The PNC Financial Services Group, Inc. (PNC) Q1 2024 Earnings Call Transcript

The PNC Financial Services Group, Inc. (NYSE:PNC) Q1 2024 Earnings Conference Call April 16, 2024 10:00 AM ET

Company Participants

Bryan Gill – Director of IR
William Demchak – Chairman, President & CEO
Robert Reilly – EVP & CFO

Conference Call Participants

Betsy Graseck – Morgan Stanley
John Pancari – Evercore
Matt O’Connor – Deutsche Bank
Gerard Cassidy – RBC
Dave Rochester – Compass Point
Ebrahim Poonawala – Bank of America
Bill Carcache – Wolfe Research
Ken Usdin – Jefferies
Mike Mayo – Wells Fargo
John McDonald – Autonomous Research

Operator

Greetings, and welcome to the PNC Financial Services Group Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Bryan Gill. Thank you, Brian. You may begin.

Bryan Gill

Well, good morning, and welcome to today’s conference call for the PNC Financial Services Group. I am Bryan Gill, the Director of Investor Relations for PNC, and participating on this call are PNC’s Chairman 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 invest relations. These statements speak only as of April 16, 2024, and PNC undertakes no obligation to update them.

Now, I’d like to turn the call over to Bill.

William Demchak

Thank you, Bryan, and good morning, everyone. In the first quarter, we executed well and delivered solid financial results. We generated $1.3 billion in net income, and adjusting for the FDIC special assessment $3.36 per share. Rob will provide details on our results in a moment, but I’ll start with a few thoughts.

First, we continue to grow our business. In the first quarter, we added new customers across our segments and increased deposits on a spot basis. We’re continuing to invest heavily in our franchise to drive growth and gain share, particularly in our retail banking technology platform or payments businesses and our expansion markets.

To that end, in the first quarter, we announced a multiyear investment of nearly $1 billion in our branch network to renovate more than 1,200 locations and open new branches in key locations, including Austin, Dallas, Denver, Houston, Miami and San Antonio.

Second, expenses were well managed during the quarter. As we’ve indicated, expense discipline remains a top priority, and we are on track to maintain stable core expenses in 2024.

Third, credit quality remains stable during the quarter. The office portfolio remains an area of focus, but we are adequately reserved overall, and particularly with respect to CRE. We believe our thoughtful approach to managing risk, customer selection and long-term relationship development will continue to serve us well.

And fourth, we continue to build on our strong liquidity and capital position during the quarter, providing us with a financial strength and flexibility to help us support our clients grow our businesses and capitalize on future opportunities.

In summary, we delivered solid results during the first quarter and positioned ourselves well for the balance of 2024 and beyond. Last month, we launched a brand campaign celebrating our boring approach to banking.

Now obviously, we’re using humor in the campaign to have a little fun and grab the public’s attention. But inside of that humor is honesty about who we are, how we think about risk, and how we run our company. In short, it is everything we do to be steady and predictable. Finally, I just want to thank our employees for everything they do for our customers, for each other, and for all of our stakeholders.

And with that, I’ll turn it over to rob to take you through the quarter. Rob?

Robert Reilly

Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4 and is presented on an average linked quarter basis. Loans are $321 billion decreased $4 billion or 1%. Investment securities declined $2 billion or 1%. And our cash balances at the Federal Reserve were $48 billion, an increase of $6 billion or 13%.

On a spot basis, our cash at the Fed was $53 billion, up from $43 billion in the prior quarter, reflecting higher period end deposits. Deposit balances averaged $420 billion, a decline of $4 billion or 1%, reflecting seasonally lower commercial deposits. However, on a spot basis, deposits were up $4 billion, reflecting growth in both commercial and consumer deposits.

Borrowed funds increased $3 billion to $76 billion, primarily driven by parent company debt issuances early in the quarter. At quarter end, AOCI was a negative $8 billion compared to a negative $7.7 billion at December 31, reflecting the impact of higher interest rates.

Our tangible book value increased to $85.70 per common share, an 11% increase compared to the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 10.1% as of March 31. While we recognize the likelihood of potentially substantial changes to the Basel III endgame NPR under the currently proposed capital rules, our estimated fully phased in expanded risk-based CET1 ratio would be approximately 8.3% as of March 31, 2024.

We continue to be well positioned with capital flexibility. Share repurchases approximated $135 million or roughly 1 million shares. And when combined with $624 million of common dividends, we returned $759 million of capital to shareholders during the quarter.

Slide 5 shows our loans in more detail. Compared to the fourth quarter, average loan balances decreased 1%, primarily driven by lower commercial loan balances. Commercial loans were $219 billion, a decrease of $3.4 billion, driven by lower utilization as well as soft loan demand.

Within the corporate and institutional bank, utilization rates have remained below 2023 year-end levels and have not increased in the first quarter as is historically typical. We expect utilization to increase throughout the year. Notably, each percent of utilization within CNIB equates to $4 billion of loan growth. Consumer loans declined approximately $600 million, driven by lower credit card and home equity balances, and total loan yields increased 7 basis points to 6.01% in the first quarter.

Slide 6 details our investment, security and swap portfolios. Average investment securities of $135 billion decreased 1% as curtailed purchase activity was more than offset by portfolio paydowns and maturities. The securities portfolio yield increased 3 basis points to 2.62%, reflecting the run-off of lower yielding securities.

As of March 31, the securities portfolio duration was four years. Our receive fixed swaps pointed to the commercial loan book totaled $37 billion on March 31. The weighted average receive fixed rate of our swap portfolio increased 20 basis points to 2.3% and the duration of the portfolio was two years.

Through the end of 2024, 13% of our securities and swap portfolio is scheduled to mature, which will allow us to reinvest into higher yielding assets, providing a meaningful benefit to net interest income in the second half of the year. Accumulated other comprehensive income was negative $8 billion at March 31, which will accrete back as our securities and swaps mature, resulting in continued tangible book value growth.

Slide 7 covers our deposits in more detail. Average deposits decreased $4 billion to $420 billion during the quarter, as growth in consumer deposits was more than offset by a seasonal decline in commercial deposits. Regarding mix, consolidated, non-interest-bearing deposits were 24% in the first quarter, down slightly from 25% in the fourth quarter.

Notably, on a spot basis in the first quarter, non-interest-bearing deposits had the smallest dollar decline since the Fed began raising rates in 2022, which gives us confidence that the non-interest-bearing portion of our deposits has largely stabilized.

Our rate paid on interest-bearing deposits increased to 2.6% during the first quarter, up from 2.48% in the prior quarter. And as of March 31, our cumulative deposit beta was 45% and consistent with our expectations. We believe our deposit betas have approached their peak levels, although, we do expect some potential drift higher through the period leading up to a Fed rate cut, which we currently expect to occur in July.

In regard to the timing and amount of potential rate cuts, we recognize there’s a lot of fluidity and uncertainty. However, our 2024 NII will largely be unaffected by any short-term interest rate movement or lack thereof. This is because our floating rate assets are aligned with our floating rate liabilities, including our high beta commercial interest-bearing deposits and our long-term debt, which is almost entirely swapped to floating rates.

Importantly, going forward, we’ve remained well positioned for the NII benefit of repricing low yielding fixed rate securities and loans maturing during the latter half of 2024 and into 2025.

Turning to the income statement on Slide 8. First quarter net income was $1.3 billion or $3.10 per share, which included a pretax, non-core, non-interest expense of $130 million or $103 million after tax related to the increased FDIC special assess assessment. Excluding non-core expenses, adjusted EPS was $3.36 per share.

Total revenue of $5.1 billion decreased $216 million or 4% compared to the fourth quarter of 2023. Net interest income declined by $139 million or 4%, and our net interest margin was 2.57%, a decline of 9 basis points, resulting primarily from higher funding costs.

Non-interest income decreased $77 million or 4%. Non-interest expense of $3.3 billion declined $740 million or 18%, and included $130 million FDIC special assessment. Importantly, core non-interest expense was $3.2 billion and decreased $205 million or 6%. Provision was $155 million in the first quarter, reflecting portfolio activity and improved macroeconomic factors, and our effective tax rate was 18.8%.

Turning to Slide 9. We highlight our revenue trends. First quarter revenue was down $216 million or 4%, driven by lower net interest income and in part a seasonal decline in fee income. Net interest income of $3.3 billion declined $139 million or 4%, reflecting increased funding costs, lower loan balances, and one less day in the quarter. Fee income was $1.7 billion and decreased $74 million or 4% linked quarter.

Looking at the detail. Asset management and brokerage revenue was up $4 million or 1%, reflecting higher average equity markets. Capital markets and advisory fees declined $50 million or 16%, driven by lower M&A advisory activity, off elevated fourth quarter levels, partially offset by higher underwriting fees.

Card and cash management decreased $17 million or 2%, driven by seasonally lower consumer transaction volumes, partially offset by higher treasury management fees. Lending and deposit related fees declined $9 million or 3%, reflecting the reduction of customer fees on certain checking products. Residential and commercial mortgage revenue declined $2 million or 1%, and included lower residential mortgage activity.

Other non-interest income of $135 million decreased $3 million or 2%, reflecting lower gains on sales. The first quarter also included a negative $7 million Visa fair value adjustment compared to a negative $100 million adjustment in the fourth quarter.

Turning to Slide 10. Our core non-interest expense at $3.2 billion decreased $205 million or 6% linked quarter, reflecting strong expense management. Importantly, compared to the first quarter of 2023, core non-interest expense declined $117 million or 4%, with a decline in every expense category. This broad-based result reflects the impact of expense actions taken in 2023.

As we’ve previously stated, we implemented expense management actions that will drive $750 million of cost savings in 2024. These actions include the $325 million workforce reduction effort last year, which was realized in our first quarter expense run rate, and our $425 million 2024 continuous improvement program goal, which we’re well on track to achieve. We remain diligent in our expense management efforts, and these actions give us confidence that will keep our year-over-year expenses stable.

Our credit metrics are presented on Slide 11. While overall credit quality remains resilient, the pressure we anticipated within the commercial real estate office sector has continued. Non-performing loans increased $200 million or 9% linked quarter, almost entirely driven by commercial real estate, which increased $188 million. And inside of that, approximately $150 million was related to the CRE office portfolio.

Total delinquencies of $1.3 billion decreased $109 million or 8% linked quarter, driven by lower consumer and commercial delinquencies. Net loan charge-offs were $243 million in the first quarter, and our annualized net charge-offs to average loans ratio was 30 basis points. Our allowance for credit losses totaled $5.4 billion or 1.7% of total loans on March 31, stable with December 31.

Slide 12 provides more detail on our CRE office credit metrics. While NPLs have increased over the past few quarters, our criticized balances have remained relatively consistent. The migration of criticized loans to non-performing status is an expected outcome as we work to resolve the occupancy and rate challenges inherent to this portfolio. In the first quarter, net loan charge-offs within the CRE office portfolio were $50 million, essentially in line with the previous quarter level.

Ultimately, we expect continued charge-offs on this portfolio, and accordingly we believe we are adequately reserved. As of March 31, our reserves on the office portfolio were 9.7% of total office loans and inside of that, 14.4% on the multitenant portfolio. Importantly, we continue to manage our exposure down and as a result, our balances declined 3%, or approximately $200 million linked quarter.

In summary, PNC reported a solid first quarter 2024, and we’re well positioned for the remainder of the year. Regarding our view of the overall economy, we’re expecting economic expansion in the second half of the year, resulting in real GDP growth of approximately 2% in 2024, and unemployment to increase modestly to 4% by year end. We expect the Fed to cut rates 2 times in 2024, with a 25 basis point decrease in July and another in November.

Looking at the second quarter of 2024 compared to the first quarter of 2024, we expect average loans to be stable, net interest income to be down approximately 1%. And as I mentioned previously, we expect NII and net interest margin to trough in the second quarter. Fee income to be up 1% to 2%. Other non-interest income to be in the range of $150 million and $200 million, excluding Visa activity.

Taking the component pieces of revenue together, we expect total revenue to be stable. We expect total core non-interest expense to be up 2% to 4%. We expect second quarter net charge-offs to be between $225 million and $275 million. As a reminder, PNC owns 3.5 million Visa class B shares with an unrecognized gain of approximately $1.6 billion. Under the terms of Visa’s current exchange program scheduled to close on or about May 3, Class B shareholders will have the opportunity to monetize 50% of their holdings. We’ve not included the impact of monetizing the Visa gain in our forecast.

Turning to Slide 14. Our full year 2024 guidance is unchanged from our January earnings call. And as a reminder, for the full year 2024 compared to the full year 2023, we expect average loan growth of approximately 1%. Total revenue to be stable to down 2%. Inside of that, our expectation is for net interest income to be down in the range of 4% to 5%, and non-interest income to be up 4% to 6%. Core non-interest expense, which excludes the FDIC assessment, is expected to be stable and we expect our affected tax rate to be approximately 18.5%.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Betsy Graseck with Morgan Stanley. Please proceed with your questions.

Betsy Graseck

Hi. Good morning.

William Demchak

Good morning.

Betsy Graseck

Okay. Just want to make sure you can hear me okay.

William Demchak

Sure.

Betsy Graseck

Yeah. No. This is great. The first question I have just has to deal (ph) with how you’re thinking about the NII indicating, 2Q the trough improving from there. And I would think that the majority of that improvement is coming from loan growth. But correct me If I’m wrong, how you’re thinking about that NII trajectory into second half of the year? And then, well, I’ll start there.

Robert Reilly

Okay. Yeah. Good morning, Betsy. This is Rob. So in terms of NII and the trajectory that we’re on, we knew at the beginning of the year that we would trough around this time in the second quarter and that’s what’s happening. We expect to grow from that trough level based on the repricing of our fixed rate assets as rates settle down. There is some reliance on the back half for loan growth, but all consistent with our full year guidance. Average loans up 1%.

Betsy Graseck

And just on that loan growth fees. You go ahead, sir.

William Demchak

I was just going to say that the largest driver is repricing of fixed rate assets. We expect some loan growth, but it’s not a heroic number in there. It’s simply to roll down of our securities book.

Betsy Graseck

Okay. Got it. Yeah. All right. And on the loan side, it is interesting to see the utilization rates ticking down here. Do you think that’s just a function of Fed funds is 5.5 and that’s the base rate from which C&I is priced off of, or is there other dynamics there besides just rate?

William Demchak

It’s a variety of things. I think the capital markets activity in the first quarter in investment-grade debt put a lot of cash into the system and you just — you saw companies that could hit that market, pay down revolver. So that was sort of a near term impact to it. There’s — as when we look out, there hasn’t been any real inventory build, which I would expect given retail sales. There hasn’t been much CapEx and capacity utilization has been holding constant at a pretty high level. So, at some point this needs to turn, but I think the first quarter kind of surprised us. And my best guess was that was on the back of just how liquid the public markets were.

Betsy Graseck

Okay. Got it. Thanks so much. Really appreciate it, Bill.

Operator

Thank you. Our next questions come from the line of John Pancari with Evercore ISI. Please proceed with your questions.

John Pancari

Good morning.

William Demchak

Hey. John.

John Pancari

On the expense front, it looks like within expenses they came in a bit better than expected, maybe on the comp side and certain other areas and you cited the solid expense management and your cost save effort. Is there — did you say that the trends are coming in perhaps a bit better than you had forecasted as you look at your expense phase, and is there any thought process that potentially your full year ’24 outlook could prove conservative in terms of your stable expectation?

Robert Reilly

John, this is Rob. So I’d say, for the full year, we’re still planning and guiding towards stable. In the first quarter, you’re right, we’re off to a good start, in terms of realizing the expense actions that we took last year and CIP program that we have this year. But it’s a little early in the year to roll that all forward. And like I said, we’re off to a good start and we’re well positioned for stable.

John Pancari

Okay. Thanks, Rob. That’s helpful. And then just separately on the credit side, you can see the commercial real estate stress that you mentioned and you prudently added to the office reserve in the quarter, but relatively stable or down a little bit in terms of your firm wide reserve. Are you seeing — could you maybe talk about the progression in credit in other areas? Do you see maybe mounting stress at all in C&I that could keep you — potentially keep the reserve currently stable, or could you continue to, from a firm y perspective bleed the reserve here?

William Demchak

Bleed is a bad word. The credit action at the moment is in the real estate book and specifically inside of office, consumer at the margin a little bit worse, but there isn’t anything systematic going on in C&I that would cause us to have any different expectations of what we see now, and we’re reserved for the moment based on our economic forecast.

Robert Reilly

Yeah. The pressure is in the CRE book, specifically the office book.

John Pancari

Okay. And then just related to that, are you seeing migration in the office book that is surprising, given your forecast on the added, notably to the office reserve, is there anything there that surprised you in terms of your reappraisals or your work on that front?

Robert Reilly

No surprises. Yeah. Everything’s progressing as we expected. We started with the criticized, the NPLs are up a little bit, but everything is consistent with what we’ve been saying.

John Pancari

Got it. All right. Thanks, Rob.

Operator

Thank you. Our next question come from the line of Matt O’Connor with Deutsche Bank. Please proceed with your questions.

Matt O’Connor

Good morning. Looking at Slide 6 here, where you show the runoff of the fixed rate securities and swaps. And any way to size the revenue pickup from this, either anchoring to the forward curve or current rates? You put out some crude analysis that showed about a $2 billion impact and just said it was linear. So half this year, half next, but obviously it’s a rough cut at it. So I don’t know, if you have any comments on that or frame it on using your estimates. Thanks.

Robert Reilly

No, I would say — so we laid it out in the slides in terms of what we see in terms of runoff. And obviously the projected AOCI burned down as it relates to capital, but all of that’s in our guide. So in terms of what our expectations are, in terms of that behavior, that’s in our full year NII guide, which is down 4% to 5%. But it does make the point in terms of what we were saying earlier. And going forward, the biggest variable is the repricing of our fixed rate assets than in this case securities.

William Demchak

Matt, I think what everybody’s struggling with here is this notion of what’s the Fed going to do in the next period of time. Is it new cuts or no cuts or three cuts, and we started out with six cuts.

Robert Reilly

We didn’t.

William Demchak

Yeah. We did not, but the market did. We know based on forward curve the repricing of our fixed rate assets, the amount of money, incremental money we will earn from that has increased because term rates have increased. At the same time, that the assumption that the Fed will maintain rates here longer causes us to pause on what happens to deposit pricing through time, right? So there’s a tradeoff. Higher rates in the long run, obviously help us on our fixed rate assets.

Deposit repricing continues on if the Fed holds longer. A much slower pace than it’s been in the past, but I think it’s — it would be a bit of a heroic assumption for anybody to say that deposit cost will continue to creep up in the face of a steady Fed. And so that’s the trade off in the near term. Longer term, the repricing of the fixed rate assets towards the repricing of deposits. And that’s kind of why we say, look, in the second quarter we trough, and then we pick up from there.

Robert Reilly

And then to ’25.

William Demchak

Yeah.

Matt O’Connor

That makes sense. And then, sorry if I missed it earlier, but did you reiterate your view that 2025 net interest income would be record level? And if you did, what would derail that if the higher prolong or doesn’t sound like — doesn’t sound like that’ll change it. Is there still a loan growth component or if rates go down too much, just what would be the risk of achieving that if you still have that view? Thank you.

William Demchak

I mean, the biggest risk would be a massive curve inversion, such that we were repricing fixed rate securities at lower yields than they are today. Well, I mean then what they were three months ago. Our original assumptions in that forecast yields were hundred lower than they are right now. If they were to fall well below that, we would be at risk at that record number, although, still a high number.

Robert Reilly

And Matt, this is Rob. It’s Rob. I’ll take the opportunity to reiterate our view that 2025 will be a record NII.

Matt O’Connor

Okay. Thank you very much.

Operator

Thank you. Our next questions come from the line of Gerard Cassidy with RBC Capital Markets. Please proceed with your questions.

Gerard Cassidy

Hi, Bill. Hi, Rob.

William Demchak

Hey, Gerard.

Robert Reilly

Hey, Gerard.

Gerard Cassidy

Rob, you talked about the utilization of the C&I loans that it was lower in the first quarter and normally it kind of ticks up a bit. Question on that. Is it — do you think your customers are just uncertain about their outlooks, which has kind of helped them back from drawing down on lines of credit, or do you think that they’re having access to other lenders, meaning private credit market or the public markets that has taken away opportunities for banks to have these companies increase those lines of utilization?

William Demchak

Yes. I think it’s both. Yeah. The capital markets activity in the first quarter, we’re not — the private credit side on leverage finance doesn’t really impact us, but the public markets were wide open, by the way, our fees were up in that space for serving clients that way, but naturally at the margin that causes our utilization to go down.

The other issue you can’t ignore, right? But we’ve seen capital spend and inventory bill be next to nothing, even though capacity utilization is high, retail sales are high. And at some point that’s got to give. But I do think there continues to be hesitancy on manufacturers in particular, just in the face of this economy, and I think that’s part of it.

Robert Reilly

And looking for a stability factor which will help.

Gerard Cassidy

Very good. And then I know, Rob, I think you touched on, in an answer to a question about the commercial real estate outlook office in particular. And you guys, everything appears to be going in your expectations. What kind of pricing declines in appraisals that have come up and where you’ve had to reappraise certain properties. Are you seeing price declines 10%, 15% 20% on those appraisals or more, any color there?

Robert Reilly

I mean, much higher than that.

Gerard Cassidy

Okay.

William Demchak

Of variance.

Robert Reilly

The variance is all over the place. But as a practical matter, if we were underwritten at the start at $0.50 to $0.55 on whatever the appraised value was at that point in time, a big chunk of the book right now is effectively at par, and we look at resolutions that we’ve gone through. We’ve had everything from we get out whole to we lose $0.75 on the $1 on a given loan.

William Demchak

That’s the variance factor.

Robert Reilly

So, it’s building specific. It’s market specific, that’s driving this. But loss rates are a lot higher. If you looked at office and said, hey, how much of values fall, it’s a lot higher than 15%. Personally across the space, my view is closer to 30 or 40 or even higher.

William Demchak

And you’re thinking ahead. You’re thinking ahead in terms of where we’re going.

Robert Reilly

Well, it’s not showing up in appraisals here. We’re just seeing it in actual resolution of properties.

Gerard Cassidy

Got it. Thank you.

Operator

Thank you. Our next questions come from the line of Dave Rochester with Compass Point. Please proceed with your questions.

Dave Rochester

Hey. Good morning, guys. Just back on the NII guide, you mentioned the largest driver of the growth you’re looking for in the back half of the year is coming from the repricing, then you got the loan growth as another factor. Was just wondering what you’re assuming for deposit flows within that as well? I would assume that this could be a little bit better, just from a seasonal perspective in the back half of the year. And then on the securities rolling off, how much of that liquidity is getting plowed back into the securities book and what kind of yields are you looking at there at this point on purchases?

William Demchak

So, I’ll let Rob hit deposits in a second. The assumption, I mean we have roll off both fixed rate loans and fixed rate securities. And the yields we assume in our forecast at this point are just forward curve, adjusted from whatever the right spread is of the asset we’d replacing, so like-for-like.

Robert Reilly

Yeah. And then just on the deposits. Back at the beginning of the year, we expected deposits to decline year-over-year low-single digits. We still expect that, albeit in the first quarter. We did outperform that a bit, but our expectations are for again slightly lower deposits through the balance of the year.

Dave Rochester

Okay. And then on the loan growth outlook, which you talked about, I guess, on an end to period basis last quarter. Does higher for longer impact that expectation at all and what’s your outlook for the longer end of the curve through the year?

William Demchak

No. I don’t know that I’ve thought much about how higher for longer impacts loan growth or not. The outlook that we have for rates at this point, our official outlook is we have, what do we say, two cuts starting in July at this point with the curve largely staying where it is. Our forecast, whether we’re using current forward curve or even when rates were lower, our NII forecast isn’t terribly sensitive to what we’re assuming at least for this year because the incremental amount we’d make from higher yields on bonds and loans repricing, we’re assuming is largely offset on the deposit cost leakage that occurs if the Fed doesn’t cut rates.

So we’re not making heroic assumptions on rates. We don’t really care where they go in the near term. What we know is once we get through the second quarter here, that the repricing of fixed rate assets simply starts to devore the potential repricing on deposits, and depending on where rates are.

Dave Rochester

Got it. Great. Thanks, guys.

Operator

Thank you. Our next questions come from the line of Ebrahim Poonawala with the Bank of America. Please proceed with your questions.

Ebrahim Poonawala

Good morning. I guess maybe the tenth question on your loan growth outlook for the back half, I think, I guess the macro concern is that higher for longer will eventually tip this economy into a recession. Would love to hear, Bill, Rob your perspective based on what you are hearing from your bankers clients?

If we don’t get any rate cuts for the year based on what you’re seeing, like could we have a blind spot where the economy really kind of tails off, where a lot of these things catch up, we enter some version of a stack ration. Just how do you handicap that downside risk heading into the back half of the year?

William Demchak

Look, I think that’s a possibility. One of the peculiar things about utilization is when credit conditions tighten, the utilization increases. It’s actually one of the primary drivers of utilization. So bizarrely, loan growth would increase if you ran because utilization would increase if you ran into that scenario. But I do worry about that. Look, eventually if the only way to get rid of inflation is to really hurt the economy. I worry less about loan growth and more about long-term credit losses for the whole industry, just as right now everybody’s planning for a soft landing.

Ebrahim Poonawala

Got it. And you still think soft lending is base case in terms of most likely outcome right now?

William Demchak

Yes.

Ebrahim Poonawala

Got it. And separately, one, I think thanks for your advocacy and bank M&A. Just wanted to follow up on the letter you wrote to the OCC. One, are you finding any kind of sympathy within the regulatory apparatus around the case for allowing for larger bank M&A? And is there any possibility that we should deal making pick up ahead of the elections?

William Demchak

Sorry. And any possibility of what?

Ebrahim Poonawala

Of deal making picking up ahead of the November elections?

William Demchak

Look, the letter was self-explanatory and we’ve kind of beaten the topic to death. I guess what I would suggest is, I think the banking industry by and large is set up to do well over the next 18 months or so simply through rates normalizing, assuming you didn’t have big concentrations to real estate in office. And I think everybody in the near term is focused on that.

I think long term, some of the charts we put in that letter. It’s just hard to ignore. You see the two largest banks in the country who in the last four years grew of size, larger than Truist U.S. Bank and PNC put together. I don’t know what the regulators think or don’t think about that.

The intent of the letter was to just point out that if what they wrote in the OCC comment letter was to freeze M&A across the country for any bank over $50 billion, I think you could see the outcome that we’ll have in this country, which is a massive consolidation with the giant national banks. That’s all my point was.

Ebrahim Poonawala

Got it. And do you see the backdrop conducive for deal making over the coming months, quarters or?

William Demchak

Like, what?

Robert Reilly

To anything near term for us or the industry.

William Demchak

No. I think most banks are content to hang out the next 18 months because their earnings are going to improve and their internal forecasts are going to look good and everything’s rosy. I worry about the out years. But in the near term, I imagine everybody’s internal looks pretty good.

Robert Reilly

And we don’t control others timing, so that’s up to them.

Ebrahim Poonawala

That’s right. Got it. Thank you so much.

Operator

Thank you. Our next questions come from the line of Bill Carcache with Wolfe Research. Please proceed with your questions.

Bill Carcache

Thanks. Good morning, Bill and Rob. Following up on your comments around soft loan demand and utilization rates, assuming we avoid recession and the soft landing scenario plays out, how would you respond to the view that the ingredients may not be in place for a reacceleration in loan growth given this environment where Fed funds is running above CPI and the Fed can’t cut amidst sticky inflation?

We spent most of the post GFC with Fed funds running below CPI and had mid-single digit loan growth, but just love your thoughts on the risk that loan growth may not go up much if the Fed can’t cut below CPI? And do you lean more heavily into your fee-based businesses if that happens?

William Demchak

I’m not sure Fed funds versus CPI necessarily has much to do with loan growth. I think loan growth ultimately is driven by the economy, and the economy has been running hotter than most people had assumed. Then it’s been running hotter than most people had assumed without big inventory builds. If you look at fourth quarter GDP, there was a drawdown on inventories.

Inventories are directly correlated with utilization and loan growth, and CapEx has been muted. So, the economy slows. If the Fed has to slow the economy to a point where it’s not a soft landing in order to get inflation under control, that can hurt loan growth. But if the economy is strong, you just saw retail sales, eventually it’s going to translate into loan growth, independent of whether or not there’s positive real rates.

Robert Reilly

Yeah. I think that strong correlation there.

William Demchak

Yeah.

Bill Carcache

That’s helpful. Thank you. And then, as a follow up on your comments about the Visa B shares. How should we think about the dollar amount and the use of proceeds?

Robert Reilly

Well, as I mentioned our comments on May 3, we’ll have the opportunity to monetize 50% of our holdings, which our holdings are roughly $1 billion fix in unrealized gains. And that’ll just be capital and we’ll look at how we apply everything in terms of our excess capital, but we’ll wait until we get the capital to do that.

Bill Carcache

Got it. Thank you for taking my questions.

Robert Reilly

And monetize half of the 1.6.

Operator

Thank you. Our next questions come from the line of Ken Usdin with Jeffries. Please proceed with your questions.

Ken Usdin

Hey, guys. Good morning. Just to follow up on the fee side, I think when you spoke in January, you talked about expected slowness in capital markets in M&A to begin the year. And then, I think you were thinking about a 20% growth overall. Just wondering just how that’s looking in terms of the body language you’re getting from those middle market clients in Harris Williams? And then also if you have any other color on what you think the other drivers of fees are going to be? Thanks.

William Demchak

I mean, the Harris Williams pipeline at the moment is larger, larger than it’s ever been, but it’s larger than it was last year, which the first quarter relative to their fourth quarter results, and that’s what drove the quarter-on-quarter change in our total fees.

Robert Reilly

Yeah. We had — so, Ken, to answer your question, we are sticking to the 20% expectation for growth in capital markets year-over-year. Bill is right. First quarter was off elevated at fourth quarter levels. But in terms of the comp, last year in the second and third quarter capital markets was really soft. Harris Williams was really soft. And the pipeline suggests we are not going to repeat that. We’ll be well above those levels.

Ken Usdin

Okay. Got it. All right. And the last one just on, on the asset and wealth side, I think you’ve had some pretty good flows, things like that, that first quarter starting point was more the markets. I know you put a lot of effort into that business. Any sense of just change in terms of like asset flows and new business wins and incremental potential revenue growth out of that business specifically?

William Demchak

We have had success over the last year kind of repositioning who and what we are in the market, bringing in new assets. To accelerate that to a level where it becomes a meaningful part of our company, I think, is a bit of a challenge. It’s a service to our clients, and we’re good at it. But the trends are going the right way.

Robert Reilly

Yeah. I would just add to that, Ken. Obviously, the business is doing well with the equity markets supporting that. The growth opportunity is in the new BBVA markets in the southwest, where you’ll recall, BBVA really didn’t have a wealth management business, so we’re de novo, so to speak, in all those markets. But we’re up and running with teams, inflows, asset inflows are occurring. And long term, that’s where the incremental growth will come from.

Ken Usdin

And one more just follow-up. Is that an area that you could add to organically over time? I know it’s tough just because of multiples and whatnot, but you’ve done it organically, as you just said.

William Demchak

That’s a tough business in my view to add to inorganically. Cultural differences, the way you go to market, the outright price and the goodwill associated with it and the return on equity that comes with that makes it all really difficult to do. And at least historically the opportunity to grow organically is much stronger than going out and trying to add to it through purchase.

Ken Usdin

Okay. Got it. Thank you.

Operator

Thank you. [Operator Instructions] Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.

Mike Mayo

Hi. Looks like we’re leaning into the expense control this quarter, but I’m just trying to figure out ahead. So you mentioned $750 million of cost savings for this year. How much of that was in the first quarter? But you also mentioned $1 billion of extra spending for branches. How much of that was in the first quarter and how should we think about those offsets? And I know it’s a tough fight to get positive optimum leverage this year. Do you feel better or works the same as you did three months ago? Thanks.

Robert Reilly

Well. Yeah, we’ll chunk that down. So we’ll start with the positive operating leverage for this full year. We still think that’s pretty tough, not including any Visa gains, of course, simply because of the NII and the rate issues and those run rates. We do feel good about our expenses. We projected and guided to being stable year-over-year. We’re off to a good start in the first quarter, a little bit ahead where we expected to be, but we still got a long way to go. So all of the items that you talked about there in there, but the guidance is stable over year-over-year, which is important to us.

Mike Mayo

Okay. I’ll shift gears back. Bill, you were talking about commercial real estate. Look, you reserved 10% for office. And you said the value of the underlying properties are probably down 30% to 40% or more. So I guess that is reflected in your reserving, which I think is more than the average bank. Do you see a difference by, and I know it changes by region and subregion and property and type and all that, but do you see a difference by region, whether it’s the big cities? What — give a little sense of that variance because it’s all over the place. You just fill in a few data points around that, that’d be great.

William Demchak

Yeah. Look, no surprise, parts of California are the worst. But it really comes down to the building and the market. I mean, you could have a building that’s in the right place in Pittsburgh, and it’s doing absolutely fine and you could have a building that’s in the wrong place in Pittsburgh, and it’s literally worth zero. And that’s the market we’re playing with right now.

Now, inside of that whole thing, we do feel that we’ve been ahead of this game, that were reserved correctly, that we are conservatively taking marks and we had the opportunity to do so. But it’s going to play out over time. And your eyes aren’t lying to you when you look out and see vacancies.

And I think ourselves and the large banks have been pretty open about, it’s going to be an issue. It’s not a massive book of business for us. I’m not particularly worried about it. We’re well reserved, but it’s going to roll through the country and impact some of the smaller banks, I think in a way that is probably larger than people [Multiple Speakers]. Yeah.

Mike Mayo

And just one short follow up on that one. The longer rates stay higher, do you expect this to bleed over from office to other areas of commercial real estate?

William Demchak

With the margin, yes. But it is kind of just at the margin. So you see debt service coverage ratios decline as interest costs take more of the cash flow out in multifamily, for example, rents aren’t increasing at the pace they once were. The massive difference though, Mike, is that all other types, or virtually all other types of real estate are cash flowing. So there’s a value to them, right? They just might not cash flow to support the original amount of debt they had. The problem you have in office is in many instances, there’s no cash flow at all. It’s really a unique animal at the moment.

Mike Mayo

Great. Thank you.

Operator

Thank you. Our next questions come from the line of John McDonald with Autonomous Research. Please proceed with your questions.

John McDonald

Hey, guys. Just wanted to just touch base on how you’re thinking about capital build. Obviously, you’re building organically, you’ve got some Visa that will add 14, 15 bps next quarter, I guess. Are you just kind of thinking of gradually kind of building from this? 10% reported and the 8.3% fully loaded to get to 9% or 10% or so over the next year, do a little bit of buybacks. Just kind of what’s the plan there?

William Demchak

Well, you phrased the question almost exactly correctly, so congratulations. [Multiple Speakers] You think about it inside, we have always moving pieces. So inside of the NPR on Basel III end game. The one thing, it’s all up in the year — but one thing that you got to believe is going to stick as AOCI. And so if that’s the case, then our printed A3 number is kind of a real number, and that would be otherwise too low for us if we want to build that through time. Some of that will happen just from the rundown of the book and some of that will happen through us building capital. The ultimate, where should we be Basel III end game, everything settled out number, I don’t know that we’ve necessarily set yet other than it’s higher than where we sit today on the A3. I think that’s…

Robert Reilly

No. That’s fair. And we’ve got capital flexibility, as you know, John, and that’s where you want to be right now with the fluidity of everything.

John McDonald

And so for the near term, Rob, is this kind of the ballpark $100 million a little bit north of that? Is that kind of the ballpark until you get a little more clarity?

Robert Reilly

Yeah. That’s right.

William Demchak

Yeah.

John McDonald

Okay. Thanks, guys.

Operator

Thank you. There are no further questions at this time. I would now like to turn the floor back over to Bryan Gill for closing comments.

Bryan Gill

Well, thank you all for joining the PNC call this morning. And if you have any follow-up questions, please feel free to reach out to the IR team. Take care.

William Demchak

Thank you.

Operator

Sorry about that. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.