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The PNC Financial Services Group, Inc. (NYSE:PNC) Q4 2022 Earnings Call Transcript January 18, 2023
Bryan Gill: Good morning. 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 are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of January 18, 2023, and PNC undertakes no obligation to update them. Now, I’d like to turn the call over to Bill.
Photo by Marga Santoso on Unsplash
Bill Demchak: Thanks, Bryan, and good morning, everybody. 2022 is a successful year for our company, and our strong performance during the year reflects the power of our Main Street bank model and our coast-to-coast franchise. For the full year, we reported $6.1 billion in net income or $13.85 per share. Inside of that, we grew loans and generated record revenue during a rapidly rising rate environment while at the same time we controlled expenses, resulting in substantial positive operating leverage for the full year 2022. Turning to our results for the fourth quarter, we generated $1.5 billion of net income or $3.47 per share. Growth in both net interest income and fee income contributed to a 4% increase in revenue. Our expenses were up 6% this quarter, primarily due to increased compensation from elevated business activity, particularly in our advisory businesses.
Rob is going to provide more detail on our fourth quarter expenses as well as our outlook in a few minutes. Average loans grew 3% during the quarter, driven by growth in both commercial and consumer. For the full year, average loans were up 15%, and we continue to grow our loan book in a disciplined manner. As we look ahead, we are operating our company with the expectation for a shallow recession in 2023. Accordingly, this outlook drove an increase in our loan loss provision in the quarter and a modest build in reserves under the CECL methodology. Importantly, as the credit environment continues to trend towards normalized levels our overall credit quality metrics remain solid. I’d add that with charge-offs having been so low, it’s not surprising to see volatility quarter-to-quarter and we saw this in the fourth quarter with an outsized loss on one commercial credit pushing us outside of our expected range.
We continue to manage our liquidity levels to support growth. Our deposits remain relatively stable, and we’ve increased our wholesale borrowings to bolster liquidity. During the quarter, we returned $1.2 billion of capital to shareholders through share repurchases and dividends, bringing our total annual capital return to $6 billion. Our progress within the BBVA influence markets continues to exceed our expectations, and we see powerful growth opportunities across our lines of business in these new markets. We continue to generate new customer relationships, and we have been thrilled with the quality of bankers we’ve been able to hire. In summary, it was a solid fourth quarter as we further built on our post-acquisition momentum, delivered for our customers and communities across the country, generated strong financial results for our shareholders and put ourselves in a position of strength as we move into 2023.
As always, I want to thank our employees for everything they do to make our success possible. And with that, I’ll turn it over to Rob to provide more details. Rob?
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Rob Reilly: Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 3 and is presented on an average basis. Loans for the fourth quarter were $322 billion, an increase of $9 billion or 3% linked quarter. Investment securities grew $6 billion or 4%. Cash balances at the Federal Reserve totaled $30 billion and declined $1.5 billion during the quarter. And our average deposit balances were down 1%, while period-end deposits remained essentially stable. Average borrowed funds increased $15 billion as we proactively bolstered our liquidity with Federal Home Loan Bank borrowings late in the third quarter, and these are reflected in our fourth quarter average balances. On a spot basis, we increased our total borrowed funds by approximately $4 billion compared to September 30.
The period-end increase was driven by $2 billion of FHLB borrowings and $3 billion of senior debt, partially offset by lower subordinated debt. At year-end, our tangible book value was $72.12 per common share, an increase of 3% linked quarter. And we remain well capitalized with an estimated CET1 ratio of 9.1% as of December 31, 2022. We continue to be well positioned with capital flexibility, during the quarter, we returned $1.2 billion of capital to shareholders through approximately $600 million of common dividends and $600 million of share repurchases or 3.8 million shares. Slide 4 shows our loans in more detail. Compared to the same period a year ago, average loans have increased 11% or $33 billion, reflecting increased loan demand as well as our ability to capitalize on opportunities and our expanded coast-to-coast franchise.
During the fourth quarter, we delivered solid loan growth. Loan balances averaged $322 billion, an increase of $9 billion or 3% compared to the third quarter reflecting growth in both commercial and consumer loans. On a spot basis, loans grew $11 billion or 3%. Commercial loans grew more than $9 billion at period end, driven by strong broad-based new production in both our corporate banking and asset-based lending businesses. Importantly, utilization rates within our C&IB portfolio remained stable linked quarter. Consumer loans increased $1 billion compared to September 30, driven by higher residential mortgage home equity and credit card balances, partially offset by lower auto loans and loan yields of 4.75% increased 77 basis points compared to the third quarter, driven by higher interest rates.
Slide 5 covers our deposits in more detail. Throughout 2022, deposit balances have declined modestly, amidst the competitive pricing environment and inflationary pressures. Fourth quarter deposits averaged $435 billion and were generally stable linked quarter. Given the rising interest rate environment, we continue to see a shift in deposits from non-interest-bearing into interest-bearing. And as a result, at December 31, our deposit portfolio mix was 71% interest-bearing and 29% non-interest bearing. Overall, our rate paid on interest-bearing deposits increased to 1.07% during the fourth quarter. And as of December 31, our cumulative beta was 31%. Slide 6 details our securities portfolio. On an average basis, our fourth quarter securities of $143 billion grew $6 billion or 4%.
The increase was largely driven by elevated purchase activity late in the third quarter, which included $3 billion of forward starting securities that settled in the fourth quarter. On a spot basis, securities were $139 billion and increased $3 billion or 2% linked quarter. The yield on our securities portfolio increased 26 basis points to 2.36% driven by higher reinvestment yields as well as lower premium amortization. And during the quarter, new purchase yields exceeded 4.75%. At the end of the fourth quarter, our accumulated other comprehensive income improved to $10.2 billion reflecting the accretion of unrealized losses on securities and swaps. Importantly, we continue to estimate that approximately 5% of AOCI will accrete back per quarter going forward without taking into account the impact of rate changes.
Turning to the income statement on Slide 7. As you can see, fourth quarter 2022 reported net income was $1.5 billion, or $3.47 per share. Revenue was up $214 million or 4% compared with the third quarter. Expenses increased $194 million or 6%. Provision was $408 million in the fourth quarter, reflecting the impact of a weaker economic as continued loan growth, which resulted in a $172 million reserve build. And our effective tax rate was 17.7%. Turning to Slide 8. We highlight our revenue trends. In 2022, total revenue was a record $21.1 billion and grew 10% or $2 billion compared to 2021. Within that, net interest income increased 22% due to both higher interest rates and strong loan growth. Non-interest income declined 5% and as lower market-sensitive fees more than offset strong card and cash management growth.
Looking more closely at the fourth quarter, total revenue was $5.8 billion, an increase of 4% were $214 million linked quarter. Net interest income of $3.7 billion was up $209 million or 6%. The benefit of higher yields on interest-earning assets and increased loan balances was partially offset by higher funding costs. And as a result, net interest margin increased 10 basis points to 2.92%. Fee income was $1.8 billion and increased $75 million or 4% linked quarter. Looking at the detail, asset management and brokerage fees decreased $12 million or 3% reflecting the impact of lower average equity markets. Capital Markets and Advisory revenue grew $37 million or 12%, driven by higher merger and acquisition advisory fees, partially offset by lower loan syndication activity.
Lending and deposit services increased $9 million or 3%, primarily due to higher loan commitment fees, reflecting our strong new loan production. Residential and commercial mortgage revenue increased $41 million, driven by higher RMSR valuation adjustments, partially offset by lower commercial mortgage banking activities. Other non-interest income declined $70 million linked quarter, reflecting a negative fourth quarter Visa fair value adjustment compared to a positive valuation adjustment in the third quarter, resulting in a change of $54 million. Turning to Slide 9. Our fourth quarter expenses were up $194 million or 6% linked quarter. The growth was largely in personnel costs, which increased $138 million reflecting higher variable compensation related to increased business activity.
Fourth quarter personnel costs also included market impacts on long-term incentive compensation plans as well as seasonally higher medical benefits. The remaining balance of the increase in expenses linked quarter included higher marketing spend as well as impairments on various assets and investments. The majority of these impairments will lower our expenses going forward and are included in our expense guidance. As you know, we had a 2022 goal of $300 million in cost savings through our continuous improvement program, and we exceeded that goal. Looking forward to 2023, we will be increasing our annual CIP goal to $400 million. This program funds a significant portion of our ongoing business and technology investments. Our credit metrics are presented on Slide 10.
Non-performing loans of $2 billion decreased $83 million or 4% compared to September 30 and continue to represent less than 1% of total loans. Total delinquencies of $1.5 billion declined $136 million or 8% linked quarter. Net charge-offs for loans and leases were $224 million, an increase of $105 million linked quarter, driven in part by one large commercial loan credit. Our annualized net charge-offs to average loans was 28 basis points in the fourth quarter. Provision for the fourth quarter was $408 million compared to $241 million in the third quarter. The increase reflected the impact of a weaker economic outlook as well as continued loan growth. During the fourth quarter, our allowance for credit losses increased $172 million, and our reserves now total $5.4 billion or 1.7% of total loans.
In summary, PNC reported a strong fourth quarter and full year 2022. In regard to our view of the overall economy, we’re now expecting a mild recession in 2023 resulting in a 1% decline in real GDP. Our rate path assumption includes a 25 basis point increase in Fed funds in both February and March. Following that, we expect the Fed to pause rate actions until December 2023, when we expect a 25 basis point cut. Looking ahead, our outlook for full year 2023 compared to 2022 results is as follows: we expect spot loan growth of 2% to 4%, which equates to average loan growth of 6% to 8%. Total revenue growth to be 6% to 8%. Inside of that, our expectation is for net interest income to be up in the range of 11% to 13% and non-interest income to be stable to up 1%.
Expenses to be up between 2% and 4% and we expect our effective tax rate to be approximately 18%. Based on this guidance, we expect we’ll generate solid positive operating leverage in 2023. Looking at first quarter of 2023 compared to fourth quarter of 2022, we expect spot loans to be stable, which equates to average loan growth of 1% to 2%. Net interest income to be down 1% to 2%, reflecting two fewer days in the quarter. Fee income to be down 3% to 5% due to seasonally lower first quarter client activity. Other non-interest income to be between $200 million and $250 million, excluding net securities and Visa activity. We expect total non-interest expense to be down 2% to 4%, and we expect first quarter net charge-offs to be approximately $200 million.
And with that, Bill and I are ready to take your questions.
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