PNC Financial Services Group Inc. (NYSE: PNC) Q4 2019 Earnings Call Transcript

PNC Financial Services Group Inc. (PNC) Q4 2020 earnings call dated Jan. 15, 2020

Corporate Participants:

Bryan K. Gill — Executive Vice President and Director of Investor Relations

William S. Demchak — Chairman, President and Chief Executive Officer

Robert Q. Reilly — Chief Financial Officer

Analysts:

John Pancari — Evercore — Analyst

Erika Najarian — Bank of America Merrill Lynch — Analyst

Scott Siefers — Piper Sandler — Analyst

John McDonald — Autonomous Research — Analyst

Gerard Cassidy — RBC Capital Markets — Analyst

Ken Usdin — Jefferies — Analyst

Matt O’Connor — Deutsche Bank — Analyst

Saul Martinez — UBS — Analyst

Presentation:

Operator

Good morning. My name is Dina, and I will be your conference operator for today. At this time, I would like to welcome everyone to The PNC Financial Services Group Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Wednesday, January 15th, 2020.

I would now turn the call over to the Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.

Bryan K. Gill — Executive Vice President and Director of Investor Relations

Well, thank you and good morning, everyone. Welcome to today’s conference call for The PNC Financial Services Group. Participating on this call are PNC’s Chairman, President and CEO, Bill Demchak; and Rob Reilly, Executive Vice President and CFO. Today’s presentation contains forward-looking information. Cautionary statements about this information as well as reconciliations of non-GAAP measures are included in today’s earnings release materials as well as our SEC filings and other investor materials. These materials are all available on our corporate website pnc.com under Investor Relations. These statements speak only as of January 15th, 2020 and PNC undertakes no obligation to update them.

Now I’d like to turn the call over to Bill.

William S. Demchak — Chairman, President and Chief Executive Officer

Thanks, Bryan, and good morning, everybody. You saw today that we reported full year 2019 results with net income of $5.4 billion or $11.39 per diluted common share. For the full year, we increased earnings per share, achieved record revenue, improved our efficiency ratio and generated positive operating leverage.

Overall, it was an excellent year for PNC capped by another solid quarter. We reported fourth quarter net income of $1.4 billion or $2.97 diluted per share. During the quarter, we grew loans, deposits and revenue, and while our provision increased, overall credit quality remained strong. Rob is going to take you through the full details of our financial results in just a second. And we remain dedicated and diligent on our continued investment in our businesses and technology to drive long-term growth.

Along these lines, I was very pleased with the continued progress we made this quarter on our key strategic initiatives including the national expansion of our middle market and retail banking efforts. We remain committed to growing our business, but also maintaining an efficient organization capable of achieving positive operating leverage. I’d like to spend just a minute to thank our employees for all of their efforts to make 2019, a successful year. We achieved a great deal this past year for our customers, shareholders and the communities we serve and none of it would have been possible without the combined efforts of our more than 51,000 employees working toward our common goals.

As 2020 begins, we expect to face uncertainty in the year to come from the economic environment to the ramifications of international trade disputes, the geopolitical situation and the presidential election — election campaign in the US. But we’re excited about the momentum with which we’ve entered the year, and along with our increased capital flexibility as a result of the tailoring rules, we believe our strategy, focus on our — our strategy and focus on our customers positions us well to continue to deliver for all of our constituencies.

And with that, I’ll turn it over to Rob, and then we’ll be happy to take your questions.

Robert Q. Reilly — Chief Financial Officer

Great. Thanks, Bill and good morning, everyone. As Bill just mentioned, we reported full year net income of $5.4 billion or $11.39 per diluted common share. And fourth quarter net income was $1.4 billion or $2.97 per diluted common share. Our balance sheet is on slide 4 and is presented on an average basis.

Total loans grew $1.2 billion to $239 billion linked quarter. Compared to the fourth quarter of 2018, growth was $13 billion or 6%. Investment securities of $83.5 billion decreased $1.7 billion or 2% linked quarter, due to portfolio run-off primarily in treasuries. Year-over-year, total security balances increased $1.4 billion or 2%. Our cash balances at the Federal Reserve averaged $23 billion for the fourth quarter, up $7.7 billion linked quarter, and $6.6 billion year-over-year, primarily as a result of strong deposit growth. Deposits grew $8.7 billion or 3% linked quarter and $21.3 billion or 8% year-over-year.

As of December 31st, 2019, our Basel III common equity Tier 1 ratio was estimated to be 9.5% compared to 9.6% at September 30th. For the full year 2019, we returned $5.4 billion of capital to shareholders. This represented a 22% increase over 2018 and was comprised of $1.9 billion in common dividends and $3.5 billion in share repurchases. Of note, the tailoring rules became effective January 1st, 2020, and as a result will provide us increased flexibility in managing both our capital and liquidity levels going forward.

As we announced earlier this morning, we’ve received approval from the Federal Reserve to repurchase up to $1 billion in common shares through the end of the second quarter of 2020, which is in addition to the share repurchase programs of up to $4.3 billion approved by the Fed as part of PNC’s 2019 capital plan. This will provide us the ability to repurchase additional shares over the next two quarters, the level of which will depend on market conditions.

Our return on average assets for the fourth quarter was 1.3%, our return on average common equity was 11.5% and our return on tangible common equity was 14.5%. Our tangible book value was $83.30 per common share as of December 31st, an increase of 10% compared to a year ago. Slide 5 shows our average loans and deposits in more detail. Average loan balances of $239 billion in the fourth quarter were up $1.2 billion compared to the third quarter. The growth was driven by consumer lending, which increased $1.9 billion or 3% reflecting higher residential mortgage, auto and credit card loan balances.

Commercial lending decreased $738 million linked quarter as growth in our corporate banking business was more than offset by declines in our real estate business, primarily due to a $1.1 billion decrease in our multi-family warehouse balances. Compared to the same period a year ago, average loans grew 6% to $13 billion. Commercial lending balances increased $8.6 billion, and consumer lending balances increased $4.4 billion, each growing by 6%.

As the slide show, the yield on our loan balances declined in the fourth quarter, primarily the result of lower LIBOR rates. Importantly, the rate paid on our deposits also declined 15 basis points linked quarter, an acceleration in the pace of the decline from the third quarter of 2019. Deposits of $288 billion increased in both the year-over-year and linked quarter comparisons. The year-over-year increase of $21.3 billion or 8% reflected strong customer growth. Linked quarter deposits increased $8.7 billion or 3% due in part to seasonal growth in commercial deposits.

Notably, non-interest bearing deposits grew $1.5 billion or 2% in the fourth quarter. Both comparisons benefited by $3.4 billion increase related to the new sweep deposit product program, we began offering our asset management clients in September.

As you can see on slide 6, full year 2019 revenue was a record $17.8 billion, up $695 million or approximately 4%, driven both — by both higher net interest income and non-interest income. Expenses increased $278 million or 2.7% and remained well controlled. Importantly, we generated positive operating leverage of 1.4% in 2019.

Our full year provision was $773 million, an increase of $365 million compared to 2018, which was driven by strong loan growth and continued credit normalization in our loan portfolio. Our effective tax rate in the fourth quarter was 15.1% down from the third quarter as a result of lower state income taxes and tax credit benefits. For the full year, our 2019 effective tax rate was 16.4% and reflected the lower fourth quarter tax rate. Now let’s discuss the key drivers of this performance in more detail.

Turning to slide 7, you can see our total revenue has grown consistently over the past several years, driven by our diverse business mix. Full year 2019 net interest income was approximately $10 billion, a record for PNC and an increase of $244 million or 3% compared with 2018, as higher loan balances and yields were partially offset by higher funding costs.

Our net interest margin decreased in 2019 to 2.89%, down 8 basis points compared to 2018, driven by the declining rate environment throughout the year. For the fourth quarter, net interest income of $2.5 billion was down $16 million or 1% from the third quarter. Lower loan and securities yields were substantially offset by lower funding costs. Net interest margin decreased 6 basis points to 2.78% in the fourth quarter, mostly due to the effect of lower interest rates primarily LIBOR. Although lower rates reduced our borrowing costs, that benefit was more than offset by the downward impact of LIBOR in our commercial loan yields.

Full year 2019 non-interest income was up $451 million or 6%, and increased $132 million or 7% in the fourth quarter compared to the third quarter. Importantly, we continue to execute on our strategies to grow our fee businesses across our franchise, and those efforts helped to drive record fee income of $6.4 billion in 2019. During 2019, fee income increased $183 million or 3% reflecting strong customer growth in our legacy and new markets. Growth was across all categories except service charges on deposits. The $12 million or 2% decline in service charges on deposits was reflective of our ongoing efforts to simplify products and reduce transaction fees for our customers. Fourth quarter fee income of $1.7 billion increased $18 million or 1% compared to the third quarter.

Taking a more detailed look at the performance in each of our fee categories, asset management fees increased $40 million, driven by higher earnings from PNC’s investment in BlackRock. Consumer service fees declined $12 million or 3% reflecting seasonally higher credit card activity that was more than offset by a full year true-up of credit card rewards. Corporate service fees grew $30 million or 6% across various categories and included growth in our treasury management product revenue. Residential mortgage non-interest income decreased $47 million — decreased by $47 million driven by a lower benefit from RMSR hedge gains as well as lower loan sales revenue. Service charges on deposits increased $7 million or 4% reflecting seasonally higher customer activity.

The final component of our revenue, other non-interest income increased $114 million compared with the third quarter. The growth was primarily driven by higher revenue from private equity investments and a gain of $57 million related to the sale of our proprietary mutual funds. Partially offsetting this was a negative Visa derivative valuation adjustment of $45 million.

Turning to slide 8, our full year 2019 expenses were $10.6 billion, an increase of $278 million or 2.7% compared with 2018, as we continue to invest in our strategies, technology and employees.

Taking a look at the fourth quarter, expenses grew by $139 million or 5% linked quarter. Personnel increased $68 million due to higher benefits including a special year-end grant to more than 51,000 of our employees, mainly in the form of health savings account contributions, totaling $25 million. Personnel also reflected higher incentive compensation associated with business activity in the fourth quarter.

Equipment expense increased $57 million largely due to $50 million of technology related write-off. These write-offs primarily resulted from the benefit of the tailoring rule which now allows us to decommission compliance and regulatory systems that are no longer required. Our efficiency ratio for the full year 2019 was 59% improving from 60% last year. As you know, expense management continues to be a focus for us. We had a 2019 goal of $300 million in cost savings through our continuous improvement program and we successfully completed actions to achieve that goal.

Looking forward to 2020, our annual CIP will once again be $300 million, which we expect to contribute to the funding of our business and technology investments. Our credit quality metrics are presented on slide 9 and remained historically strong. Full year provision for loan losses totaled $733 million and net charge-offs were $642 million in 2019, reflecting our strong loan growth and some credit normalization in our portfolio. On a linked quarter basis, provision increased $38 million in the fourth quarter due to both consumer lending and reserves attributable to certain commercial credits. Net charge-offs increased $54 million to $209 million in the fourth quarter compared with the third quarter. Commercial charge-offs accounted for $24 million of the increase driven primarily by a few specific credits. And consumer charge-offs grew $30 million, mostly related to our credit card and auto portfolios.

Reserves to total loans remained stable year-over-year at 1.14% compared to 1.16% at year-end 2018. Annualized net charge-offs to total loans was 35 basis points in the fourth quarter and while up, this is still well below our through the cycle average. Notably the leading indicators for credit quality continue to perform well. Non-performing loans were down $59 million or 3% compared to year-end 2018 and year-over-year total delinquencies were up $19 million or 1%.

As you know we adopted CECL, the new accounting standard for credit losses, effective January 1st, 2020. Based on our expectation of forecasted economic conditions and portfolio balances as of December 31st, 2019, the adoption will result in an overall increase of approximately $650 million or 21% to our allowance for credit losses at December 31st, 2019.

The increase is driven by the consumer loan portfolio as longer duration assets require more reserves under the CECL methodology. Our consumer reserve will increase approximately $900 million or 95%, and our commercial reserve will decrease approximately $250 million or 12%. These metrics include reserves for unfunded commitments. We plan to include a full description and transition details in our upcoming 10-K disclosure. As we move forward under CECL, it is a new accounting standard with many variables. And as a result, we expect more volatility in our quarterly provisioning.

Our allowance for credit losses will be determined using various models and estimation techniques utilizing for example historical losses, borrower characteristics, economic conditions, reasonable and supportable forecasts as well as other relevant factors. For expected losses in our reasonable and supportable forecast period of three years, we will use four macroeconomic scenarios and their estimated probabilities.

Given the multiple variables impacting provision expense under CECL, during 2020 will shift from our current practice of providing a quarterly provision guidance range to providing forecasted charge-off level. However, in order to establish a context for the level of change in provision expense under CECL, for this upcoming quarter, we’ll provide a range for expected provision expense based simply on expected charge-offs level plus CECL reserve rates for net new loans. This guidance will assume our economic scenarios and weights remain constant, and should any of these variables change either favorably or unfavorably, our actual provision expense may also vary possibly materially.

In summary, PNC reported a successful 2019 and we’re well positioned for 2020. Throughout 2020, we expect continued steady growth in GDP, and we expect interest rates to remain relatively stable. Taking these assumptions into consideration, our full year 2020 guidance compared to full year 2019 results is as follows. We expect loan growth to be in the range of 4% to 5%. We expect total revenue growth to be in the low end of the low-single digit range, which includes approximately 1% of net interest income growth. We expect expenses to be stable and we expect our effective tax rate to be approximately 17.5%. Based on this guidance, we believe we’ll generate positive operating leverage of approximately 1% in 2020.

Looking at first quarter 2020 compared to fourth quarter 2019 results, we expect average loans to be up approximately 1%. We expect total net interest income to decline approximately 1% reflecting one less day in the quarter. We expect fee income to be down approximately 3%. We expect other non-interest income to be between $300 million and $350 million, excluding net securities and Visa activity. We expect expenses to be down in the mid-single digit range, and we expect provision to be between $225 million and $300 million.

With that, Bill and I are ready to take your questions.

Bryan K. Gill — Executive Vice President and Director of Investor Relations

Dina, can we have the first question, please?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of John Pancari with Evercore. Please go ahead.

John Pancari — Evercore — Analyst

Good morning.

Robert Q. Reilly — Chief Financial Officer

Hey, good morning, John.

John Pancari — Evercore — Analyst

On the provision guidance, the $225 million to $300 million for the quarter, can you give us a little bit more color? I know, going forward, you’re going to guide more on charge-offs as you said, but…

Robert Q. Reilly — Chief Financial Officer

Yeah.

John Pancari — Evercore — Analyst

But regarding the quarter, can you give us a little more color behind that $225 million to $300 million? How much of that is the CECL day 2 component and then how much of that is reflecting underlying credit trends? Thanks.

Robert Q. Reilly — Chief Financial Officer

Yeah, sure. Yeah, sure, John. So for the first quarter guidance, I kept it simple, and we’re just going to take forecasted charge-offs, which we expect to be at the same level that we experienced in the fourth quarter of 2019. And then add to that, the CECL loan loss rates of the fourth quarter of ’19 to our projected loan growth. And that’s the simple math.

John Pancari — Evercore — Analyst

Okay. Okay. So, and that is carrying forward like you said, or assuming that fourth quarter charge-off level of 35 basis points which was up a fair amount from last quarter and from the year ago, so that’s the normalization you’re talking about. Where — can you give us a bit more detail around that normalization. I know you mentioned card and auto, but also you’ve had several commercial credits come up over the past several quarters that have been impacting. Is there a trend that you’re seeing on the commercial side as well? Thanks.

William S. Demchak — Chairman, President and Chief Executive Officer

Hey, John, it’s Bill. We talk about normalization, and we have for years where our charge-off rate is below what we would expect to see through the cycle. But I would tell you, our near-term pressure on charge-offs is more related to card and auto than anything else, and it’s not really related to changing in the economy.

We dipped our toe into some — the lower end of our credit bucket probably a year ago on those — those vintages are starting to play through. We’ve subsequently shut that down six months ago. So it’s going to work its way through the snake [Phonetic] here, but I don’t actually see personally that charge-offs are so much normalizing, because of the economy per se, as we have some elevated consumer stuff that will reverse through time.

The other thing that we had a big debate internally just on what to guide, is it related to provision going forward, because CECL and the impact to CECL has so many variables on what provision will be. We can reasonably forecast charge-offs, but of course outlook on economy, mix of loan growth, pace of loan growth, many other factors ultimately impact how that provision is going to behave beyond charge-offs. So we’re giving it our best shot, we could be high or low. Then we’ll see, yeah.

Robert Q. Reilly — Chief Financial Officer

Right. Well, it’s new — CECL’s new. And it’s been a lot of work as you know, both in terms of what we’ve done as we ran through parallel in 2019 to establish our transition amount. But going forward, we feel good about our framework. We’ve got a three-year reasonable and supportable forecast, we’ve got the four macroeconomic scenarios that will detail in our 2020 disclosures. But to Bill’s point, and what I said in my opening comments, there’s just a lot of factors. And then on top of that, it’s new. So there’s just going to be some learning curve aspects to sort of the practical application of CECL real time.

William S. Demchak — Chairman, President and Chief Executive Officer

And on the C&I side, John, we really haven’t seen anything, you’ll see some specific credits we’re adding to. By the way we’ve been doing this for five years. What’s changed is the recoveries that we’ve gotten through time.

Robert Q. Reilly — Chief Financial Officer

Yeah. That’s right.

William S. Demchak — Chairman, President and Chief Executive Officer

Way back from the crisis are gone. So it’s not so much that our new stuff is elevated in any given point as our recoveries have dropped.

John Pancari — Evercore — Analyst

Got it. Okay, that’s helpful. And if I could just ask one more, on the margin side, the — I know you gave the spread income guidance for the linked quarter and for the full year expectation. But how do you think the margin will traject from here? Should we see some stabilization now that we have the pause? Thanks.

Robert Q. Reilly — Chief Financial Officer

Yeah, yeah. I think so. I think so, John. We expect rates to be stable. We don’t — we don’t have NIM guidance, officially that’s more of an outcome. But I think we will spend most of it. If everything stays constant, we’ll spend the next year pretty much in this range. We could actually go up in a particular quarter as deposit costs are continuing to come down, but not a lot in either direction.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah. One of the things that hit us this quarter was just elevated amortization [Speech Overlap] on our premium mortgage securities, which we think has probably hit its peak.

Robert Q. Reilly — Chief Financial Officer

But I think we’ll be in this range, up or down.

John Pancari — Evercore — Analyst

Okay, great. Thanks, Rob. Thanks, Bill.

Robert Q. Reilly — Chief Financial Officer

Sure.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah, sure.

Operator

Your next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Hi, good morning.

William S. Demchak — Chairman, President and Chief Executive Officer

Good morning, Erika.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Just wanted to ask a little bit more detail, Rob about, on the previous question. So how should we think about one, the opportunity to deploy what seems like an extra $6 billion to $7 billion of cash? What opportunities you see for that cash going forward and also deposit costs trending down sort of balancing what has been a really successful initiative to go beyond your legacy footprint with reflecting lower rates.

Robert Q. Reilly — Chief Financial Officer

Okay. Well, so the first part of that, in terms of the new LCR requirements, we have and we will continue to work down our cash balances to the new requirement of 85%. The first step as we talked about this on the third quarter call is to pay down some short-term debt and then take a look going forward in terms of where we would deploy that. Unfortunately securities yields aren’t terrific. So I don’t think we’re going to move quickly in that direction. But…

William S. Demchak — Chairman, President and Chief Executive Officer

The simplest thing to do is to let some of our wholesale borrowings run-off — and that’s what we’ve been doing…

Robert Q. Reilly — Chief Financial Officer

Which is what we’re doing, and we’ll continue to do. That’s right.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Robert Q. Reilly — Chief Financial Officer

And on the deposits.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah, I was just going to say, on the deposit side, we have been reasonably aggressive in dropping rates and has still been able to grow balances both interest bearing and non-interest bearing. So we’re going to continue to pursue that. One of the things that’s happening in the background here of course is the Fed over the last two or three months has been injecting cash back into the system through their repo activities, which means the fight for deposits that was pretty intense is letting up somewhat as cash comes back into the system and I’m not exactly sure how that’s going to play out.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Got it. And just taking a step back, is there a difference in terms of stickiness in terms of the deposits that you raise through, let’s say, a high yield savings account versus a checking account that you are offering a cash incentive to open?

William S. Demchak — Chairman, President and Chief Executive Officer

So, the national deposits have been much more sticky than we expected, because at least as an individual, Erika, I kind of assume that unless you converted it to a full-time account, which we’ve had some success in doing, I assume people would shut those rates and move. We actually haven’t seen that be the case, even though we have dropped — really far below the competitive band on what we’re offering. No, I’m sure there is elasticity there, but thus far we haven’t seen much movement.

The upfront money on checking accounts which all of us do, you know, where you opened the account and you swipe your debit card five times and so forth [Speech Overlap] there is — there is a lot of mischief in that. So we’ve had the percentage of people who basically are taking the cash going through the motions and never using the account have made that option less attractive to us than some other things we’re doing.

Erika Najarian — Bank of America Merrill Lynch — Analyst

That’s interesting. Okay. Thank you.

Robert Q. Reilly — Chief Financial Officer

But I would say — I would just add to that, the deposits, as we worked rates down across the board, deposits have been stickier than what we would have expected.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Erika Najarian — Bank of America Merrill Lynch — Analyst

Thank you.

William S. Demchak — Chairman, President and Chief Executive Officer

And you see it in the numbers.

Robert Q. Reilly — Chief Financial Officer

Yeah.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Operator

Your next question comes from the line of Scott Siefers with Piper Sandler. Please go ahead.

Scott Siefers — Piper Sandler — Analyst

Good morning, guys. Thanks for taking my question.

William S. Demchak — Chairman, President and Chief Executive Officer

Good morning.

Scott Siefers — Piper Sandler — Analyst

I just wanted to ask on the $1 billion supplemental authorization, I was definitely glad to see that, but just in terms of how you came up with the $1 billion. I imagine it ended up given the timing and the CCAR cycle being as much art and science, but just given where you sort of flushed out. What does it say about sort of dry powder for the next cycle and or other preferences for capital use at this point?

William S. Demchak — Chairman, President and Chief Executive Officer

I mean, Rob can jump in here, but the — as we — as I mentioned at the Goldman Conference, the ask that we put in had nothing to do with tailoring. So it’s basically capital that we had in excess from ’19 independent of rule change. As to the amount, beyond the fact that $1 billion is a nice round number, you have to remember that our existing program is a pretty big program. So adding to our existing program by much more than we ask for just didn’t seem to make a lot of sense.

Scott Siefers — Piper Sandler — Analyst

Okay. All right…

Robert Q. Reilly — Chief Financial Officer

That was the art of it rather than the science of it.

Scott Siefers — Piper Sandler — Analyst

Yeah, fair enough. Fair enough. And then just separately, I guess I can sort of back into it, but Bill, I think you had noted back in, I think it was December when you sort of switched the NII outlook for 2020 given the changing rate profile and had suggested maybe up a percent in 2020. I imagine that still holds true, but any update how you’re thinking there? And then just overall balance, which becomes more self-explanatory between NII and fees as the year progresses.

Robert Q. Reilly — Chief Financial Officer

Yeah, I think it still holds. What’s helping us there is, we are forecasting pretty good loan growth for 2020. Our pipelines look good. So when we do that, we see up approximately 1% as achievable.

Scott Siefers — Piper Sandler — Analyst

Okay. Perfect. And then maybe main fee drivers as you see them for the year.

Robert Q. Reilly — Chief Financial Officer

I think on the fees, we’re in good shape, we — our fee businesses are big, they’re all growing. So I think we’ll see consistent trajectory that we’ve seen in 2019. Just going through the broad categories, asset management. Asset management, you know BlackRock, the component, the BlackRock component they’ll do what they do. The PNC component will have a little bit — will have same-store sales growth, will have a little bit of a challenge in 2019 numbers, because we divested those businesses and in fact sold some revenue.

But corporate services, consumer services, we see staying on the trajectory that they’ve been on. Residential mortgage could be off a little bit, but that’s pretty small for us. And then service charges on deposit we see as being kind of flat, because we’ll see more client activity. But as I mentioned in my comments, we are working toward eliminating a lot of those nuisance fees that our customers have experienced and we want to get ahead of that. So that will kind of offset one another. So fees are good.

Scott Siefers — Piper Sandler — Analyst

Good. All right. Well, thank you very much. I appreciate it.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Your next question comes from the line of John McDonald with Autonomous Research. Please go ahead.

John McDonald — Autonomous Research — Analyst

Hi, guys. Two follow-ups, in terms of consumer lending, you have a long-term goal to remix towards a little bit higher contribution from consumer lending. Does the CECL or the experienced dipping your toe in the auto and card that you mentioned in some of the lower spectrum, does either of those change your appetite or the degree to which you might be growing consumer loans?

William S. Demchak — Chairman, President and Chief Executive Officer

No, I would, I mean a couple of comments, the issue — the issue we had by going a little bit down in our risk bucket, by the way, that’s not a huge amount, it’s kind of flowing through. I — our team is supposed to do that test and learn and see and we learned, we didn’t like it, we move on, but we’re growing independent of that, if you just look at the balances that we’ve grown in card, in auto and in resi and even home equity, I guess this quarter.

Robert Q. Reilly — Chief Financial Officer

First time in a while.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah. They’re executing really well and that will continue. The issue for CECL of course is in today’s environment, it’s an easier answer to say yes, we’ll keep growing home equity in resi on the balance sheet, because the loss rates, the loss content is so low even in the CECL reserve, the challenge will be in a more pressed economy and environment where charge-offs and losses are higher, will you be booking loans that effectively cause negative income in the year, you book them and that’s a discussion we’ll have at that period of time. I do think, as I’ve always said, that CECL in general will hurt consumer lending, particularly when it’s needed most as people pull back because of the financial pain from the reserves. But in today’s environment I don’t see…

Robert Q. Reilly — Chief Financial Officer

Yeah. And to your question, John, we have no change in terms of our strategies for growth because of CECL.

John McDonald — Autonomous Research — Analyst

Yeah. Great. And the experience like you had, you’re just fine-tuning where you’re targeting based on the experience of what you had last year.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah. That’s right.

Robert Q. Reilly — Chief Financial Officer

That’s right.

John McDonald — Autonomous Research — Analyst

Okay. And then in terms of the CET1 that you ultimately target, does tailoring effect how you think about what you should run out over time, and if you need any kind of fine-tuning on that and just kind of remind us that target range, Rob?

Robert Q. Reilly — Chief Financial Officer

Yeah, sure. The — so tailoring is obviously going to add some flexibility to our capital ratios. In terms of tailoring alone, we see our capital ratio, CET1 ratio going up about 60 bps. That’s including opting out of AOCI which hurts by about 20 basis points. And then with CECL, CECL will affect CET1, that’s another 19, 20 basis points. So net net net, tailoring CECL, we see our capital ratio going up about 40% to — that’s where we are today. So that adds a lot of flexibility — basis points, I’m sorry, 40 basis points, 99-ish, from 95 to 99-ish. So that’s a lot of flexibility. We’ve talked about a target in the 8% to 8.5% range. So we’ve got room.

John McDonald — Autonomous Research — Analyst

Got it. Okay, great. Thanks very much, guys.

Robert Q. Reilly — Chief Financial Officer

Sure.

Operator

Your next question comes from the line of Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy — RBC Capital Markets — Analyst

Hi, Rob. Hi, Bill.

Robert Q. Reilly — Chief Financial Officer

Hey, Gerard.

Gerard Cassidy — RBC Capital Markets — Analyst

Can you guys give us some color — I jumped on the call late, so I apologize if you touched on this. Rob, you mentioned the outlook for loan growth this year is actually one of the better numbers that we’ve heard from your peers. Can you share with us, some of your peers have told us that, there seem to be a change in business confidence if you will or sentiment in the fourth quarter with these trade deals looking like they’re coming together. Can you guys share with us what your customers are telling — your commercial customers are telling you about how they feel about business for 2020?

William S. Demchak — Chairman, President and Chief Executive Officer

Well, as it relates to trade, I think there is a lot of wait and see as to what’s really there and how it impacts people. So I don’t know that people have really changed. They’ve been and you’ve seen it in manufacturing and capex, they’ve been a bit on the sidelines, eventually they’re going to have to spend simply to replace dated stuff. But I don’t know that we’ve seen that yet.

Our growth on the C&I side continues to come from specialty businesses and our geographic expansion. And probably one of the things that makes us a bit of an outlier just in terms of growth is, once we turn consumer positive, which we’ve done, the totality of the loan book is growing and we just haven’t had that [Speech Overlap].

Robert Q. Reilly — Chief Financial Officer

Yeah. That’s right. And it’s pretty balanced in terms of our outlook, and the pipelines look good.

Gerard Cassidy — RBC Capital Markets — Analyst

Very good. In fact that was going to be my second question, Bill, can you guys kind of share with us how much of the projected growth or what you think you’ll see in 2020 is coming from your existing footprint versus what’s coming from these new markets that you’ve penetrated?

William S. Demchak — Chairman, President and Chief Executive Officer

I’ve seen that statistics, I don’t remember it.

Robert Q. Reilly — Chief Financial Officer

Yeah. Well, it’s, I mean, the new markets are accretive to our loan growth in terms of percentages, but they’re working off pretty small — small basis.

William S. Demchak — Chairman, President and Chief Executive Officer

But they are a healthy percentage of our growth.

Robert Q. Reilly — Chief Financial Officer

Yeah, yeah.

William S. Demchak — Chairman, President and Chief Executive Officer

Far outpacing that legacy books and they add. I’m not going to guess a percentage, but I’ve seen it. They add to the total.

Robert Q. Reilly — Chief Financial Officer

They do, no question.

Gerard Cassidy — RBC Capital Markets — Analyst

And I guess lastly on that, other than you guys being handsome, good guys, what’s getting — how are you guys winning these customers in these new markets? Is it just better products that you have at the — that your competitors don’t have for the customers that you’re targeting?

William S. Demchak — Chairman, President and Chief Executive Officer

It’s a number of factors that start with really good people. It includes bringing to our new markets, the totality of PNC with a regional president model, with our community involvement. And yes, it’s dependent on our products. We show up in a market, we get embedded in the community and centers of influence. We go in with our foundation and grow grade. We pick the clients we want to cover and bank long term and we’re very patient. We will call on them for two and three years before we get a shot on goal, and when we get that, our products are very good, particularly in comparison to some of the smaller in-market players.

We’ve been doing this going all the way back to the RBC acquisition and it works. We use the same playbook in each market that we go into, we talk about breaking even inside of three years, we’ve been able to do that with all the vintages and we’ll keep going.

Robert Q. Reilly — Chief Financial Officer

Yeah, and Gerard, I just want add to that. I’ve said that, before this — this is a great receptivity of these corporate clients and prospects for the PNC calling effort and once that dialog goes as Bill said, then we compete well.

William S. Demchak — Chairman, President and Chief Executive Officer

The other thing that I would just remind you and this is important. The potential criticism that somehow we are out just participating in other loans is not at all accurate. When you look at our cross-sell rates in those markets, they’re pushing 50% fees of total revenue, which is not wildly off what we do in our legacy markets.

Robert Q. Reilly — Chief Financial Officer

And signifies the relationship, rather than just purchasing loans.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Gerard Cassidy — RBC Capital Markets — Analyst

Great. Very insightful. Thank you.

Operator

Your next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Ken Usdin — Jefferies — Analyst

Hey, thanks guys. Just a question on the expense side. Rob, we heard you say that, you’re kind of re-upping the 300 [Phonetic] CIP. And also kind of continuing to move that overall expense growth down to flattish, right, which is a nice change over the last couple of years. And I’m just wondering underneath that, are some other things also starting to taper down in terms of, I wouldn’t dare say that you guys are changing your investment pace, but what else is helping underneath the surface kind of clampdown on that overall rate of expense growth, that gets it closer to flattish. Thanks.

Robert Q. Reilly — Chief Financial Officer

Well, sure, I mean it’s, it is that. We’re not backing off of our investments or anything along those lines. We just think that the continuous improvement program that we have in place is a strength of the Company that we can achieve in essence, 3% cost savings to fund these investments on a annual basis. And that’s — that’s something that we’ve been very good at and that will continue. So I don’t think there’s a whole lot that’s changing under that.

Ken Usdin — Jefferies — Analyst

Okay, got it. And then just one more follow-up on the kind of the balance sheet mix sense. So you mentioned that the low rate environment doesn’t have a lot of right now interested in the securities portfolio. Right. So you’re growing loans a lot which — and you’re able to pay down wholesale debt. So does the mix of earning assets continue to push more towards higher yielding loans. And you just kind of keep the portfolio in check. How do you balance the left side of your balance sheet?

Robert Q. Reilly — Chief Financial Officer

A little bit, but that’s a little bit in that direction, but it’s not — it’s not that dramatic.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah. The — I mean at the end of the day, we are under-invested today, we’re certainly going to invest run-off, we’ll probably grow. One of the things going on in the background here is on the receive fixed swap side, because the curve steepened out while we had largely gotten out of or lowered our position, we’re back into that. So you can’t just look at the securities book in terms of the way we’re actually investing against the yield curve. You can think about it in terms of cash, but it’s not necessarily the sole tool we use to manage the balance sheet.

Ken Usdin — Jefferies — Analyst

Okay. And that means that you’re back into it meaning that you’re more protected against lower from here. Right. Given those — getting back into it.

William S. Demchak — Chairman, President and Chief Executive Officer

Yes.

Robert Q. Reilly — Chief Financial Officer

Yeah.

Ken Usdin — Jefferies — Analyst

Right. Okay, I get it. Understood. Thank you.

Operator

[Operator Instructions] And your next question comes from the line of Matt O’Connor with Deutsche Bank. Please go ahead.

Matt O’Connor — Deutsche Bank — Analyst

Hi, guys. There’s obviously a lot of commentary, just on the strong capital and you generate a lot of capital. Just as we think about like various uses of that capital besides buybacks, dividends, maybe you could talk about some of other potential users. I mean, we’ve been pretty clear, how you feel in bank deals, but what about loan portfolios? We’ve seen some branch divestitures from other people doing deals acquiring technologies, fee deal opportunities, just kind of a whole portfolio of options. Thanks.

William S. Demchak — Chairman, President and Chief Executive Officer

I mean, it’s a fair question, and you should assume that we look at loan portfolios will continue to do so. We look at a lot of stuff. We look at product add-ons, and you’ve seen us do that in small size, in terms of capabilities in the C&I space things we would do in retail, and we’ll continue to be rational actors in terms of how we spend the capital. We have been pretty clear on our thoughts on depository institutions and that hasn’t really changed. So we’ll let this play out. It’s nice. If you think about the environment that we are going into notwithstanding the strength of the economy, the volatility of kind of what comes in an election year. I think having a lot of capital and being able to generate a lot of capitals are really good thing, simply because of the opportunities that are likely to present themselves here.

Matt O’Connor — Deutsche Bank — Analyst

And then just long-term, I mean you’ve talked about trying to boost growth on the consumer side and obviously over the years there have been either asset generators available or big credit card portfolios, and you haven’t done any of those. But if you look out kind of the next five plus years. I mean it does seem like that could be an opportunity for you, you’ve got always deposit. I know you’re not a huge fan of holding a ton of securities. If there is other options. But any change in thinking of that. Again like looking out long-term, maybe now is not the right time in the cycle, but that is how one big difference between your balance sheet and say USBs and…

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah, look, you never say never, but my experience is, the consumer asset generators that come up for sale are broken, number 1. And number 2, we aren’t the house to fix them, right. We are a prime lender in consumer that’s focused on customer experience. We aren’t a sub-prime lender which typically most of these people play in. We don’t understand it, we don’t want to be that person. The fact that if they are for sale, they blew up, they didn’t understand it either suggest to me that all else equal, you won’t see us — you won’t ever see us do that. Now, you never say never, but that is my likely guess.

Matt O’Connor — Deutsche Bank — Analyst

Okay. Thank you very much.

Robert Q. Reilly — Chief Financial Officer

We said that for some time. That’s not a new view.

William S. Demchak — Chairman, President and Chief Executive Officer

You know the flip side of that by the way, on the C&I side, we’re really good at fixing busted C&I, right. So big portfolios that are troubled or lenders that are troubled show up with big portfolios, that is something we pursue. That’s in our wheelhouse.

Matt O’Connor — Deutsche Bank — Analyst

Got it. Thank you.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Operator

And your next question comes from the line of Saul Martinez with UBS. Please go ahead.

Saul Martinez — UBS — Analyst

Hey, guys, good morning. Question on provisioning and CECL. So you’re — I think your reserve ratio is about, I think ended the quarter at about 1.15% or 1.16% I think. And with CECL that — you, on January 1st, that gets trued up, show up in the first quarter results, but it will get trued up based on the fourth quarter to 1.4%. As I think about provisioning going forward and some of the dynamics around that reserve ratio, how do I think about growth and sort of the marginal growth of your portfolio versus that 1.4%? Are you growing in loans that have materially high on average, have materially –higher loss content than 1.4% and how do we think about that mix change in terms of, how to think about provisioning versus charge-offs and ALLL ratio evolution?

William S. Demchak — Chairman, President and Chief Executive Officer

You will drive yourself and say. I mean, I can tell you think through…

Saul Martinez — UBS — Analyst

All else equal.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah, but you know, the issue is, if we grow to the — in the same categories, today you wouldn’t necessarily have the same loss content, because for example we shut off the lower FICO-scored consumer.

Saul Martinez — UBS — Analyst

Yeah.

William S. Demchak — Chairman, President and Chief Executive Officer

If we shift to secured products and C&I versus unsecured products, it shifts. If we do more card than we do resi mortgage, it’s — this thing is going to be really hard to predict. And what we have to do and we will do is give you an effect, a provision attribution each quarter so that you understand [Speech Overlap].

Robert Q. Reilly — Chief Financial Officer

Which is part of the disclosure. That’s right.

Saul Martinez — UBS — Analyst

All right. And look, like the loss content…

Robert Q. Reilly — Chief Financial Officer

I think to remember is, we have more reserves right here, day one…

William S. Demchak — Chairman, President and Chief Executive Officer

So, that 1.14% is now going to 1%.

Robert Q. Reilly — Chief Financial Officer

Yeah, yeah. We got lot of reserves.

Saul Martinez — UBS — Analyst

Got it. Not, fair. But like, to the extent mix is changing and there is no change in our strategy in the trajectory, which has seen auto cards grow disproportionately you’ll be it from a lower base, I would think that if that trend continues. Your loss content and your expected losses over time. Assuming all else equal, which I know is unrealistic. I mean shouldn’t we assume that your ALLL, given current trends should move higher from here?

William S. Demchak — Chairman, President and Chief Executive Officer

The challenge with that is the assumption that the absolute growth in consumer will somehow keep pace with the absolute growth in C&I which it weren’t, simply because C&I is disproportionately larger. So, yes, consumer will grow, but you got to remember that that’s balanced by a larger C&I book, growing just past.

Robert Q. Reilly — Chief Financial Officer

Right. That’s right.

Saul Martinez — UBS — Analyst

Right. So the balance growth is much bigger just from — okay.

William S. Demchak — Chairman, President and Chief Executive Officer

Yeah.

Saul Martinez — UBS — Analyst

Got it. Okay. All right. That’s very helpful. Thanks.

Robert Q. Reilly — Chief Financial Officer

Sure.

William S. Demchak — Chairman, President and Chief Executive Officer

Thank you.

Operator

There are no further questions.

William S. Demchak — Chairman, President and Chief Executive Officer

All right, well thank you everybody. And we’ll see you in the first quarter.

Robert Q. Reilly — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]