In the second quarter of 2023, PNC Financial Services Group reported $1.5 billion in net income and $3.36 in diluted earnings per share. Despite macroeconomic and competitive pressures on revenue, the company remained focused on executing its strategic priorities, with strong momentum in the Southwest. Bill Demchak, PNC's Chairman, President and CEO, noted the company's strong capital and liquidity levels, as well as its earnings power, which provide the strength and flexibility to address upcoming regulatory changes.

Wells Fargo reported an increase in its quarterly common stock dividend by $0.05, and its stress capital buffer improved to the regulatory minimum level of 2.5% in October. The balance sheet was stable and cash balances at the Federal Reserve decreased by $3 billion. Borrowed funds increased $3 billion and tangible book value was $77.80 per common share, an increase of 5% compared to the same period a year ago. The estimated CET1 ratio of 9.5% increased 30 basis points linked quarter.

In the second quarter, Bank of America returned $700 million of capital to shareholders through dividends and share repurchases. The bank's balance sheet was strengthened by the CCAR results. Share repurchase activity in the third quarter is expected to remain modest due to proposed rules adjusting the Basel III capital framework. Average loan balances were stable quarter-over-quarter, with consumer loans increasing by $400 million and commercial loans declining by $1 billion. Loan yields increased 28 basis points to 5.57%, mainly due to the higher rate environment. In terms of deposits, the bank saw an increase in the second quarter.

Deposits declined 2% in the second quarter due to quantitative tightening and increased spending activity, resulting in a shift of deposits from non-interest bearing to interest bearing accounts. The rate paid on interest bearing deposits increased to 1.96%, and the cumulative deposit beta was 39%. Investment securities decreased by $2.4 billion, with the portfolio yield increasing 3 basis points to 2.52%. The duration of the investment securities portfolio was 4.2 years, and the received fixed swaps pointed to the commercial loan book totaled $40 billion at the end of the quarter.

During the second quarter, the weighted average received fixed rate of the swap portfolio increased 25 basis points, and the portfolio duration was 2.3 years. The AOCI impacted tangible book value, but as lower rate securities and swaps roll off, tangible book value is expected to improve. For the first half of 2023, revenue grew 11% and PPNR grew 24%. Net income was $1.5 billion and total revenue was $5.3 billion, but net interest income declined 2%. Non-interest income declined 12%, driven by lower fee income and Visa fair value adjustments. Expenses increased 2%, provision was $146 million, and the effective tax rate was 15.5%. Revenue trends are highlighted on Slide 8.

In the second quarter, revenue decreased by $310 million or 6% compared to the first quarter, primarily due to a decrease in fee income and other non-interest income. Expenses increased by $51 million or 2%, primarily due to an increase in marketing expenses and personnel costs. Going forward, the company expects activity to increase in the second half of the year.

PNC reported a solid second quarter of 2023, with a CIP goal of $450 million and credit metrics that remain strong. The office category within commercial real estate is a key area of concern, with an increase in charge offs, but metrics remain largely similar to those presented last quarter. PNC is expecting a mild recession in early 2024 with a contraction in real GDP of less than 1%, and the Fed is expected to increase rates in July before pausing and then cutting them in March 2024.

The bank's outlook for the third quarter of 2023 compared to the second quarter is for average loan decline of 1%, net interest income to be down 3-4%, non-interest income to be up 10-11%, total revenue to be up 1%, and total non-interest expense to be stable. For the full year 2023, they expect average loan growth of 5-6%, total revenue growth of 2-2.5%, net interest income to be up 5-6%, non-interest income to decline 2-4%, expenses to be up 2%, and an effective tax rate of 18%. This change in expectations is largely due to expected deposit costs moving faster than expected and slightly lower loan growth, as well as softer than expected capital markets revenue and $127 million in Visa related charges.

Robert Reilly and Bill discussed capital return and M&A appetite. Reilly mentioned that the guidance for noninterest income was changed from stable to down 2% to 4%, and that the decline has already occurred and been blended into the full year. He also mentioned that capital markets fees are expected to get back to the first quarter's run rate and experience meaningful growth on top of that. Reilly also noted that the CET capital ratio increased 30 basis points in the quarter and that the bank did well on the most recent stress test, resulting in an excess capital position. Lastly, Bill discussed M&A appetite both on the nonbank and bank side.

PNC is continuing to look for opportunities to expand their franchise through M&A, but their appetite to do so has decreased. They are managing their balance sheet to maximize returns while continuing to support their clients, but loan growth is tepid due to lack of loan demand.

Robert Reilly and the speaker discuss the balance sheet and the implications of interest rate cuts on net interest income. They explain that the balance sheet is neutrally positioned and that rate cuts are expected in the first quarter of the following year. They also mention that net interest income is expected to stay within a range of $3.2 billion and $3.25 billion, excluding any assumed growth.

Bill Demchak explains that PNC is currently neutral to rates and that they are not sure if they agree with the forward curve yet. He goes on to explain that the big unknown for them and everyone else is what happens to the shape of the yield curve when the Fed pauses and cuts rates. He states that they are not sure if there is value to be had in extending duration at the moment, and that their deposit outflows are largely following the expectations seen across the industry with QT.

Robert Reilly and Bill Demchak discuss the competitive dynamic of their client base, trying to keep them competitively priced and increasing the beta. They are not aggressively trying to boost deposits, but instead protecting their core consumer and commercial customer. Scott Siefers then inquires about the expected capital markets recovery, specifically regarding the three main areas of DCM, ECM, and M&A. Robert Reilly responds to his inquiry.

Bill Demchak and Robert Reilly discussed the revised 2023 guidance for NII, fees, and expenses. They noted that expenses are only 50 basis points lower than the original guidance, and they plan to push harder to reduce expenses. However, they acknowledged that the benefits of any changes may not be seen in the run rate for 2023 due to the limited time left in the year.

Bill Demchak and Robert Reilly discussed the potential for long-term growth, but could not determine if the company had reached the trough of the rate normalization. Betsy Graseck asked about the demand for loans, to which Demchak and Reilly responded that demand was not great.

Bill Demchak and Robert Reilly discussed the possibility of a credit box widening event, but concluded that there was not much of an appetite for it given the current funding markets. Betsy Graseck asked if the LCR ratio would be compliant under the GSIB standard, to which Bill Demchak responded that it was very close to 100%, and historically had been over the full 100%. Lastly, Betsy asked about the FDIC special assessment and whether it was in the full year expense guide, to which Robert Reilly responded that it was not.

Robert Reilly believes that the biggest hurdle to consolidation in the banking industry is the need for a substantial capital raise due to fair value accounting on targets. He also acknowledges that there is a need for consolidation in the industry in order to create competition against the larger banks. Lastly, he cautions against doing deals just for size due to the potential presence of bad balance sheets with heavy real estate concentrations.

Bill Demchak and Ebrahim Poonawala discuss the challenge of mark-to-market and the potential for deposit behavior to shift if the Fed stops cutting rates. Robert Reilly adds that consumer deposits could still go up even if the Fed stops cutting. Mike Mayo then asks Bill's opinion on the likelihood of a recession, to which he responds that reserves are predicated on a certain level of unemployment.

The team discussed their reserves and unemployment assumptions, which are currently over 5%. They are appropriately reserved, with 7.4% on the office book and close to 11% on the multi-tenant piece. Bill Demchak believes there will be problems in the office space, but they are reserved for whatever happens. The conference call was concluded with the IR team available for any follow-up questions.

This summary was generated with AI and may contain some inaccuracies.