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.
