00:00There is the notion out there that that K-shaped economy, it's only being exacerbated by what we're seeing right
00:06now when it comes to higher energy costs and, you know, persistent inflation here.
00:10I'm wondering what you're seeing when you survey the scene from your perch and whether or not, you know, you
00:16think lower income consumers are being left out by some of the biggest banks.
00:21Well, they're not being left out by the banks, but, you know, even before the situation in the Middle East,
00:30you know, we saw U.S. consumers at the lower end of the income spectrum getting squeezed by rent, by
00:35health care, by insurance costs, by food.
00:38Now you're adding gas to that mix. And even though, you know, gas is three or four percent of a
00:43household's expenditures at that level, it starts to make a difference.
00:48At least for today, consumers continue to spend. So we haven't seen slowdown in discretionary spending from that lower income
00:59consumer.
01:00But eventually that kind of has to happen unless, you know, unless prices go, you know, gas prices and other
01:08things decline or wages go up.
01:10And it's interesting. I mean, how do you approach that from the perspective of being the CEO of PNC?
01:16You know, affordability is a problem right now. And I wonder, you know, if you look to past cycles, whether
01:23there's anything instructive there.
01:29I mean, I guess I would just lead off with the fact that, you know, despite the change we've seen
01:36in the, you know, the share of a consumer's wallet that now is going to staple goods in effect, the
01:42consumer is really healthy.
01:43Right. Employment is strong. You know, the consumer is still spending.
01:48We're not in this place where they're over levered. Their balance sheets are good. Housing's strong if they're, you know,
01:53if they're a homeowner.
01:55So I don't know what to compare this to other than it's getting worse than it was yesterday.
02:00But it's not nearly to a place where, you know, you don't see it in any delinquencies.
02:05It's not nearly to a place where either we or, you know, the rest of the banking industry is particularly
02:10concerned about it.
02:11So when you sort of look at your loan book, particularly when it comes to, you know, mortgage companies, insurers,
02:18and obviously in the private equity space or private capital space, I should say here.
02:22Are you picking up new business because of some of the concerns that we've seen out there over the last
02:28few months or has it not changed?
02:30Sorry, with respect to private credit?
02:32Yeah. And yeah, private capital.
02:34Well, I mean, look, yeah, you know, look at the margin spreads on speculative grade lending and opportunity sets there
02:43without taking quite as much risk have improved, you know.
02:49But for all the headlines on private credit, you know, the real headlines ought to be around what I'll just
02:54call speculative grade credit.
02:56So we see higher, you know, default rates that are creeping up in that space.
03:01We see more PIC loans kind of increasing at an increasing pace.
03:06You know, the stuff you've seen on redemption from some of the retail-based funds isn't really the news.
03:12The news is, hey, is there weaker credit structures out there in the face of an economy that might be
03:20getting weaker?
03:21And if that's the case, then I think you'll see credit losses be greater than what some people are assuming
03:27right now.
03:27I don't know that I predict that, but we're in this world where it's hard to get much better than
03:31it's been.
03:32All right. You know, Bill, I do want to pivot to what's been going on in the real estate space,
03:37specifically with commercial real estate.
03:39We have seen, I guess, a relatively surprising strength there, given some of the issues out there.
03:45What are you seeing specifically with regards to where you're doing business over at PNC Financial?
03:51Well, so, you know, in short form, a market has been created.
03:57So you think about office, right?
03:59You know, we didn't know what recovery rates were going to be for buildings that lost their large tenants.
04:05And long story short, over the course of a couple of years, we've kind of established steadier values.
04:10By the way, there's a lot of lost content.
04:12And we and others have, you know, charged off some loans.
04:15And you hear about people selling buildings at a big discount.
04:17But we all kind of know where the value is now.
04:20And that helps a lot.
04:22Right.
04:22It kind of stops the scare factor.
04:25And now we can recapitalize and move on.
04:28Is there a sense here, Bill, that sort of as we sort of start to recapitalize and move on,
04:34has the landscape of commercial real estate shifted both geographically,
04:39but also in terms of the types of things that are getting built and getting funded?
04:47You know, I guess at the margin, right, for a while, you know, office is still really strong in hot
04:55markets.
04:55And things are actually still getting built.
04:58And you have buildings, you know, in some cities that have massive lease increases and others that are empty.
05:05So it depends on the building, depends where it is.
05:07You know, we had an overbuild and multifamily for a bunch of years.
05:11It's kind of worked its way through.
05:12And that's coming back.
05:13One of the things we talk about at PNC is our, you know, this quarter was actually the first quarter.
05:19And probably I'm just going to guess here, but two, two and a half years where our real estate balances
05:24actually went up
05:25as opposed to declining as loans ran off.
05:28I do also want to talk about your M&A strategy from here, because you think about the first bank
05:32acquisition,
05:33that deal closed in January, boosting your share when it comes to markets like Denver.
05:39Are you set for a while when you take a look at your portfolio?
05:41Or could you consider, you know, perhaps pursuing other deals to sort of fuel your expansion here?
05:49Yeah, I don't know that we think about it that way.
05:51You know, we don't have an M&A strategy.
05:53We have a strategy of growing share and retail clients across the country, you know,
05:59which in our instance means that we have to, you know, create more dense networks in certain places.
06:06Colorado was one of those, which is why First Bank made sense to us.
06:09But, you know, there is a share grab going on in terms of retail clients where the largest banks are
06:15pulling traditional household DDA accounts
06:18out of smaller banks.
06:19And, you know, due to scale, we need to be a winner in that space.
06:24That means building lots of branches, being best in digital, you know, activating your brand, you know, best in class
06:31service,
06:32all the things you might do.
06:33And by the way, if you're really good at that, you might get an opportunity to then use M&A
06:38as part of the strategy to gather retail clients.
06:41But it's not, I just want to be really clear, but it's not we sit around and say, oh, you
06:45know, who should we buy?
06:46That isn't a game at all.
06:47The game is we need retail clients because this market's consolidating and anything we can do to cause that to
06:52happen faster, better, cheaper, we're going to do.
06:55All right.
06:56Point taken there.
06:57And before we let you go, I do just want to go back to the private credit conversation because I'm
07:02taking a look at your earnings call.
07:04And you make clear that you have about about $7 billion worth of exposure on your balance sheet, most of
07:11that being in CLOs.
07:12It doesn't seem like it's something that you're necessarily worried about.
07:15And I would just love to hear quickly, you know, what gives you that confidence here?
07:22You know, in its simplest form, of our $7 billion, I think $6.5 billion plus or minus is in
07:28CLO form in the AAA tranche.
07:31To my knowledge, there's never actually been a loss in history on any of those AAA corporate credit CLOs.
07:38We're really comfortable with the outcomes.
07:41You know, maybe a soundbite helps.
07:44You can go through quadruple the defaults in the financial crisis and have twice the loss given default before it
07:50ever gets close to touching our tranche.
07:52For the second choice, right now, I mean, it's in the only opportunity to walk off screen.
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