Good morning...our bank earnings call reviews continue.
Slowing global growth. Rolling, country-level recessions starting in this quarter.
Inflation causing global reduction in consumer demand.
Europe is the highest warning. US market looks strong. Inflation fighting will take time and strong actions, through second half of 2023.
Asia: concerned with COVID lockdowns.
Geopolitical risks and rates dominate client discussions. Counterparty risk vs. credit risk.
Impressive reserves of about 2.5% funded loans.
CET1 equity levels are equal to regulatory requirements, at 12.2%.
Citigroup benefits from spinning off global consumer business.
Stock buybacks at 13%? Asked by an analyst. Mile-markers:
Net interest income is strong (seems in line or slightly lower than other banks in Q3.
Non-interest revenue is down significantly.
BETA levels are increasing, but lower than expected. This is driven by mix of business towards institutional and operational / corporate, as opposed to retail BETAs which are lower.
Interesting to see that average loans and deposits are both down 2%.
Also surprising to see cost of interest-bearing deposits up in Q2/22 0.53% to Q3/22 1.21%. This is a significant gain.
Reducing (slightly) risk-weighted assets (RWA) by exits and asks for greater collateral from investors. Interesting to see this massive bank look to reduce market exposure. Should be confirmed, as this is material.
Net-Net, in Q4, Citigroup expects net interest income to rise, non-interest income to fall, and non-interest expenses to increase by 9%.
When will revenue growth exceed expense growth? These are multi-year investments, and in years, we should get to an operating ratio below 60%. No direct answer, but it will take years to see revenue growth cover expense growth.
PNC Q3 Earnings Call Highlights
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.
More loans, growth in usage of credit lines. Strong consumer credit card spending activity and slower payment rates on credit cards.
Allowances for credit losses are 1.88% oif period end loans. $200M addition to allowances for credit losses due to increased volume of loans, and uncertainty of the economic environment.
11.3% increase QoQ and 20.6% growth YoY for net interest income. NII growth into Q4 and beyond it. Probably the pace of growth changes in the industry, as deposit BETAs changing, loan growth rates are strong, may not stay as strong, as we move forward through time.
Net interest margin in Q3: 2.83%
Efficiency Ratio: 57.5%
Loan balances are up 3.9% for Q3 (over Q2). Average balance deposits (average): Up 2.1%.
Declines in mortgage revenues and payment services and treasury management fees. Lower refinancing volumes. Payment services fees dropped slightly, due to pre-paid card volume declines (e.g., benefit cards) as they they are more profitable for banks.
Payments revenues (current and forward): credit cards shifted, but fairly strong level of spend (up 10% YoY and up 30% since Pandemic). FX rate on the pound hurt them. Mix of categories is consistent, from hard goods to services, and to non-discretionary from discretionary. Overall levels are still strong.
Historically, consumer deposits increased over time for the past 2 years, and now they are stable, not shrinking dramatically for the past 2 quarters. They are now flat for Q2 and down modestly in Q3. Expect a moderation of spend, but not seeing it yet. Payments revenue growth of high single digits for 2023. Still realistic. Volumes strong, but there is a spend shift (but didn't say where). Inflation should raise the amount of purchases even if the volume drops. Trust deposits are up, and are now 15% of our base. Consumer doing ok. Deposit BETAs are 30% in Q3, up from 20% in Q2, and we expect mid-high 30s in Q4. As rates rise, and the FED is more competitive, we expect to see mid-30s%, more conversion to interest bearing.
FX impacts out of the UK, and volatility, hurt their merchant revenues.
Expenses increased 1.9% QoQ and 4.8% year over year, excluding notable items like preparing for a merger.
Forward Looking Guidance for 2022 (Q4 and Full Year 2022):
Revenue to increase 5% to 6% in 2022 over 2021.
Core expenses up ~2%
Reduce non-interest income.
Taxable rate to be around 22% to 23%. Fee revenue will be lower, but net interest income will be higher.
Credit quality will stay low this year, but should trend higher to historical norms over time.
Basel III Standardized Approach
These numbers came from the executive discussion during the call:
Acquisition of Mitsubishi retail should be positive and provide a 20% return on equity.
Acquisition at scale in their core markets. Less synergies than expected, but earnings should be same. Accretion of mark to market levels (guided in the past). What does that mean? 40% to 50% accretion levels. Not changing guidance on the acquisition.
Manage the balance sheet in a very prudent way. Higher profit relationships. CAT2 by end of 2024 (up to $1T in deposits). They should hit about $800B after the acquisition.
Credit is benign. No early stage warning signs. Worried about the future. Economic slowdown driven by lower confidence levels and reduced spending by consumers and business.
Prudently manage equity, capital and growth.
Balance sheet is strong.
Manage the company for the long term.
Tech infrastructure was invested in...but now positive operating leverage should grow. Focus on the acquisition, and no guidance on operating leverage growth.
Thank you to our employees.
Questions on capital structure:
Widening of the interest rate mark. Looked at 50 bps mark up. Masking on the buy side. 100bps lower than what you are giving us. How is the street getting the math wrong, hedges, or something in the deal protecting UBS. Interest rate moves should be hitting them much harder. Acquisition: Make Whole Agreement to make whole available for sale securities. Also, assumptions on the duration of the AFS / HTM portfolio. Also, manage the portfolio prudently.
$6.25B of tangible assets. Make whole provision on investments, but not necessarily on loans.
Interest rate marks. Loan portfolio quality overall (slightly better, they think).
Mark to market final impacts will depend on many things.
53% HTM vs. 47% AFS, and about 6% of their securities are not impacted by interest rates.
They moved some securities in late July as rates dipped.
Depositors will move from non-interest bearing to interest-bearing as quantitative tightening continues, and interest rates rise. They work on this and maintaining operating balances (e.g., company uses of cash). $130B balances of money market funds. It's a pricing decision whether to bring them on/off balance sheet, and consumer choices.
Residential mortgage business. Gain on sale margins lower. Still excess capacity in the mortgage origination business. Servicing margins dropping too. Gain on sale was down in Q3 (half driven by mix of correspondent and retail origination) and the rest is type/mix of loans.
CRE: important business for us. Large corporate REITS (saw some growth). Homebuilders are pulling back, withdrawing from projects. Middle market CRE pricing still pretty competitive, but extending terms. Pressure in the middle market space.
Portfolio duration is a little over 5 years. AOCI can be modeled that way. Little longer than 5-year period. Restructuring the books options? Might remix the securities portfolio, e.g., increasing HTM.
Investment advisor representative & father of six.