrown up in the air and you're working on cost saves and integration.

The potential of the franchise in these markets is phenomenal.

The potential for cross-sell and for growth of new clients is phenomenal.

And we're really excited by that.

I guess I'll just wait until you close it and get more information for 2022 guidance.

And we'll have it.

Okay.

Well, let me get some concrete numbers from you.

I love what you're saying about the loan data.

I just -- I love data.

So when you say you're 11 points below peak utilization and 5 points below average, what are those numbers?

And you also say corporate lending utilization is the lowest ever.

What's that percentage?

If I could have those, that would be great.

So the only one I can think of right off the top of my head is our corporate finance utilization is 57% of the peak number.

And I think -- I saw some strange table.

That was lower there.

Yes.

And that's a function of all the corporate cash.

The 11-point drop was off of the high utilization.

We saw Mike,with all the draws during the first quarter of last year, which is why the average is maybe 5%.

And it's hit certain areas have been impacted more than others.

Municipal utilization is way, way down.

As I said, Corporate Finance is way, way down.

Even our asset-based business, which typically runs fairly high utilization has really struggled just given the lack of ability to build inventory.

So I don't know if you remember the number, Rob, but we've messed around with -- if you kind of regress economic growth, retail sales, a whole bunch of other different things against -- and inventory levels against loan utilization.

It's an r squared up over 80.

And it should be growing today.

We just haven't seen it.

I can't give an answer as to why.

And then last one.

You said private companies are over 90% of your customers as a percentage of loan balances, how much should that be?

Could you say...

That's my number.

So by loan balances, it's -- I'm going to say it's half.

Yes.

That's right.

That's right.

That's a better number.

And that's obviously on the institutional corporate side.

Yes.

And just -- I mean, I guess you're just being conservative or what?

Because you're saying it has to "mechanically has to happen." It's in the process.

You're starting to see an asset-based lending, but you're not building it in your expectations even for the fourth quarter of this year.

So is that just you being conservative or...

Yes.

No, it's us saying -- look, Mike, we could sit here and tell you all of them, and I latched some of these calls.

So the back half of the year is going to be great.

Everything will be wonderful.

I hope they're right.

And if they're right, we'll do really well.

But I can't promise you that.

For a specific timing, right?

Yes.

What we show you is the stuff we know.

I know that mechanically, our loan balances are going to grow as the economy improves and they build inventories.

I can't tell you the timing of that.

By the way, nobody else can either.

(Operator Instructions) Our next question comes from Gerard Cassidy with RBC.

Can you guys talk about -- your deposit balances, of course, are up dramatically.

You've given that to us.

And Bill, you've talked about the utilization of your customers with the liquidity.

Is that the #1 driver of possibly taking deposits down?

Or some of your custody bank is not necessarily your peer, but the custody banks are hoping for higher rates to bring their balances down.

How much would rising short-term interest rates help you guys bring down your deposit balances to get the loan-to-deposit ratio in more of a historical relationship without having the loans having to grow dramatically?

I don't think rising short-term rates has any impact at all.

I think as a practical matter, deposit balances in the industry are driven by the size of the Fed's balance sheet and fiscal transfers, coupled with loan growth.

Loan growth will actually drive more deposit balances once we see a pickup in that.

And I think excess liquidity in the system is here to stay for a long period of time.

Because I don't think the Fed is going to shrink their balance sheet anytime soon.

So I think we're going to be in a -- there's a structural change in banking, which is going to have more liquidity, higher security balances for an extended period of time.

For the foreseeable future for sure.

Very good, which obviously, I agree with you guys on that as well.

Shifting over to the allowance for credit losses in your slide.

I think it was Slide 10.

You gave us good color on the levels and what drives those with the portfolio changes and the economic qualitative factors, recognizing BBVA is going to influence this number by the -- on the out years.

But when you look at the reserves and you compare them to the day 1 reserves back in January 1, 2020, which you guys show here, you're still well above them.

And if the economy over the next 12 to 18 months is even going to be better than what we all thought on January 1, 2020, pre-pandemic, that would suggest reserves should come down.

Do you think you'd get close to that day 1 level?

Or is that just too low?

No.

I think you can get there to that level.

It's just a question like as you pointed out in terms of timing.

So our reserves right now reflect our current forecast if subsequent forecasts are more bullish or more optimistic, we'll continue on that trend.

But the timing of how fast we would get there, Gerard, per our earlier comments, difficult to be precise about.

Our next question comes from Matt O'Connor with Deutsche Bank.

Can you talk about your interest rate positioning post the actions you plan to take in the securities portfolio and then also after you fold in BBVA USA?

I realized there are some moving pieces, but what would your expectations be in terms of how asset sensitive you are in factoring those 2 things in?

We're going to still end up being asset sensitive.

I mean, largely because even with our suggested build, the deposits we're going to have with the Fed are going to be quite large.

I would tell you that our duration of equity and measured asset sensitivity has decreased as a function of the rise in rates, but that's less about what we're doing and more about the negative convexity in the bank's balance sheet.

Okay.

Any way to kind of just frame how meaningfully levered you will be to rates, I guess, both the short and long end?

No.

I mean...

I guess, put another way, like you have a lot of leverage to rising rates now, but as you grow the securities book...

We still will.

We're hardly going to dent it.

I mean the chart -- you see the chart we have in there, where you see our cash balances versus security balances.

But any loan growth you want in there.

We're buying -- we're not buying the long end of the curve.

We have a massive opportunity to deploy that.

But as we always do, we're going to increment our way in.

By the way, incrementing our way in is what gets us to that 25%.

Okay.

Yes.

Okay.

And then separately, I'm probably getting a little ahead of myself here.

But as we think after the BBVA deal closes, you've clearly shifted your view to wanting branches nationally.

And would the thought be to lead with organic growth?

Or because you're basically folding them into your platform, would you be ready to do another deal, maybe quicker than normally?

We certainly mechanically would be ready to do another deal.

I think like all things, it's a function of where you create value.

If it's cheaper to go organically, which it was for a bunch of years, then we would choose that route.

I personally believe that we will see opportunities in smaller institutions simply because of the massive shift in technology and the cost of technology that we've seen to serve customers.

So I think low rates, not a lot of loan growth.

Big technology costs are going to give us opportunities to continue to create scale.

And we'll have those capabilities.

Yes.

Our next question comes from Bill Carcache with Wolfe Research.

Thank you.

So Bill and Rob, can you discuss how you guys are thinking about pent-up demand dynamics for your consumer versus commercial customers?

Where is there greater gearing to the reopening and how to access savings and excess liquidity on both sides, shape review?

Well, sort of our outlook for consumer lending.

Is that sort of what you're getting?

Trying to find your question.

Yes.

I guess, just thinking about, as we look to like sort of these pent-up demand dynamics and sort of like the reopening and like kind of animal spirits being unleashed as you look to the second half of the year and all of that being a positive for loan growth, like how does that differ between the consumer and the commercial side?

Like there's a lot of liquidity sitting around on commercial balance sheets.

There's -- consumer has a lot of savings.

But does that sort of delay like the rebound in balance growth on each side?

Or are both sides going to be affected similarly or differently?

Maybe just some color or perspective.

I see where you're going.

I think consumer lending is going to drag C&I increase.

Yes.

Right.

I think consumers are really flushed with cash.

You've seen retail sales.

I think they continue to accelerate, by the way.

But what's happening is that people who don't borrow are buying and that people who would normally borrow are sitting on fiscal payments that they're going to have to burn through over time before you see balance growth.

We're seeing massive transaction volumes.

So we see it in our swipe fees in effect.

But I don't know that you're going to see balanced growth.

I think consumer will lag commercial.

And I get back this place where inside of commercial, the smaller nonpublic companies and even some of the smaller public companies will continue to rely on bank balance sheets to fuel their growth.

Got it.

That's very helpful.

And Bill, maybe I could circle back on a question there I had asked you a while ago about sort of the financial technology players like the times of the world.

And maybe just specifically on, any color that you can give on perhaps how active you are in discussions with regulators regarding sort of the uneven playing field with many of these players, particularly some of these players are benefiting from things like unregulated debit interchange, which was never intended for them.

It was more for like the smaller bank exemption that was intended for post Durbin.

And so I guess is there any expectation of a leveling of the playing field do you see in the future?

Or is this sort of the competitive landscape that is sort of the new reality?

So it is a topic of interest, both on the political and regulatory side, less about competition and more about safety and soundness and data protection and fraud.

And not -- I'm not referring to chime specifically, but rather new entrants into the payment space, the exponential increase in fraud we've seen because of less robust, know your customer rules and frankly, probably just because of the COVID environment.

All of that has gathered attention of politicians and regulators.

The competition side, we're happy to compete.

I'm somewhat shocked actually nobody's asked me a question about low cash flow that we rolled out this -- yesterday, day before.

That product is a result of years of technology investment that allows us, I think, is the only institution in the world to have effectively real-time capability of what's going on in our customers' accounts.

And therefore, showing them what's going on in their accounts and therefore, empowering them to choose what's going on in their accounts.

No fintech has that.

Go back to -- because they rely on these small banks as their back office, which, in turn, are relying on 30-year-old cobalt-based mainframe-based batch process, not very exciting core processors.

Bring on the competition.

At some point, they need to make money and to justify their existence.

Our challenge is presenting, and we think we do this.

A great proposition to our customers with ease of use and the very best products.

And I think we have the technology backbone to do that.

So I'm less worried about competing with somebody.

I'm more worried about safety and soundness for the system and data and disruption to our customers who don't understand where data is being shared and who has access to it.

That's very helpful.

I was going to ask about the new service, which I saw you talk about it on CNBC, so I figured I'd save my question.

If I could squeeze in maybe one last one.

Are treasury departments of any of your clients even remotely considering the idea of having some allocation to Bitcoin?

We've seen some businesses move in that direction.

And with the coin-based IPO, I guess, it sort of seems like it's a bit out of left field, but perhaps you can argue it's becoming more mainstream.

And so just wondering, is that something that your treasury function is preparing for?

And then maybe on the wealth side, are any wealth clients expressing interest in gaining exposure to crypto assets?

Any thoughts on how you guys are sort of positioned for any potential emergence of crypto as a potential asset class, especially in the aftermath of that Coinbase.

Well, we've been working on this long before Coinbase went public.

In fact, we've talked to Coinbase about partnership and custody for our wealth clients.

Practically, we've had work stream around this, both for our corporate clients and treasury but also for our wealth clients.

The technology stretch isn't a big deal for us.

It's more of a compliance-based issues that you would expect and then importantly, choosing the right partners that you would choose as a trading transfer platform and, importantly, the custody platform.

So that's an open and continuing dialogue here.

And suitability in fiduciary.

Yes.

Yes.

You can imagine that for wealth clients, there'd be a lot of disclosure around it.

It's your own risk.

Right.

Right.

We have a follow-up from Mike Mayo with Wells Fargo Securities.

The fintech comment got me to ask another question.

If you think about some of the players, the bankers in the industry, they're starting to set up bilateral relationships, even multilateral relationships with some big tech.

And that's an option versus going directly for the consumer especially with you going national now.

Are you looking to continue permanently with getting customers directly?

Or are you looking to partner more to lower your customer acquisition cost and go more broadly kind of like banking as a service as a plan B?

We're going to get them directly.

Look like, I think when you effectively offer your products as the low-cost provider to somebody else who owns the relationship, you've just sold your soul -- you sold your soul the devil.

It's the beginning of the end of your franchise in whatever space you're playing.

We need to own the customer relationship, and we need to deserve to own the customer relationship through an offering that doesn't need that fintech platform on the front end.

It's the alternative to that, right?

And this is -- you've heard Jamie talk about this as well.

If tech gets into the space and owns client relationships, then we become a commodity provider industry with 5,000 participants.

It's a disaster.

You can't default to that end game.

You have to own the customer.

And when you think about the risk with data to the extent customers open banking and if customers opt-in to share their data with other providers, does that force your hand more?

Or how do you defend against that?

I think there's a lot of appropriate focus on data.

The CFPB I know is working on this as our various politicians and other regulators.

We need safety and soundness around data, that is the biggest systemic risk at the moment, in my view.

People talk about cyber, but what they're really talking about is data and disruption of account flows, payment flows because data is corrupted.

The consumer -- that, by the way, is solved, ultimately through tokenized, API-based, authorization at the bank for what the consumer wants to share, not through screen scraping.

And we're working our way towards that.

I think that's the ultimate end game.

But the consumer has to be empowered to share data but the data they want and to share it when they want.

Not all the time and not everything and not to places that are otherwise, in my view, not regulated in terms of their controls around data.

And looking to monetize that data in some way.

Yes.

There are no further questions at this time.

Okay.

Well, thanks, Frank.

Bill, would you like to make any closing comments?

Thank you, everybody.

Look forward to talking to you at the end of the second quarter.

Stay safe.

Looking forward to summer here.

I hope you're doing the same.

Take care.

Okay.

Thank you.

Bye.

This concludes today's conference call.

You may now all disconnect.

Have a great day, everyone.