PNC Financial Services Group Inc
NYSE:PNC
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
128.7
211.04
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
PNC Financial Services Group Inc
You don't have any saved screeners yet
Good morning, and 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 Roley, 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 materials are all available on our corporate website, pnc.com, under Investor Relations. These statements speak only as of July 15, 2022, 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. As you've seen, we had a strong second quarter, highlighted by 9% revenue growth and solid positive operating leverage resulting in PPNR growth of 23%. We maintained strong credit quality and fees rebounded from the first quarter, driven primarily by capital markets activity, including Harris Williams, and continued growth in card and cash management. The strong loan growth and rising rates helped us to increase both net interest income and net interest margin meaningfully. Loan growth was driven by C&I, where new production increased significantly and utilization returned to near pre-pandemic levels. Consumer loans also grew, driven by mortgage and home equity.
Higher rates continued to adversely impact the unrealized value of our securities book. In response, we’ve continued to reposition the portfolio during the quarter, resulting in 60% of our securities portfolio now being held and held to maturity. We returned $1.4 billion of capital to shareholders during the quarter through share repurchases and dividends.
Looking forward, there is uncertainty in the environment we're operating and including the impact of higher rates, supply chain disruptions and inflation. But regardless of the path ahead macroeconomically, we believe having a strong balance sheet, a solid mix of fee-based businesses, continued focus on expense management and differentiated strategies for organic growth will continue to provide the foundation for our success. And our focus is on executing the things we can control and not getting distracted by what is beyond our control.
Along those lines, we delivered well on our strategic priorities in the quarter, including the build-out of our new BBVA and expansion markets, modernizing our retail banking technology platform, bolstering our asset management offering and building differentiated and responsible capabilities for our retail and commercial customers in the payment space. As I've talked about recently at conferences, our performance in the BBVA markets has exceeded our own expectations.
On Slide 3, you can see the strong growth we've generated in these markets across customer segments. In corporate banking, we've seen sales increase 40% linked quarter and maintained a 50% noncredit mix of sales since conversion. We've seen similar growth within commercial banking, where sales in the BBVA USA markets are up 32% linked quarter and noncredit sales to total sales have been approximately 55% since conversion. In retail banking, we've experienced a notable increase in sales for both small businesses and consumers of 16% and 22%, respectively.
And we continue to invest in AMG, and a big part of that is building a strong customer-focused team that can deliver our brand across our footprint. We have built good momentum in our recruiting efforts over the past few quarters, hiring advisers across all areas of the business to help deliver for our clients. I'll close by thanking our employees for their hard work and dedication to our customers and communities.
Moving forward, we believe that we're well positioned to continue to grow shareholder value. And with that, I'll turn it over to Rob for a closer look at our results, and then we'll take your questions.
Well, thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 4, and is presented on an average basis. During the quarter, loan balances averaged $305 billion, an increase of $14 billion or 5%. Investment securities grew approximately $1 billion or 1%. And our average cash balances at the Federal Reserve declined $23 billion. Deposit balances averaged $447 billion, a decline of $7 billion or 2%. Our tangible book value was $74.39 per common share as of June 30, a 7% decline linked quarter, entirely AOCI driven as a function of higher rates.
And as of June 30, 2022, our CET1 ratio was estimated to be 9.6%. Given our strong capital ratios, we continue to be well positioned with significant capital flexibility. During the quarter, we returned $1.4 billion of capital to shareholders through $627 million of common dividends and $737 million of share repurchases for 4.3 million shares.
Our recent CCAR results underscore the strength of our balance sheet and support our commitment to returning capital to our shareholders. As you know, our stress capital buffer for the fourth quarter period beginning in October 2022, is now 2.9%, and our applicable ratios are comfortably in excess of the regulatory minimums. Earlier this year, our Board of Directors authorized a new repurchase framework, which allows for up to 100 million common shares, of which approximately 59% were still available for repurchase as of June 30. This allows for the continuation of our recent average share repurchase levels in dollars as well as the flexibility to increase those levels should conditions warrant.
Slide 5 shows our loans in more detail. During the second quarter, we delivered solid loan growth across our expanded franchise, particularly when compared to 2021 growth rates. 2021, as you know, was characterized by low utilization levels, PPP loan forgiveness, and in PNC's case, a repositioning of certain acquisition-related portfolios. Loan balances averaged $305 billion, an increase of $14 billion or 5% compared to the first quarter, reflecting growth in both commercial and consumer loans.
Commercial loans, excluding PPP, grew $13 billion, driven by higher new production as well as utilization. Included in this growth was approximately $5 billion related to high-quality short-term loans that are expected to mature during the second half of the year. Notably, in our C&IB segment, the utilization rate increased more than 120 basis points, and our overall commitments were 5% higher compared to the first quarter. PPP loan balances declined $1.2 billion, and at the end of the quarter were less than $1 billion. Consumer loans increased $2 billion as higher mortgage and home equity balances were partially offset by lower auto loans. And loan yields increased 10 basis points compared to the first quarter, driven by higher interest rates.
Slide 6 highlights the composition of our deposit portfolio as well as the average balance changes linked quarter. We have a strong core deposit base, which is 2/3 interest-bearing and 1/3 noninterest-bearing. Within interest-bearing, 70% are consumer, and within noninterest-bearing, 50% are commercial compensating balances and represent stable operating deposits. At the end of the second quarter, our loan-to-deposit ratio was 71%, which remains well below our pre-pandemic historic average.
On the right, you can see linked quarter change in deposits in more detail. Deposits averaged $447 billion in the second quarter, a decline of nearly $7 billion or 2% linked quarter. Commercial deposits declined $8 billion or 4%, primarily in noninterest-bearing deposits due to movement to higher yielding investments and seasonality. Average consumer deposits increased seasonally by $2 billion or 1%.
Overall, our rate paid on interest-bearing deposits increased 8 basis points linked quarter to 12 basis points. Deposit betas have lagged early in the rate rising cycle, but we expect our deposit betas to accelerate in the third quarter and throughout the remainder of the year given our increased rate forecast. And as a result, we now expect our betas to approach 30% by year-end, compared to our previous expectation of 22%.
Slide 7 details our securities portfolio. On an average basis, our securities grew $800 million or 1% during the quarter, representing a slower pace of reinvestment in light of the rapidly rising interest rate environment. The yield on our securities portfolio increased 25 basis points to 1.89%, driven by higher reinvestment yields as well as lower premium amortization.
On a spot basis, our securities remained relatively stable during the second quarter as net purchases were largely offset by net unrealized losses on the portfolio. As Bill mentioned, in total, we now have 60% of our securities and held to maturity as of June 30, which will help mitigate future AOCI impacts from rising interest rates. Net pretax unrealized losses on the securities portfolio totaled $8.3 billion at the end of the second quarter. This includes $5.4 billion related to securities transferred to held to maturity, which will accrete back over the remaining lives of those securities.
Turning to the income statement on Slide 8. As you can see, second quarter 2022 reported net income was $1.5 billion, or $3.39 per share, which included pretax integration costs of $14 million. Excluding integration costs, adjusted EPS was $3.42. Revenue was up $424 million or 9% compared with the first quarter. Expenses increased $72 million or 2%, resulting in 7% positive operating leverage linked quarter. Provision was $36 million and our effective tax rate was 18.5%.
Now let's discuss the key drivers of this performance in more detail. Slide 9 details our revenue trends. Total revenue for the second quarter of $5.1 billion increased 9% or $424 million linked quarter. Net interest income of $3.1 billion was up $247 million or 9%. 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 22 basis points to 2.5%. Second quarter fee income was $1.9 billion, an increase of $211 million or 13% linked quarter.
Looking at the detail of each category. Asset management and brokerage fees decreased $12 million or 3%, reflecting lower average equity markets. Capital market-related fees rebounded as expected and increased $157 million or 62%, driven by higher M&A advisory seats. Card and cash management revenue grew $51 million or 8%, driven by higher consumer spending activity and increased treasury management product revenue.
Lending and deposit services increased $13 million or 5%, reflecting seasonally higher activity and included lower integration-related fee waivers. Residential and commercial mortgage noninterest income was essentially stable linked quarter, with higher revenue from commercial mortgage banking activities offset lower residential mortgage loan sales revenue.
Finally, other noninterest income declined $34 million and included a $16 million Visa negative fair value adjustment related to litigation escrow funding and derivative valuation changes.
Turning to Slide 10. Our second quarter expenses were up by $72 million or 2% linked quarter, driven by increased business activity, merit increases and higher marketing spend. These increases were partially offset by seasonally lower occupancy expense and lower other expense. We remain deliberate around our expense management. And as we've previously stated, we have a goal to reduce costs by $300 million in 2022 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.
Our credit metrics are presented on Slide 11. Overall, we saw broad improvements across all categories. Nonperforming loans of $2 billion decreased $252 million or 11% compared to March 31, and continue to represent less than 1% of total loans. Total delinquencies were $1.5 billion on June 30, a $188 million decline linked quarter, reflecting lower consumer and commercial loan delinquencies, which included the resolution of acquisition-related administrative and operational delays.
Net charge-offs for loans and leases were $83 million, a decrease of $54 million linked quarter, driven by lower consumer net charge-offs, primarily within the auto portfolio. Our annualized net charge-offs to average loans continues to be historically low at 11 basis points. And during the second quarter, our allowance for credit losses remained essentially stable, and our reserves now total $5.1 billion or 1.7% of total loans.
In summary, PNC reported a solid second quarter, and we're well positioned for the second half of 2022 as we continue to realize the potential of our coast-to-coast franchise. In regard to our view of the overall economy, we expect the pace of economic growth to slow over the remainder of 2022, resulting in 2% average annual real GDP growth. We also expect the Fed to raise rates by an additional cumulative 175 basis points through the remainder of this year to a range of 3.25% to 3.5% by year-end.
Looking at the third quarter of 2022, compared to the second quarter of 2022, we expect average loan balances to be up 1% to 2%. We expect net interest income to be up 10% to 12%. We expect noninterest income to be down 3% to 5%, which results in total revenue increasing 4% to 6%. We expect total noninterest expense to be stable to up 1%. And we expect third quarter net charge-offs to be between $125 million and $175 million.
Considering our reported operating results for the first half of 2022, third quarter expectations, and current economic forecast for the full year 2022 compared to the full year 2021, we expect average loan growth of approximately 13% by an 8% loan growth on a spot basis. We expect total revenue growth to be 9% to 11%. Our revenue outlook for the full year is unchanged from the guidance we provided in April. However, relative to our expectations at that time, we now expect more net interest income from higher rates, offset by somewhat lower fees.
We expect expenses, excluding integration expense to be up 4% to 6%. And we now expect our effective tax rate to be approximately 19%.
And with that, Bill and I are ready to take your questions.
[Operator Instructions] And our first question comes from the line of Gerard Cassidy with RBC.
Rob, can you elaborate a little further on the deposit beta change? Is it purely just the rate of Or is there a deposit mix that's also influencing your new outlook for the beta?
Yes, probably both, but a little bit more of the former. We're just at that point now where we're seeing rates rising to the point where the betas are becoming active. They were not that active on the consumer side, a little bit on the commercial side in the first quarter, and that's picked up a bit. More on the commercial side as we expected, and in our case, it's our nonoperating deposits that explains the decline there in the second quarter. So betas are beginning to move. We expected that, and we're ready for it.
Very good. Credit quality, obviously, was quite strong for you folks, similar to the prior quarter. And Bill, I don't know -- I know there's a lot of uncertainty out there with what's going on in the world, but it just seems, for your company at least, you are so well positioned from a credit quality standpoint. And is it -- are we just going to go off a cliff or something at the end of the year with some sort of big recession that has frightened everybody about credit quality for banks in general? Any elaboration on your outlook on credit and the outlook for the economy?
Yes. Look, I don't think there's any cliff involved. I do think that the trouble ahead lies somewhere in the middle of next year not any time in the next 6 months. But what you're seeing inside of our credit book, you got to remember that during this period of time, we continue to kind of run off a higher risk book from BBVA, and our loan growth is largely in higher quality names. So the overall quality of our book actually improves quarter-on-quarter.
Eventually, that has to stop. And eventually, I think the Fed has to slow the economy to a pace to get inflation under control, and I think that's going to be harder to do than the market currently assumes, and I think it's going to take longer than the market currently assumes. And when that happens, we're going to see credit costs go up at least back to what we would call normalized levels. But I don't think -- I don't see any particular bubbles inside of the banking system as it relates to credit. I think you're just going to see a slow grind with credit losses increasing over time as we get into the slowdown.
And some normalization.
I'm sorry, what was that Rob, I'm sorry.
Saying just -- and Bill mentioned it, Gerard, just some normalization, which is inevitable.
And our next question comes from the line of Bill Carcache with Wolfe Research.
There was a time where you talked about increasing the mix of your securities given all the liquidity in the system. But as the Fed engages in QT, and with the strong loan growth that you're seeing, could we see you go the other way and perhaps redeploy some of your securities portfolio paydowns to fund more of your growth such that you actually remix more -- a larger mix of your earning assets towards loans?
I think, over time that is probably likely if we continue to see loan growth we do. But you shouldn't mix security balances with the way we think about fixed rate exposure hedging our deposits, right? Securities are one way we do that, swaps are another way, and then, of course, our fixed rate assets themselves. And then inside of that, the duration of the securities we buy.
So long story short, the balance is probably decline, but we're sitting in a period of time right now where we're very asset sensitive. You'll notice our balances basically stayed flat through the course of the quarter as we kind of purposely watch and let things roll off here given our view on what we think longer term rates are going to ultimately do. So balances could go down just as a matter of sort of algebra in the balance sheet, but our ability to invest in rising rates is still there in a large way.
Yes, that's right. Well, the context -- Bill, as you know, the context of your question is historically pre sort of the rapid increase in liquidity over the last couple of years, we did run about 20% of our securities to our earning assets. We raised that because of all the liquidity in the system. So we're still pretty high on a historical basis, but it's still -- Demchak just said, that's not likely to change anytime soon.
That's very helpful. And separately, as the Fed proceeds through the hiking cycle at some point, I think as you've both alluded to in your comments, that's going to presumably slow the pace of growth. But taking your loan growth guidance higher for the year, maybe could you speak to how much of that improved outlook is idiosyncratic because it certainly does sound like that you're expecting a deceleration at some point at the macro level.
A lot of it just comes from our ability to win new business. Utilization rates have largely approached where we were, I think, Rob, pre pandemic at this point.
Yes.
So there's a little bit of room there. But these new markets and our -- just our ability to win new business. And by the way, new business that is 50% fee-based is pretty strong. And we feel confident we'll be able to continue to do that independent of what happens in the economy.
Yes. And I would just add to that. In terms of the loan growth outlook for the 12 months, we're up a bit, mostly because of the outperformance in the first half relative to our expectations. So that's sort of truing up, so to speak.
Got it. And if I could squeeze in one last one. I think it's interesting, Bill, to think about your commentary around the normalization of credit as the Fed proceeds through its hiking cycle. And sort of we think about the long and variable lags that between monetary policy and when that ultimately starts to show up in credit, and then when you sort of juxtapose that with what's happening with reserve rates, which it's notable that for most of your peers, they've drifted below their day 1 levels. And I know, for you guys, there's a BBVA deal and lots of other moving parts, but that [1.65] seems relatively conservative.
How are you thinking about the trajectory of that from here in the context of the thought process you just laid out of the Fed hiking cycle eventually leading to credit normalization probably as we get into maybe the middle of next year or somewhere in that time frame?
That's an impossible question to answer given the dynamics of CECL. But you should assume -- we assume that, all else equal, credit quality is going to deteriorate at some pace from here through the next 2 years. I just don't think it's going to be all that dramatic. And it almost has to be a true statement given the charge-off levels that we've been seeing.
Right. And I would add to that, our reserve levels are above our day 1 fee so even adjusted for the BBVA acquisition, we're appropriately reserved. Now -- and feel good about it.
And our next question comes from the line of Ken Usdin with Jefferies.
Just wanted to just ask to dissect a little bit. Rob, you mentioned that your outlook for NII is a little bit better. Your outlook for fees are a little softer. The NII one, I think we get, just wondering if you can help us understand now what kind of curve you're building in? And is it more just that uptick of rates that offsets that new 30% beta outcome?
Yes, that's right, Ken. Yes, that's exactly right. So higher rate environment, NII and the balances that we've generated contribute to the improved NII look. And then you sort of referenced it in terms of the fees, mostly in terms of our full year expectations compared to what we thought at the beginning of the year and last quarter, some softer on AMG and mortgage, as you would expect, with the equity markets performing like they are for AMG and interest rates on the mortgage side. So it's sort of a -- the trade-off of the higher rates.
Got it, right. Sorry, I missed your 3.25%, 3.50% comment from earlier. So thank you. And then just on the fee side then, you had a really good bounce back as you expected, especially in the capital market. So what's your -- what's changed there in terms of what you're seeing as far as the outlook on the fee side?
So on the fee side, again, for the full year, most of the change relative to our full year expectations is within AMG and mortgage. On capital markets, you'll recall, we had a soft first quarter relative to our expectations. We did see the bounce back in the second quarter. So we're back in position with our full year expectations in the second half, obviously remains to be seen.
Okay. And if I could just sneak one more in. You mentioned -- Bill, you mentioned all the different ways that you can get exposure to variable rates and such. I'm just wondering, how are you guys thinking about just swaps portfolio, you had done some adds in terms of protecting and managing the near-term upside versus the potential of what happens down the road based on Fed funds, Futures curve expectations and your general view of the economy.
We don't think about the swaps book separate from our basic investing and fixed rate exposure. Where we sit across the securities book and swaps and everything we do fixed rate, we're looking at a curve now where I kind of think the year-end rates, in my own mind, are probably largely right, but I think there's a -- I think the assumption that the Fed is going to start easing in the spring of next year is absurd, which means we're holding off at this point because we think there's going to be -- there's still value to be had in the longer end of the curve as people come to the realization that inflation isn't as easy to tame as people might assume. And separately that the Fed isn't going to immediately cut simply because the economy slows if inflation is still running high.
So we're going to sit pat, but not -- we don't think swaps are one thing in bonds or another. We just -- we look at our interest rate exposure. We're very asset sensitive. We have an opportunity to deploy in multiple places. We're just not doing it. We basically let everything run down thus far this year.
And our next question comes from the line of Erika Najarian with UBS.
I'm sure if this is the question I can ask, but I just wanted to clarify the loan growth expectation rose, the performance has been spectacular, the revenues didn't move even though we had the higher loan growth and the higher rate outlook, and that's because of the higher beta assumed and also lower fees, Rob?
Well, in part. I think the earlier question you might have missed it, Erika, was the improved outlook for the full year loan growth. The answer was most of that was a true-up to our outperformance in the first half. So we grew loans faster than we thought we would in the first 6 months, which is great. So we true-up that full year expectation. So all of that is built in to the full year guidance.
Part of the impact that we're seeing in NII and NIM is actually on our loan yields, where the quality of our book is it improves fairly substantially. We've put a lot of very high-grade stuff on. And spreads have actually come in quarter-on-quarter. So when we look at the out forecast on NII, together with loan growth, which will be pretty healthy, we have in there -- embedded in there this notion that spreads are tighter than they were as we basically improve the quality of the book.
That's another component. That's right.
Yes.
Got it. And just as a follow-up question. How should we think about deposit growth from here? Bill, I think you've been the one that has been vocal about the notion that if loan growth is positive, deposit growth should be positive. How should we weigh that relative to probably your willful desire to work out the nonoperating deposits out of your balance sheet and QT.
Yes. Well, it's a good question, and the answer remains to be seen a little bit. We've clearly seen the larger corporates move liquidity out of the banking system into money markets, government money markets. And I think, as we go forward, the combination of QT from the Fed and what they do with their repo facility is going to drive some of the yield available in those funds, which in turn is going to drive how much of that sits on bank's balance sheets or not.
Outside of those deposits, it's more about a rate paid game. And I think deposits kind of inside of the retail space and the smaller mid-market commercial space, I think deposits actually grow simply because of the loan volume. But the mix shift that we've seen in commercial from a little bit less noninterest-bearing into interest-bearing, that game is going to play out.
So thus far, I mean, if you look at total liquidity in the system, it really hasn't moved. And of course, the Fed hasn't really started their QT program yet. What we've seen is a movement of liquidity from banks into money funds as money fund yields started to grow. So this is going to take a while to play out.
Yes. And our expectations, Erika, are generally stable, but Bill pointed the mix could be different. And then an open question on the nonoperational deposits, which we'll either do or not do.
Yes. A big part of what we've seen go thus far are kind of deposits that we don't really care about. They were -- we kind of call them surge deposits internally, which were noncore clients' parking liquidity that now have kind of gone into funds.
And importantly, are, by definition low margin.
Yes.
Got it. And my last question, Bill, you said earlier you don't really see any bubbles within the banking system. I think a lot of investors are more concerned about what's outside of the banking system. And interestingly, I'm sure you know this statistic very well. Corporate lending in terms of the bank share of it has declined to 16%.
I guess my question to you is, do you see an opportunity as rates rise and the economy slows down, is some of that market share available back to banks in terms of what's happened in the private market? Or was that never credit that you wanted to do anyway? And don't you have a unit within P&C that does third-party recoveries in terms of if you have corporate defaults, you could be a third-party recoverer if that's the term.
Yes. Well, first, I want to see the audit on only 16% of corporate credit being inside of banks, but I'm sure there's some way you can get that right.
Yes.
No, we -- its credit outside of the banking system melts. We play in that in 2 ways. One is, if it's in the real estate space, we do that inside of our special servicing arm in Midland. Two is we are very good at working corporate credits, and we wouldn't be afraid of buying portfolios of troubled assets. And three, and I think this is what you're referring to is in our asset-based lending group, we play the role of senior lender on a very secured basis for -- and basically the agent for the entire capital structure. And as pieces below us struggle, the fee opportunity for us to work those loans out on behalf of the B lenders is quite high.
Furthermore, we continue to be approached by multiple B lenders to basically run their books as they look at what's coming their way. Thus far, we haven't agreed to do any of that. And were we to do it, I think it'd be quite lucrative.
And we've done that in the past.
Yes.
And our next question comes from the line of Mike Mayo with Wells Fargo Securities.
Can you hear me?
Yes.
Okay. Great. I guess all these questions get down to NIM. So are you forecasting deposits to run off for the year because you've mentioned betas are starting to move. And I missed the updated guidance because you're guiding for good NII growth. So how much deposit runoff are you assuming in your deposit growth?
I can jump on that, and we covered some of that, Mike. Generally speaking, and we recognize the fluidity. For the second half, we're calling for stable deposits, some mix change between noninterest-bearing and interest-bearing also an open question in terms of nonoperational deposits and what betas are required for that and whether we choose to keep those or not. So that all remains to be seen. But the outlook is stable. And NIM, we do expect to expand.
And you talked about tighter loan yield spreads just because you're going up in quality. Are you getting rewarded for this more uncertain outlook? I mean, capital markets, some assets are pricing at near recession levels, but I feel like the lending markets are not doing the same. And are you getting more spread for the added chance of a recession?
It depends on the lending sector. So we are, for example, an asset-based -- straight spreads on high rated stuff has kind of stabilized. A lot of what we're seeing is just a mix shift in the quality of our book, not a change in the market in terms of spread where I think the market continues to be irrational is on the consumer side. So auto lending seems, in our view, to be a little bit of a bubble, and some of the things we're still seeing being done on the consumer side. But on the corporate side, on the real estate side, the shift is moving back towards the banks in terms of our ability to negotiate and get spread and get covenants and get structure. Just not a dramatic shift the way you've seen in some of the headline stuff on capital markets related issues.
So you're getting some of that. Bill, can you put this in context, this looks like the fastest commercial loan growth in 14 years. And we haven't had a cycle like this in quite some time. And I guess, I'm repeating, I think what you've said in the past. It's inventory, it's credit utilization, it's capital expenditures, it's working capital, some business from capital markets back to the banks. Did I miss anything there?
No. I mean it's -- thank you for reminding. I mean that's what happened, right? We've had inventory build and CapEx and a little volume back to the banks and boom, you get big loan growth.
Yes, in particular, and it overlaps, Mike, particularly on the utilization, which has grown.
Yes. But that's coming off of their inventory, Bill, which overlaps.
The one I didn't mention that some other banks have mentioned, you did not. So I don't want to leave the witness here, but in terms of gaining share from nonbanks, because you're seeing some nonbank entities not on a solid footing as they were in the past. Are you gaining share from them? Do you expect to gain share from them? Are there opportunities to do so? Are you shifting resources because I get it, you're the national main street bank, you're in 30 MSAs. You have a lot on your plate to try to gain share in all those markets. Meanwhile, you have some verticals where you might be able to gain share. What are you doing to try to capitalize on that?
Yes. Mike, most of those players play in a risk bucket that we don't like to play in, right? So the exception to that is, in our asset-based lending book, where borrowers who might have been able to do a cash flow loan with a BDC at one point are now going to come back to the banks and do it asset-based. But on the consumer side, the guys who are out there playing subprime consumer or even in the leverage lending side, cash flow unsecured, we just don't have a big book of business there, nor do we want one.
Okay. And my last one, just on CECL. You didn't -- I mean you beat on credit. Your credit is great. You've always been high quality. You proved it through the global financial crisis. We get it. But with all this talk about a recession out there, doesn't that give you cover to go ahead and increase reserves. Like, I get it you're above day 1 CECL, but why not just take more reserves out of conservatism?
It's -- we have a model and we run by a model. So we're not allowed to just --
That's right.
As much as I'd like to sometimes put my thumb on the scale. We're not --
We don't do that. We don't do that. CECL is a model-driven approach. And as you pointed out, Mike, we're above our day 1. We're appropriately reserved relative to our book.
And our next question comes from the line of John Pancari with Evercore ISI.
On the -- back to the commercial loan growth topic, I'm sorry if I missed the detail on it, but I know you mentioned the $5 billion in high-quality, short-term loans that were brought on that you expect to mature in the second half. Can you give a little bit of color on that -- on those balances and what drove it? And maybe a little bit in terms of outlook, could you see additional flows in that type of lending as well?
We'd like to see additional flows in that type of lending.
Sure.
It's kind of -- that was client -- a handful of clients, but client-specific timing issues that we were able to serve client needs and their big balances, and they're going to run off.
And we'd like to do that.
Yes. That happens again, that's great. But these were specific ones we called out both because of their size and also because there are lower spreads in the rest of the book and that had some impact on the loan yield this quarter.
Okay. And then also related to that, in what areas do you expect that you could see some moderation in commercial loan demand as we do get some slowing in economic activity if the Fed succeeds here with the tightening?
Eventually, what you're going to see, we've seen utilizations go up as people have built inventories. Now that will reverse itself as we get into a slowdown and people struggle to move inventories, it will peak and then they'll grind it to a halt. But I think that's going to end up being the driver. We'll continue to go work and gain share. And ultimately, against the money we put out, we look at what happens to utilization and utilization will start to drop through a slowdown, peak early into it and then slow down as they try to free up working capital.
Okay. Got it. And then back to the most reserve front. I hear you again in terms of the adequacy of your reserve. In your scenarios, do your economic scenarios that you run that support CECL, did they get worse at all versus last quarter? Or did they -- like how did that change? And then separately, did you have any reallocations within the reserve that were noteworthy, like coming from commercial going into consumer. Can you maybe talk about that? So just trying to get a better feel of your confidence --.
Without getting into the details of CECL, I would tell you that we -- within our overall provision, we added 2 reserves as a function of the scenarios we run.
Yes. I mean, it's pretty stable, John. So no big mix changes, no big dollar changes. The percentage came down a little bit just because of largely the high credit quality, large underwritings we just spoke about improving the mix. So pretty much unchanged.
Well, no, so to clarify that. In terms of the dollar amounts and the stable. But inside of that, obviously, our scenarios built in some worsening concepts. But there's QFR as part of that process that offset that. So end of the day, stable.
And our next question comes from the line of Ebrahim Poonawala with Bank of America.
I guess just 1 follow-up, Rob. In terms of as we think about the outlook for deposit betas and margins, if the Fed stops at the end of the year, you talked about the deposit beta and deposit growth expectation in the back half. But give us a sense of the asset sensitivity profile of the balance sheet in a world where the Fed stops hiking, the 2.10 remains inverted for 6 to 12 months. And as Bill alluded to, we may not get cuts as quickly. In that backdrop, do you still expect the margin to drift higher? Or do we start seeing some liability sensitivity where deposits are repricing higher, but you're not seeing the benefit on the asset side?
Yes, yes. We don't give explicit NIM outlook. But I would say your question is when does NIM peak. We see NIMs continuing to expand and peaking in '23. So with everything that you described we still see upside in them.
Got it. So safe to assume that even in a backdrop where the Fed stops hiking the NIM should still at least drift higher a bit for a few more quarters. So point noted.
Yes, possibly. And again, we're in sort of that context, we're talking about '23 then. 2023.
'23, Yes. And I didn't mean to pin you down or ask for 2023 guidance. I'm just trying to conceptually think if we go into this period where we've not been where the curve remains flat to inverted for a while, what that does to the NIM and it's not unique to you, but I appreciate the color.
That's right. That's right.
Yes, you have to. The number of pieces that are moving inside of that, even if let's assume they get out there and they just freeze and you have a small inversion in the curve and you sit there, in that instance, betas probably don't move from wherever they were post the last hike. And instead, what you're going to see is a increase in fixed rate asset yields that basically roll off from very low yields into higher yields. And then the upside to the extent we want to deploy at that point. So you see a gain in yields inside of the security book in a static environment simply because everything that was purchased with 1.5% handles rolls off.
Yes. That's right. That's why we're still -- some part -- some ways from the peak.
That's fair. I appreciate the perspective. And on the lending side, just still wanted to follow up on 2 things. One, like, do you have a sense of where customers are in terms of rebuilding inventories like that's been a big driver of growth for the last 2 to 3 quarters. But compared to pre-pandemic, are customer inventories back to those levels? Like how would you frame that? And secondly, I would love to hear your thoughts about just outlook for the commercial real estate market in this backdrop, especially if we get a recession? You've been cautious in the past, so would love to hear your thoughts.
The inventory question is all over the place because you have a bunch of customers who have more inventory than they want. And you have others who are still struggling to build inventory to keep up with supply because of continued supply chain disruption. So I don't know that there's a simple answer on inventories.
Real estate, with the exception of the slow burn on office, where we just -- we continue to be worried, we continue to see slow deterioration, we think we're really well reserved. But absent that kind of slow burn, the rest of it continues to kind of do okay to improve. And I think that holds even at least on the slowdown that's in the back of my mind. Again, I just don't see some big spike into a really ugly recession. So we have our eye on real estate. We have exposure into the office space that we’re reserved against. It's kind of doing what we expected. And beyond that, we're not particularly worried about it.
Yes. And, to your point, we're well reserved. And multifamily, which is the biggest component of that, is very strong.
Got it. And just 1 quick one. Sorry if I missed it. Did you talk about the pace of buybacks. How we should think about that in the back half of the year?
I did in my opening comments. We're going to continue buying back shares roughly at the average rate of what we've been doing the last couple of quarters.
Our next question comes from the line of Matt O'Connor with Deutsche Bank.
As we think about loan loss reserves in, call it, a moderate recession, how high or how much add do you think you have to do? I think, for COVID, it was around $2.5 billion X the day 1 CECL impact. But obviously, there's been a mix shift, the BBVA deal and a lot of factors. But as you guys run your stress tests, what would cumulative reserve bill be for a moderate recession?
No way to answer that.
I was going to say that, Bill said there was an earlier impossible question. Yes, that 1 might be number two.
But, I mean, remember that reserve build in COVID, the scenarios we are running, I don't remember off the top of my head if it’s the kind of employment to 15%, higher GDP. We're not -- this has nothing to do with that, right? We're going to go into a slowdown and we're going to see an increase in reserves at some point, but they're not even going to be related to the thing we saw when COVID hit [Multiple Speakers] economy down.
--recovery.
Yes, just in terms of size. So you almost have to take that whole example set and remove it from the framework of how you think about provisions going forward.
Right. So it seems like you're implying, and we've heard from some others that it should be a lot less. But I guess we'll see.
No, no. I can't – Matt, I mean --
Yes, right.
Only if you think about what those forecasts were, right? I mean, do you remember, they were unemployment going to --
15% to 20%.
15% Yes. I mean it was I don't think there's anybody out there who thinks we have to cater the economy by that amount to get inflation under control. That was -- look, there could be some world event that causes that, but it's not going to be a function of the Fed raising rates and slowing the economy to get inflation under control.
Yes, agreed. I mean obviously, that's what the market’s still worried about. And it's just interesting, if you put it relative to capital, even if you did what you did for COVID, it's only 50 basis points of capital. So --
Matt, look you're bringing up -- this whole issue is the issue, I think, that investors just have completely wrong about the banking system right now. If you look at the market cap that's been pulled out of the banking system and take your worst case reserve build and charge-offs through some cycle, it's just wildly wrong. Yes. We'll have increased losses, but --
Not to that extent.
Not to anything close like what we put in during COVID. And more importantly, I think there's a growth opportunity through a mild downturn for us, just given the way we run our business and the business that will come back into the banking systems and out of the capital markets. So I am personally confused about all the concern that sits out there on banking reserves and the coming recession and the impacts on the profitability of banks. It will hurt a little bit, but --
To your point, if it's being extrapolated from COVID scenario --
It's just -- again, that's a data point that needs removed.
Right.
And then just the flip side got a little over $8 billion of losses in OCI. Obviously, a lot of that comes back over time, the part that's related to the bond book. Just give us a rule of thumb like how much of that accretes back each year if rates stay here on the kind of the medium, longer-term part of the curve?
Well, the held-to-maturity accretes back independent this point. And I don't know you guys --
We disclosed that, Bryan. It's a couple of hundred million.
Yes. You can say that.
I mean the way we kind of think about it internally, given how much we moved is we ought to have pulled a par on the held-to-maturity book adding to our capital base at a pace that largely hedges us against further declines in AOCI and the available-for-sale book, depending how much of a spike their rates are versus the rolled up. But we feel pretty good about the mix we have at this point. And obviously, it's not impacting our capital flexibility vis-a-vis the way we look at AOCI in terms -- inside of regulatory capital.
Yes. And I guess what I was asking is like if we just think over the next few years, right, like all that OCI eventually gets reversed back as the bonds mature, you are saddled with $8 billion of losses like a lot of banks, having a drag. I'm just wondering what's a good rule of thumb? Does that $8 billion come back, kind of maybe $1.5 billion, $2 billion a year or something like that?
I mean, let's say we've got a [indiscernible] 7 years or something.
Well, the short answer is approximately $200 million a quarter, $1 billion a year. So that's the number you're looking for. But that's the right neighborhood.
Sorry, that's out of the held to maturity.
Held to the maturity. Yes, the held to maturity.
We have a separate AOCI loss available for sale.
Which is dependent on rates. Right.
[Operator Instructions] And our next question comes from the line of Betsy Graseck with Morgan Stanley.
Just 1 follow-up on that, on the AFS book. I guess the underlying question is, is the duration roughly the same as the HTM book. I get that rates will move that mark around, but let's say, rates never change. Is it the same duration as HTM?
Yes, roughly. Yes, roughly.
Yes. Yes. Okay. And then just separately, I know there's a lot of questions earlier about deposits, et cetera. And I'm just wondering, your loan-to-deposit ratio, I think, today is around 70%, maybe 71%. And in 4Q '19, it was at 83%. So there's lots of room there in the LDR. I'm wondering how you think about it is -- are you happy to go back to 83% in the near term? Or is there a trajectory or a pace that you're comfortable with?
Look, if it's high quality, we'd love to go back to 83%. If it's in our risk box and coupled with client relationships where we have really strong cross-sell, that would be a great outcome.
Well, that also relates to the deposit pricing and what we choose to do. So yes, you're right. We have room and flexibility there as we go through these increased betas and a growing loan environment.
Right. So part of the question is just trying to get a sense as to the pace of LDR increase you kind of control with the deposit pricing?
Right.
So you could let a lot more run off before you start to --
Yes. Yes, that's my point. That's the flexibility so we can, and we can view these deposits in terms of whether we want to take for that --
No. I don't think. I mean, look, our intention here is to keep deposits and grow deposits if we can without having to be aggressive on rate. It's very simple. And inside of that, we'd like to grow loans. And if we manage to do the 2 things there and grow loan to deposits to 83%, we'll be making [Expletive] load of money given the fee mix we get when we grow loans.
That's a good --
That would be a great thing to be able to do, and we’re going to work on it.
Yes. Well, I mean, I guess part of the question is you don't have to be more competitive on deposit rate right now, you could wait a few more quarters and then move.
Yes. That's what I said.
Yes.
Our next question comes from the line of Mike Mayo with Wells Fargo Securities.
I wanted to follow up just because, Bill, you're just -- seem so adamant that the market cap that's been taken out of your stock far exceeds credit loss hits that you have in a scenario. So a personal question. You've owned a lot of stock for a long time. You have a lot of skin in the game. At what point would you put more skin in the game and buy some shares? We haven't seen that I think, by any bank CEO. And if you think this is a dislocation and you think it's so unlikely to have some kind of deep recession, global financial crisis, pandemic sort of situation, have you thought about that? I mean, would you do that?
I think about it all the time. I don't know when I go into details on my own financial situation, but it's -- I see a lot of value there. It's interesting. We've had a bunch of senior execs actually enroll in our employee stock purchase plan --
That's right.
Which maybe is a simple way for me to get a few shares here and there. But look, I think there's a lot of value. I don't know that you're going to see me make a giant purchase because, as you said, I own a lot of stock, and it's most of my net worth.
Just an extra tone from the top, but I guess you said it on the call. Just one more time on that question. Again, you have this disconnect between pricing the capital markets with some other areas and your own expectations. So what you're saying before is that the power or the control has gone back to the banks from the borrower in terms of terms and structure, maybe not the same degree of pricing though. And I'm just -- it's that pricing element that -- it's tough for you or anyone to really know how much you should be pricing these loans if you think we might be going into a recession. So how do you get to that level?
Look, it's -- I mean pricing ultimately is market-driven. And it's -- I would expect, for a given credit quality, we're going to see small backup. Of course, pricing is also based on a grid. So as we go into a slower economy and people run another turn of leverage given their performance, we'll see jumps in spreads that's built into the existing contract because spreads are performance based on a lot of the loans that we do. So I -- -- we'll get there.
More important to us, Mike, is the cross-sell that we ultimately get. At the end loan prices -- as long as we get good structure, pricing is important, but pricing along with the majority of the TM relationship and capital markets business really ups the return that you get from that client relationship.
And there's a structure component. There's a lot of good companies out there that don't have structures that we would lend into that they could change that.
And then I guess one more. Just in terms of your 30 MSAs or your newer markets, your BBVA markets, do you have any metrics on what market share you have there versus your legacy franchise? Because that would size the opportunity.
It's small. Big opportunity. Opportunity is big.
Big opportunity. We don't need to worry about that right now. We just need to do more.
There are no further questions.
Thanks, everybody.
Thank you.
Thank you. That does conclude the call for today. We thank you for your participation and ask that you disconnect your lines. Have a great day.