PNC 4Q15 Earnings Call Notes

Bill Demchak

2B of energy exposure. Credit deterioration but modest charge offs

“We are cognizant of the volatility effecting the energy related in commodity sectors. That stated not much has changed regarding our exposures since last quarter. Specifically on oil and gas we have a total of $2.6 billion in outstanding, which is relatively flat quarter-over-quarter. This represents approximately 2% of our total commercial loan book. We have approximately $700 million in outstanding to Energy and Production Company, $1 billion to midstream and downstream and $900 million to oil services. Approximately $200 million of this services portfolio is not asset based on investment grade and this poses a greatest near term risk consistent with what we’ve been telling you the last few quarters. We continue to experience some portfolio deterioration in the fourth quarter, though charge-offs were quite modest. And during the quarter we increased our reserves to reflect the incremental impact of the continued decline in oil and gas prices.”

Our operating plan factors in 3 rate increases this year

“Turning to 2016 we’re obviously off to an unexpected rough start to the year relative to the global macro economy. However our 2016 operating plan completed at the end of last year and prior to this recent volatility assumes continued steady growth in GDP and a corresponding increase in short term interest rates three times this year, in March, June and December with each increase meaning [ph] 25 basis points.”

The Fed is expecting rate increases this year

“by the way some investors and even the Feds dot [ph] taught themselves I guess having going four times, obviously the market doesn’t believe that today. We’re three weeks into the year, so we’re not going to bin a whole planning process until we see how it plays out, and as it plays out we would give you, as we do always quarterly guidance on what you might expect.”

We are not interested in traditional bank M&A

“As it relates to tradition of bank M&A we are not interested, we are not involved there is a variety of reasons you’ve heard me talk about before. Sometime through time could that somehow change sure because forever is a long time, but today it’s not on our radar.’

We’re focused on other areas for potential M&A

“I would tell you that we have taken some small investments and syntax [ph] stuff you would had seen an announcement with EWS and Clear Exchange in partnership with six other large banks to put a P-to-P product out on a ubiquitous way to all bank clients. We are interested in distributive ledger block chain technology, we are interested in some of the corporate payments dispersement technology, none of these are big numbers. But in terms of our focus and where we think about growth opportunities in how to deploy capital it would be much more focused in that area than it would be a traditional bank deal.”

In commercial real estate we’re a little concerned about energy and tech heavy cities, but we’re still doing new projects

“The bankers will tell you and as we look at markets, we’re obviously concerned about energy heavy cities, we’re a little bit concerned about some of the technology heavy cities across all property types and that you would see that in our underwriting criteria in the step that we target to the extend we’re still doing new projects.”

Even with rate increases we’re still wildly accommodative

“the thing you always have to hold in the back of your mind is we’re coming off of a base of zero, so we’re still wildly accommodative and notwithstanding some localized stress in the economy, as you know doesn’t necessarily stop you from raising rates. ”

Do see some pressure in Texas spreading on the margin

“you know the localized economy here notwithstanding some reliance on coal and natural gas is actually quite strong. We see some pressure down not surprisingly into Texas and other areas on our energy book and it’s starting to spread as you would expect it would into at the margin real estate and other service providers from everybody from accountants to lawyers than anybody who was in the game as the oil boom started. But you know that’s kind of at the margin and beyond that I don’t know that we see a particular region in the country that is standing out ”

Traveling around the country seeing a little lower activity at the margin

“although I’d tell you, Mike Lyons who runs our C&I business just finished a grand tour around the country, seen a lot of clients and kind of came back with the notion that more so than he saw in the last time he was through, he said people are feeling more margin pressure and at the margin a little lower activity than they otherwise thought they’d see at this point in the year.”

Rob Reilly

There’s a shift in commercial real estate towards more permanent lending

“in terms of our commercial real-estate. We continue to see growth there, not quite at the same levels that we’ve seen in the past years. But the big difference there and it didn’t really sit up in the fourth quarter, but it’s been happening for a while, is the shift in the emphasis in terms of what we’re lending into much, much more around the permanent lending. You can see that in our supplement and less so on the construction sides in terms of a mix. So our commercial mortgage loan balance as you can see it continued to increase quarterly and we would expect that to continue.”

Demchack (cont): “Part was what’s happening is the combination of a lot of the European Banks pulling back post-crisis. And then the lack of volume that’s getting through the CMBS market is continuing the opportunity for what historically has been called Life Insurance product. But basically balance sheeting term loans with good debt service coverage and loan to value ratios kind of as we hit this big CMBS maturity double plus their projects get funded and come online. So that’s kind of where we see the opportunity.”