As we listen to the earnings call, here is what we are learning.
Net interest margin increased 32 basis points, which is a record for many years. Credit quality is unchanged over the quarter. Capital strong, and returned $1.7B to shareholders through common dividends and share buy-backs.
PNC, a national, main-street bank.
They borrowed more from the Federal Home Loan Bank, up by $8B in the quarter.
CET1 ratio is 9.3%.
Higher mortgage loans and credit card balances, offset by automotive loan decreases (overall up $1.5B of consumer loans). Credit cards usage is up. That is good for them. They just raise prices as risk raises, but don't change credit availability. They lend to the higher levels of credit (investment grade for corporates and prime for consumer).
Consumer deposits down 2%, or -$4.3B. 68% interest bearing. Commercial deposits grew at the end of the quarter. So far in Q4, deposits are increasing but expect stable to down a bit.
Stable to down in consumer, and consumers are spending more. Inflationary pressures.
Interest costs increased.
Cumulative BETA Q3 is 22%, will rise to 30% by year-end. Deposit BETAs.
Securities grew and yield increased to 2.21% or 21 bp. 80% of purchases directly into HTM, 66.4% overall HTM. AFS is 33.6%. AOCI -$10.5B. They expect those values to fully accrete back per year, or 5% per quarter. Ouch.
They use derivatives, and made $13M this quarter, but lost $16m last quarters.
They are reducing operating costs to fund internal investments (e.g., technology).
Provision for credit losses: $241M to account for uncertain economic outlooks.
Delinquencies increased by 8%, but many are being resolved. Net charge offs, 15 bps, are at historical lows. Very strong credit quality metrics. Total reserves are 1.67% of total loans.
They expect 125bps raise by the FED FOMC, 75bps in October and 50bps in December.
Buybacks came in higher than the $750M planned for Q3. Active repurchase event underway. Following BBVA acquisition, they are expecting to average $700M to $750M in Q4 share buybacks.
NII: It is somewhat self-evident. NII goes up as interest rates are raised by the FED. Loans will earn more, and deposits cost more too. When the FED is done, they increase rates on deposits (BETA). The roll-down of securities (as they mature), and we can reinvest at higher yields.
What about swaps on rates? What happens to the high end of the rates schedule (as they grow)?
Can NII continue to grow in Q4? Capital dropped $4B to $5B. Flat to more asset sensitive due to rates. We let things roll off, replaced them, but not added. Letting things roll-down (4.6 year duration). Duration of the swap book is 2.3 years.
Current investments: 4.6 year duration. Rates from one handle to 4.5 plus. We are much more exposed to 'down rates' than we are to 'up rates.' They limited investments with swaps and bonds. They are more worried about down rates, because they make more money as rates rise. They have capacity to buy more assets, but are not yet. Waiting to see what happens. More asset sensitive.
Why go asset sensitive for the last 6 months? Arguments with the economics team. We would need much higher rates to fight inflation. Don't buy anything when you know rates are rising. It's obvious.
Consumer money is stickier than expected is the answer to why are deposit BETAs better than everyone modeled? Corporate and money markets are doing what is expected, but consumer money is sticky. Repricing is stickier and slower than everyone assumes.
Back of the curve will sell off. They go negative in 3 months on rates. If the FED stops, and inflation keeps going (low 3s and sticks there), then the long bonds will sell off more. Deposits gathered through Covid sticky? Following the flood of liquidity into the system, we will see it recede. They see the shift towards interest-bearing. 33% non-interest bearing and 66% interest-bearing.
Bank executives perplexed why the FED would want to add additional 'too big to fail' oversight to the US regional banks. Not necessary, these are not systemically risky companies.