PNC Financial Services Group Inc (PNC) 2020 Q3 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 everyone -- 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. Sir, please go ahead.

Well, thank you, and good morning, everyone. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO.

Today's presentation contains forward-looking information. The 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 October 14, 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. I hope everybody is safe and well. You've seen that amidst continued uncertainty on many fronts, PNC delivered solid third quarter results. We grew revenue led by noninterest income, which included a bounce back in consumer fees on higher volumes. We managed expenses, which allowed us to generate positive operating leverage of over 4% in both the quarter and year-to-date period, and our provision for credit losses was substantially less than last quarter.

On the flip side, net interest income fell from the second quarter, given the low interest rate environment and weak loan demand. Despite growth in customers and commitments, our loans outstanding declined due to lower utilization rates, including the payoff of commercial lines of credit that were drawn early in the pandemic.

And while we continue to experience strong deposit growth, the current environment has made it more challenging to put those deposits to work. While the provision and charge-offs were down quarter-on-quarter, nonperformers continue to rise, especially in the high-impact COVID areas that Rob is going to discuss in a little bit more detail.

Notwithstanding these challenges, we feel that PNC is well positioned with very strong capital, liquidity and loan loss reserves. Needless to say, there are several significant upcoming events, including the next round of stress tests, the election and PPP forgiveness that may impact the industry and our borrowers, which underscores the importance of our strong position. We're confident that the actions we've taken position us to both support our clients and communities, and take advantage of potential investment opportunities as they arise to enhance shareholder value.

I want to thank our employees who, despite the various challenges of the pandemic, continued to execute on our strategic priorities, including ongoing investments in our national expansion and digital offerings, all while helping our customers navigate financial hardship and other challenges.

During the quarter, we opened retail solution centers in Nashville, Houston, Denver, Boston and Dallas and filled out corporate teams in the recently opened Seattle and Portland markets. In 2021, we will continue our middle market expansion into San Antonio, Austin and San Diego. The ability to expose our model to these demographically attractive markets continues to generate strong returns.

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

Great. Thanks, Bill, and good morning, everyone. As you've seen, we've reported third quarter net income of $1.5 billion or $3.39 per diluted common share. Our balance sheet is on Slide 4 and is presented on an average basis.

On the asset side, total loans declined $15 billion to $253 billion linked quarter. Investment securities of $91 billion increased $2 billion or 2% linked quarter. But on a spot basis, declined $7 billion, primarily due to significant prepayment activity and maturities at quarter end.

Our cash balances at the Federal Reserve averaged $60 billion compared with $34 billion in the second quarter. The increase was a result of continued deposit growth and the full quarter impact of proceeds from the sale of our equity investment in BlackRock.

On the liability side, deposit balances averaged $350 billion and were up $15 billion or 5% linked quarter. Borrowed funds decreased $10 billion compared to the second quarter as we used our strong liquidity position to reduce borrowings, primarily with the Federal Home Loan Bank. And our tangible book value was $95.71 per common share as of September 30, an increase of 2% linked quarter and 16% year-over-year.

As you can see on Slide 5, our capital reserve and liquidity positions remain strong. As of September 30, 2020, our CET1 ratio was estimated to be 11.7%. Our Board recently approved a quarterly cash dividend on common stock of $1.15 per share. And as you know, the Fed has authorized dividends for the fourth quarter, again, subject to amounts not exceeding the average of net income for the preceding 4 quarters.

On this basis, our fourth quarter dividend is 26% of that rolling number. In regard to share repurchases and in accordance with the Federal Reserve's directive, we'll continue to suspend repurchases through the fourth quarter of 2020.

Our loan loss reserve levels are 2.58%, up slightly from 2.55% at the end of June. And our liquidity coverage ratios continue to significantly exceed the regulatory minimum requirements as we remain core funded with a low-cost deposit base.

Slide 6 shows our average loans and deposits in more detail. Average loan balances of $253 billion in the third quarter were down $15 billion or 6% compared to the second quarter. This decline reflected a $13.7 billion decrease in commercial loan balances, as new loan production was more than offset by broad-based lower utilization.

In our C&IB segment, virtually all of the drawdowns that occurred in the first quarter have since paid back, and our utilization rates are currently running approximately 1% below pre-pandemic levels. Consumer loans declined approximately $1.3 billion across all categories except for residential mortgage, which increased. Compared to the same period a year ago, average loans grew 6% or $15 billion.

As the slide shows, the yield on our loan balances is 3.32%, a 5 basis point decline in the second quarter. And the rate paid on our interest-bearing deposits was 12 basis points, an 11 basis point decline linked quarter. Average deposit balances of $350 billion increased $15 billion or 5%.

Commercial deposits grew, reflecting the enhanced liquidity positions of our customers. And consumer deposits also grew, primarily due to government stimulus and lower consumer spending. Year-over-year, deposits increased $71 billion or 26%.

As you can see on Slide 7, third quarter total revenue was $4.3 billion, up $205 million linked quarter or 5%. Net interest income of $2.5 billion was down $43 million or 2% compared to the second quarter as lower earning asset yields and a decline in loan balances more than offset the benefit of lower funding costs and an extra day in the quarter.

Our net interest margin decreased to 2.39%, down 13 basis points linked quarter, reflecting the impact of higher balances held with the Federal Reserve Bank, which averaged $60 billion for the quarter. Fed cash balances in excess of our LCR requirements were approximately $40 billion, which represented 25 basis points of compression to our net interest margin. Noninterest income of $1.8 billion increased $248 million or 16% linked quarter.

Fee revenue of $1.3 billion increased $62 million or 5% compared to the second quarter. Asset management revenue increased $16 million or 8%, primarily due to higher average equity markets. Consumer services and service charges on deposits in total increased by $100 million due to higher consumer activity and a decrease in fee waivers.

Corporate services declined $33 million or 6% as higher treasury management product revenue was more than offset by lower advisory-related fees. Residential mortgage revenue declined $21 million or 13%, driven by both lower servicing fees and lower loan sales revenue.

Other noninterest income of $457 million increased $186 million, and included a positive valuation adjustment of private equity investments compared with a negative valuation adjustment in the second quarter of a similar magnitude. The positive valuation adjustment was partially offset by lower capital markets-related revenue.

Noninterest expense increased $16 million or less than 1% compared to the second quarter. Provision for credit losses was $52 million, a decrease of $2.4 billion as a provision expense for our commercial portfolio was largely offset by a provision recapture in our consumer portfolio. And our effective tax rate was 9.8%. The lower rate was primarily related to increased tax credits during the quarter. For the fourth quarter, we expect our effective tax rate to be approximately 13%.

Turning to Slide 8. During the third quarter, we generated positive operating leverage of 4% in both the year-over-year quarter and the year-to-date comparisons. As a result, our efficiency ratio improved to 59% in the third quarter of 2020 compared to 62% for both the prior year third quarter and the 9 months ended September 30, 2019.

While the current environment presents revenue challenges from low rates and pandemic-related pressures, we remained deliberate and disciplined around our expense management. As we've previously stated, we have a goal to reduce costs by $300 million in 2020 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 and technology investments.

Slide 9 is an update regarding specific industries we've identified as most likely to be impacted by the effects of the pandemic. Our outstanding loan balances as of September 30 to these industries were $18.3 billion or $16.4 billion, excluding PPP loans. These balances declined 7% compared to the second quarter, primarily due to paydowns. While we still haven't experienced material charge-offs in these industries, we do expect to see charge-offs increase over time should current economic trends continue.

Commercial and industrial loan balances in this category totaled $10.5 billion on September 30, declining approximately $1 billion or 9% compared to the prior quarter. Nonperforming loans in these industries remain relatively low at 1% of loans outstanding, but we're continuing to see downgrades with the greatest stress continuing to be in leisure and recreation.

Looking at the lower half of this slide. Commercial real estate loans in this category totaled $7.8 billion at the end of the third quarter, declining $300 million or 4% compared to the prior quarter. Nonperforming loans increased approximately $180 million, and downgrades continue to occur, primarily in retail and lodging. Correspondingly, our reserves on our total commercial real estate portfolio have increased to 2.17% from 1.33% in the second quarter.

Moving to Slide 10. We have seen a significant reduction in the number of consumers and small businesses requesting hardship assistance. At the peak this summer, we had granted modifications to more than 300,000 consumer and small business accounts, representing approximately $13.7 billion of loans. $6.9 billion of these loans were government guaranteed or investor owned, which present very little credit risk to PNC. Of the remaining $6.8 billion of loans that did present credit risk, more than $5 billion have rolled off payment assistance, and 92% of those accounts are current or less than 30 days past due.

As a result, we had $1.7 billion of consumer and small business balances in some form of payment assistance as of September 30. Of those balances, approximately 85% are secured and more than 60% of these accounts have made a payment in their last cycle. On the commercial side, we're also continuing to selectively grant loan modifications based on each individual borrower situation. Within our C&IB segment, approximately $700 million of loan balances were in deferral as of September 30. When combining consumer and commercial customers, loans on deferral, posing credit risk to PNC, approximate 1% of total loan outstandings.

Our credit metrics are presented on Slide 11. Net charge-offs for loans and leases were $155 million, down $81 million from the second quarter. Commercial net charge-offs were $38 million, and consumer net charge-offs were $117 million, both down linked quarter. Annualized net charge-offs to total loans was 24 basis points.

Total delinquencies of $1.2 billion at September 30 declined $72 million or 5%. Consumer loan delinquencies decreased $41 million and commercial loan delinquencies declined $31 million.

Nonperforming loans increased $209 million or 11% compared to June 30. The increase was primarily driven by commercial real estate borrowers and the high-impact COVID-19 industries. As you can see, the allowance for credit losses to loans was 2.58% at quarter end, up slightly from last quarter. We believe that our reserves sufficiently reflect the life of loan losses in the current portfolio.

Slide 12 highlights the components of the change in our allowance for credit losses year-to-date which have increased $3.4 billion since December 31, 2019. As a result, our allowance for credit losses to total loans was 2.58%, and our allowance to nonperforming loans was 276%.

Our reserves have increased materially this year due to the adoption of CECL and significant changes in the macroeconomic outlook during the first half of the year. In the third quarter, portfolio changes, primarily driven by lower loan balances, reduced reserves by $158 million. In addition, our economic outlook improved modestly during the quarter, but this was offset by increased reserves for both commercial and consumer borrowers adversely impacted by the pandemic. In total, this resulted in a $150 million decline in our reserves to $6.4 billion.

In summary, PNC posted solid third quarter results, and we believe our balance sheet is well positioned for this challenging environment. For the fourth quarter of 2020 compared to the third quarter of 2020, we expect average loans to decline low single digits. We expect net interest income to be stable. We expect core fee income to be stable. We expect other noninterest income to be between $275 million and $325 million, resulting in our expectation that total noninterest income will be down in the high single-digit range.

We expect total noninterest expense to be up approximately 1%. And in regard to net charge-offs, we expect fourth quarter levels to be between $200 million and $250 million. Importantly, after taking all this into account, we're on pace to deliver positive operating leverage between 3% and 4% for the full year of 2020.

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

(Operator Instructions) Our first question comes from John Pancari with Evercore ISI.

On the loan loss reserve, it looks like you released reserves a bit in the quarter, although your ACL percentage increased given the loan balance decline. Is it fair to assume that if we do see charge-offs continue to increase from here, like in the fourth quarter, for example, that we would expect that you probably still will not match those charge-offs with provision and, accordingly, continue to put up loan loss reserve releases?

There's a lot of variables that kind of go into that answer, John. But remember, again, when we put up the second quarter reserve, the assumption based on our economic forecast in the model was that we covered all of the losses we knew about at that point in time. At the margin, the economy has gotten perhaps a little bit better on the forecast. And so we're kind of -- as charge-offs go up, we're using an effective reserves that we've provided for in the second quarter. So that, all else equal, should continue unless we have deterioration from our current forecast and what the economy is doing. But the general principle is, all else equal, as loans run down and charge-offs go through, that's what we've reserved for.

Yes, that's right.

That's helpful. Got it. And then on that same topic, the charge-off trajectory, just given what you expect in terms of the ongoing migration you saw -- indicated that the nonperformers saw some pressure. Is -- when do you expect that you'll see the greatest pressure in charge-offs build as this plays out? Are we looking more like the first half of next year is where we get the greatest upside pressure in terms of loss content?

It's -- again, it depends on a lot of things, not the least of which is what fiscal stimulus they put out there, if any. But all else equal, it probably starts showing up in the second half of next year. My own belief is we're probably going to see more pressure on COVID-sensitive industries, real estate earlier on and then consumers flow through as we get into the back half of next year. But it all depends. We're -- the consumer number in my view is going to be highly dependent on whether they provide more fiscal stimulus, which I think they absolutely need to do.

John, I would just add that I think it's all speculation at this point, but mid-2021 feels right.

Got it. No, that's helpful. If I could just ask one more. On the -- just to ask the M&A question in a different way, Bill. If we get a Biden victory next month and the political environment potentially could move more against big bank deals, how does that influence your appetite for a larger deal? Could you pursue smaller bank deals given that or possibly just view buybacks more attractively? Just want to get your thoughts.

Look, you're making a whole bunch of assumptions in there. The regulation as I understand it, as it's written in the law as I understand it, it's written just basically to the extent that we were to do a deal and not cause a systemic risk to the economy. Ultimately, it has to go through approval process to be approved. They can delay it, they can hold hearings, they can do all sorts of different things, but basically, it gets approved.

So even in a change in administration, the assumption that somehow they either change laws on this particular issue, even if they switch governors, that the regulatory process is still the same. So I don't know that that's a real risk. I would say that, as we've always said, that the smaller deals aren't off the table, but they require a fair amount of work for less total return in effect. Can we do a bunch of them? Yes, we could do a bunch of them over time.

Okay. That's helpful.

And a lot of things to play out. I'd say, John, a lot of things to play out and our thinking generally hasn't changed.

Yes.

Our next question comes from Ken Usdin with Jefferies.

Just a question -- a couple of questions on NII. Just -- nice to see that you guys are expecting NII to be stable sequentially. And just wondering if you can help us flush out like what parts of the loan book are you still expecting to see come down? And how is that being offset with other parts of the -- kind of earning asset statement in terms of being able to keep the NII stable?

Yes, so when we take a look at the NII stable, there's obviously the earning asset side and the liability side. I think we've made a lot of -- we've made up a lot of ground on the liability side, I think we can still do some more there. When we look at the fourth quarter in terms of loan balances, commercial, we see -- we still see being relatively flattish. And again, this all depends on what happens. And consumer, we could see some uptick there, particularly if there's some stimulus.

I think the other factor for us and for the industry in terms of the fourth quarter will be the rate at which PPP loans are forgiven. We have an expectation built into our guidance that about half of those -- half of what we have will be forgiven and that's built into our guidance in the fourth quarter and then the other half in the first quarter of 2021. So that's probably the biggest play in terms of how NII and total loans...

But we continue to drop funding costs.

I said that. Yes, I said that on the front end, yes. And we've got some more room to go.

Right. And my follow-up, actually, Rob, is on that PPP front. The C&I loan yields were actually stable, down 1 basis point. I was wondering if you can help us understand the contribution from PPP related interest income this quarter versus last. And again, how that plays through in terms of the yields and the forgiveness in fees and all that. It gets really tricky, right?

It does get a little tricky. I'd say a good number for us in terms of our guidance would be about $100 million in NII related to PPP forgiveness in the fourth quarter. So that will help you size it.

But straight C&I loan spread, I think we're up 7%.

Spreads' up, yields are down. Yes, right.

Yields still grinding down as we roll down in the lower LIBOR.

Yes, that's right. So about $100 million, Ken, on that -- on the PPP.

Do you have just what that was in the third quarter versus the $100 million?

Yes, it was very -- much smaller.

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

Another firm that is going through this downturn solidly, JPMorgan, was essentially chomping at the bit in terms of appetite for buybacks once the Fed lifts its restrictions. And Bill, I'm wondering, given the amount of excess capital you're sitting on, if the Fed does lift its restrictions by the first quarter or second quarter of next year, how patient are you going to be in terms of thinking about your inorganic opportunities versus buying your -- buying back your stock here at a narrower premium to tangible book than the stock usually enjoys?

So you should assume that we would otherwise be in the market. But you should also assume that we'll be patient in looking at acquisitions through time. The environment -- notwithstanding COVID, the environment for banks is going to be tough going forward for all the obvious reasons. So we continue to think that there's going to be a lot of opportunities out there.

The other thing with respect to buybacks -- I mean, the only thing I think you ever know for certain is trying to spend as much capital as we have all in a big hurry almost never works out and makes sense. So we'll be in the market to a certain degree, but not enough that it changes our focus on the opportunities that we see in expansion through acquisition.

And it's quite conceivable we'll do both.

Yes. In fact, probably.

Yes. Got it. And as a follow-up question, this management team has always been ahead in terms of warning us about the excesses that we're building up in the system pre-COVID. And I'm wondering, as we think about the charge-offs that were coming, as a follow-up to John's question, do you think that the current programs from the government and the Fed have effectively redefined cumulative credit losses lower for this cycle? Or are we just kicking the realization down the road?

Look, they've definitely helped. But with PPP effectively running out and with CARES Act having run out, we're going to see an acceleration. We did a survey into small business and smaller commercial and I think 60% of the respondents, if I'm remembering this right, basically said if this continues for another year, they'll be out of business.

Alarming.

Yes, by an incredible percentage. And a lot of those guys have gotten by either through PPP or simply drawing on reserves and operating at an unsustainable level, and something's got to give. My guess is -- and that's why we kind of talk about charge-offs ramping up as we get into kind of the mid-back half of next year, my guess is it's still -- there's going to be a lot that's going to show up.

Got it.

And future fiscal support is a big variable.

Yes.

Our next question comes from Gerard Cassidy with RBC.

Bill, can you give us some thoughts? Obviously, you guys pointed out that you have $60 billion up at the Federal Reserve, and clearly, that's weighing on your net interest margin like your peers because of the influx in deposits. Can you kind of give us some color if that level -- if your customers just don't start using their deposits and it's now heading into the second quarter of next year, is there anything you can do to shift that money out of there to get a higher yield without taking too much interest rate risk?

There's actually $70 billion there, I think, on a spot basis.

On a spot basis.

Yes.

Okay.

Yes -- no, look, you're seeing it not just on the deposit side, but our utilization rate on credit is down 1.6%, I think, from the pre-COVID levels. The economy just isn't running, right? So corporates are using less on their lines. They're creating less inventory. They're doing less investment. They're holding more cash. And I don't know that, that necessarily abates, particularly with the size of the Fed's balance sheet looking like it's going to remain at least stable.

In terms of redeployment, it's hard to find something that you see in size that offers a good risk return. We're doing a lot of things at the margin both on the lending side and some of the specialty finance areas and even on the security side that offer a lot of value, but they're not enough to dent that amount of...

Substantially faster.

Yes. And trying to force that outcome, so, right, we could just go out and buy $70 billion worth of 10 years at 70 basis points and make a lot of money for some short period of time, it's just -- it's a lousy risk return trade-off. So we'll be opportunistic. But my best guess is we're going to be sitting on a lot of cash for a pretty long period of time, as will the whole banking industry.

Very good. And then moving over to credit. Obviously, you guys have been through cycles before. Is there -- aside from what has caused this down cycle, we all know was quite unique, when you look at the commercial credits that you've been forced to write down or the commercial real estate that you have been forced to write down, has there been any different or any differences between what you saw in the last cycle or the 1990s cycle in terms of write-downs that has surprised you? Or is it just very similar to the past downturns?

No. It's -- I mean, if you go all the way back, most real estate problems historically came from projects, so office buildings that were built that were never occupied. So you can remember Boston when you could see straight through downtown because nobody was in it. That's where the big losses historically have come from. This is an instance where real estate is struggling, even though in theory everything is leased up, right? But you have -- if you think about retail, nobody is paying rent, right? So malls are getting killed and they were already on a decline.

Hotels.

Hotels are obvious. A lot of things that in a normal downturn would have probably still cash flowed and been fine are struggling from a cash flow basis. Interestingly, in this one versus the other ones, the loan to values for the assets, notwithstanding the lack of cash flow, still looks pretty good.

Very good, yes.

Yes. So this is -- real estate has come up with yet another way, to hurt the industry again.

(Operator Instructions) Our next question comes from Bill Carcache with Wolfe Research.

Bill, you said in response to John Pancari's earlier question that the consumer number will depend on whether there's more fiscal stimulus. Would you expect stimulus to be less beneficial on the commercial side?

That's a fair question. It depends if they redo PPP in some form. That obviously helped out thousands and thousands and thousands of smaller business, commercial borrowers and kept people employed. The consumer side, one of the things we've watched and have talked about before is the extra $600 that came in from the CARES Act for unemployment benefits allowed consumers to substantially build cash balances and pay down debt. Now that, that has gone away, you're basically seeing the balance excess they had in their DDA accounts decline, which is why I'm worried about consumers. But no, look, if they redid PPP, it would substantially affect the amount of small business commercial charge-offs we've had. Small business -- you guys already know this, but small business, commercial, people who have less access to other forms of capital are really getting hurt in this environment.

Got it. That's very helpful. I guess following up on your CRE comments, it seems like there may be greater willingness among banks to work with borrowers who are experiencing financial difficulties. But maybe there's a bit less patience, for example, with some, say, CMBS conduits set up by private equity companies, and then that raises the question of whether the likelihood of foreclosure is higher outside of the banking system.

Do you think that's the case? And if so, do you think it could result in growing pressure on commercial real estate prices? And then maybe sort of just to cap off, like how -- can you share your thoughts on how an effective vaccine by, say, mid-2021 would impact your view of the ultimate loss content within CRE? There's a lot there, but would just love to hear your thoughts on them.

Yes, sure. So at the margin, banks have always been more willing to work with borrowers than a contractual CMBS relationship where Midland -- where -- is a fiduciary working on behalf of the various credit tranches. Having said that, we've actually been surprised by the turnover that we've seen in our special servicing portfolio in Midland.

So we have actually seen a couple of things. One, the B-piece buyers being willing to work with borrowers probably in a way they haven't in past environments. And two, to the extent that they say no, take the asset, there's a lot of capital on the sidelines from traditional B-piece buyers who are effectively writing it off in one fund and rebuying it another one. So the turnover has been pretty high.

They're -- a bit to my surprise, there's a pretty active secondary market for real estate properties at the moment. Probably doesn't carry through to all types. I imagine there's not a good bid for strip malls, but for other types of properties, there's...

But to your earlier point, the nature of this pandemic crises and these loan to values sort of support that.

Yes. The COVID vaccine I have zero predictions, assumptions on when, if, how and whether it works and all of the above. So I'll just pass on that.

Yes. We know what you know on that.

Yes.

That's fair. If I may squeeze in one last one. Bill, can you share your thoughts around the direct neo-banks, sort of the Chimes and others out there that operate exclusively online without traditional branch networks? And in this sort of post-COVID environment, how you see their presence impacting the competitive environment over, say, in the next 3 to 5 years? And is there any potential benefit to deploying some of the BlackRock proceeds on a neo-bank? Or are those sort of capabilities things that you think you can build on your own?

I'm trying to contain myself. I wish we had the opportunity to basically not have to make any money and grow customers by giving stuff away and running our back office on a third-party bank system that's written in COBOL from 50 years ago. But we don't have that luxury. The tech capability of these guys, there's nothing that they have that we don't have, nothing that they have that we can't produce if we wanted to have.

Our platforms are much more modern than their platforms. They're all running on third-party banks, which is a whole another issue that drives me insane. And they basically do free accounts and no overdraft and simple simplification. They find very low-balance customers and I just don't think, long term, that model works. I think that a delivery -- multiple delivery channel model that includes real care centers and customer service, we see that through our NPS scores; through ATM delivery networks; through branch delivery networks and through top line digital is going to win.

And [VR] technology.

Yes. And without that, I -- look, it's kind of cool and they're growing lots of customers. But like a lot of things, they're not making money at it. And banking is a business that you ultimately need to make money at. Sorry, there's my rant.

Good question. Good question.

Our next question comes from Mike Mayo with Wells Fargo.

So Bill, you certainly have been ahead in expressing concern about the way this COVID situation plays out. How do you feel -- just in the last 3 months, on the one hand, you do see the fixed income market securities, which have come in, and I know you know that market. You have low line utilizations, which means probably that firms aren't quite ready to go bankrupt. You see your charge-off rate being exceptionally low.

On the other hand, who knows, if we have a second wave, it's a W or how that plays out. So just what's your temperature on the outlook over the next couple of years? And do you have seller remorse for selling BlackRock? Or do you say, "Hey, you know what, I feel even better today?"

Yes. So a couple of things going into this. If we look at the corporate side, notwithstanding utilization being down, corporate America is levered 4x today. We went into the crisis levered 3x, which we all thought was high. None of that has changed.

The one thing that gives me a little bit of comfort, certainly relative to my initial concerns on this environment, is I think we've defined the downside, Mike. So when we went into this, we really had no idea of what, in fact, the downside could be. We didn't know mortality rates. There were no real treatments for COVID. There was no vaccine on -- so all of the things, we didn't know how to define the downside.

So I think the best thing I can tell you is I think we've defined the downside is that we, at this point, muddle along pretty much where we are in the economy. And I think that plays out through time and I think losses grind out through time. As we said, we think at this point, we're reserved for that environment. Do I have seller's remorse? I don't. And not surprisingly, I've gotten that question.

I think there's a lot of things I regret in life with hindsight. And all else equal, I wish we were selling BlackRock today at $650 as opposed to when we sold them at the start of this thing. But I think with the information we had in our hands, it was the right decision. I hope that people -- and I know a number of our shareholders bought BlackRock when we sold it. I hope you bought it and rode that stock up, that was always your choice.

We were always going to be left with this basic notion that, eventually, we were going to have a tax burden that looks like it's going to come to fruition. Eventually, we were going to have regulatory pressure. Eventually -- not eventually, we already had a concentrated asset that was outside of our control. And I'd much rather deploy that capital into something that is within our control.

So I wouldn't change the decision based on what we knew at the time and what our strategic direction is, and what I think the opportunity set is going forward. I still remain -- trying to find the right word here, but confident that having capital in this coming environment is going to be incredibly valuable and open up a lot of inorganic opportunities for us.

Which is, to your point, there's a lot of the game left to play.

Yes. Anybody who thought we'd have the S&P where it is today when we sold BlackRock, give me a call because I'll invest some money with you. I just -- that was -- if I made a mistake, and I've made many of my life, that was probably my one mistake.

Do we have any other questions?

There are no further questions at this time.

All right. Well, thank you, everybody. We'll see you again in the fourth quarter.

Yes. Thank you.

This concludes today's conference call. You may now disconnect your line. Have a great day, everyone.