Bill Carcache: Got it. Thank you for taking my questions.
Robert Reilly: And monetize half of the 1.6.
Operator: Thank you. Our next questions come from the line of Ken Usdin with Jeffries. Please proceed with your questions.
Ken Usdin: Hey, guys. Good morning. Just to follow up on the fee side, I think when you spoke in January, you talked about expected slowness in capital markets in M&A to begin the year. And then, I think you were thinking about a 20% growth overall. Just wondering just how that’s looking in terms of the body language you’re getting from those middle market clients in Harris Williams? And then also if you have any other color on what you think the other drivers of fees are going to be? Thanks.
William Demchak: I mean, the Harris Williams pipeline at the moment is larger, larger than it’s ever been, but it’s larger than it was last year, which the first quarter relative to their fourth quarter results, and that’s what drove the quarter-on-quarter change in our total fees.
Robert Reilly: Yeah. We had — so, Ken, to answer your question, we are sticking to the 20% expectation for growth in capital markets year-over-year. Bill is right. First quarter was off elevated at fourth quarter levels. But in terms of the comp, last year in the second and third quarter capital markets was really soft. Harris Williams was really soft. And the pipeline suggests we are not going to repeat that. We’ll be well above those levels.
Ken Usdin: Okay. Got it. All right. And the last one just on, on the asset and wealth side, I think you’ve had some pretty good flows, things like that, that first quarter starting point was more the markets. I know you put a lot of effort into that business. Any sense of just change in terms of like asset flows and new business wins and incremental potential revenue growth out of that business specifically?
William Demchak: We have had success over the last year kind of repositioning who and what we are in the market, bringing in new assets. To accelerate that to a level where it becomes a meaningful part of our company, I think, is a bit of a challenge. It’s a service to our clients, and we’re good at it. But the trends are going the right way.
Robert Reilly: Yeah. I would just add to that, Ken. Obviously, the business is doing well with the equity markets supporting that. The growth opportunity is in the new BBVA markets in the southwest, where you’ll recall, BBVA really didn’t have a wealth management business, so we’re de novo, so to speak, in all those markets. But we’re up and running with teams, inflows, asset inflows are occurring. And long term, that’s where the incremental growth will come from.
Ken Usdin: And one more just follow-up. Is that an area that you could add to organically over time? I know it’s tough just because of multiples and whatnot, but you’ve done it organically, as you just said.
William Demchak: That’s a tough business in my view to add to inorganically. Cultural differences, the way you go to market, the outright price and the goodwill associated with it and the return on equity that comes with that makes it all really difficult to do. And at least historically the opportunity to grow organically is much stronger than going out and trying to add to it through purchase.
Ken Usdin: Okay. Got it. Thank you.
Operator: Thank you. [Operator Instructions] Our next questions come from the line of Mike Mayo with Wells Fargo. Please proceed with your questions.
Mike Mayo: Hi. Looks like we’re leaning into the expense control this quarter, but I’m just trying to figure out ahead. So you mentioned $750 million of cost savings for this year. How much of that was in the first quarter? But you also mentioned $1 billion of extra spending for branches. How much of that was in the first quarter and how should we think about those offsets? And I know it’s a tough fight to get positive optimum leverage this year. Do you feel better or works the same as you did three months ago? Thanks.
Robert Reilly: Well. Yeah, we’ll chunk that down. So we’ll start with the positive operating leverage for this full year. We still think that’s pretty tough, not including any Visa gains, of course, simply because of the NII and the rate issues and those run rates. We do feel good about our expenses. We projected and guided to being stable year-over-year. We’re off to a good start in the first quarter, a little bit ahead where we expected to be, but we still got a long way to go. So all of the items that you talked about there in there, but the guidance is stable over year-over-year, which is important to us.
Mike Mayo: Okay. I’ll shift gears back. Bill, you were talking about commercial real estate. Look, you reserved 10% for office. And you said the value of the underlying properties are probably down 30% to 40% or more. So I guess that is reflected in your reserving, which I think is more than the average bank. Do you see a difference by, and I know it changes by region and subregion and property and type and all that, but do you see a difference by region, whether it’s the big cities? What — give a little sense of that variance because it’s all over the place. You just fill in a few data points around that, that’d be great.
William Demchak: Yeah. Look, no surprise, parts of California are the worst. But it really comes down to the building and the market. I mean, you could have a building that’s in the right place in Pittsburgh, and it’s doing absolutely fine and you could have a building that’s in the wrong place in Pittsburgh, and it’s literally worth zero. And that’s the market we’re playing with right now. Now, inside of that whole thing, we do feel that we’ve been ahead of this game, that were reserved correctly, that we are conservatively taking marks and we had the opportunity to do so. But it’s going to play out over time. And your eyes aren’t lying to you when you look out and see vacancies. And I think ourselves and the large banks have been pretty open about, it’s going to be an issue.
It’s not a massive book of business for us. I’m not particularly worried about it. We’re well reserved, but it’s going to roll through the country and impact some of the smaller banks, I think in a way that is probably larger than people [Multiple Speakers]. Yeah.
Mike Mayo: And just one short follow up on that one. The longer rates stay higher, do you expect this to bleed over from office to other areas of commercial real estate?
William Demchak: With the margin, yes. But it is kind of just at the margin. So you see debt service coverage ratios decline as interest costs take more of the cash flow out in multifamily, for example, rents aren’t increasing at the pace they once were. The massive difference though, Mike, is that all other types, or virtually all other types of real estate are cash flowing. So there’s a value to them, right? They just might not cash flow to support the original amount of debt they had. The problem you have in office is in many instances, there’s no cash flow at all. It’s really a unique animal at the moment.
Mike Mayo: Great. Thank you.
Operator: Thank you. Our next questions come from the line of John McDonald with Autonomous Research. Please proceed with your questions.
John McDonald: Hey, guys. Just wanted to just touch base on how you’re thinking about capital build. Obviously, you’re building organically, you’ve got some Visa that will add 14, 15 bps next quarter, I guess. Are you just kind of thinking of gradually kind of building from this? 10% reported and the 8.3% fully loaded to get to 9% or 10% or so over the next year, do a little bit of buybacks. Just kind of what’s the plan there?
William Demchak: Well, you phrased the question almost exactly correctly, so congratulations. [Multiple Speakers] You think about it inside, we have always moving pieces. So inside of the NPR on Basel III end game. The one thing, it’s all up in the year — but one thing that you got to believe is going to stick as AOCI. And so if that’s the case, then our printed A3 number is kind of a real number, and that would be otherwise too low for us if we want to build that through time. Some of that will happen just from the rundown of the book and some of that will happen through us building capital. The ultimate, where should we be Basel III end game, everything settled out number, I don’t know that we’ve necessarily set yet other than it’s higher than where we sit today on the A3. I think that’s…
Robert Reilly: No. That’s fair. And we’ve got capital flexibility, as you know, John, and that’s where you want to be right now with the fluidity of everything.
John McDonald: And so for the near term, Rob, is this kind of the ballpark $100 million a little bit north of that? Is that kind of the ballpark until you get a little more clarity?
Robert Reilly: Yeah. That’s right.
William Demchak: Yeah.
John McDonald: Okay. Thanks, guys.
Operator: Thank you. There are no further questions at this time. I would now like to turn the floor back over to Bryan Gill for closing comments.
Bryan Gill: Well, thank you all for joining the PNC call this morning. And if you have any follow-up questions, please feel free to reach out to the IR team. Take care.
William Demchak: Thank you.
Operator: Sorry about that. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.
