Business context and reporting period
PNC Financial Services Group, Inc. is a diversified U.S. financial institution operating in Retail Banking, Corporate & Institutional Banking, and Asset Management. This Form 10-K covers the fiscal year ended December 31, 2023; figures are generally compared with 2022. PNC reported $561.6 billion in assets and $421.4 billion in deposits at year-end.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $21.49 billion | $21.12 billion |
| Net interest income | $13.92 billion | $13.01 billion |
| Noninterest income | $7.57 billion | $8.11 billion |
| Provision for credit losses | $742 million | $477 million |
| Noninterest expense | $14.01 billion | $13.17 billion |
| Net income | $5.65 billion | $6.11 billion |
| Net income attributable to common shareholders | $5.15 billion | $5.74 billion |
| Diluted earnings per share | $12.79 | $13.85 |
| Net interest margin (non-GAAP) | 2.76% | 2.65% |
| Efficiency ratio | 65% | 62% |
| Return on average common equity | 12.35% | 13.52% |
| Operating cash flow | $10.11 billion | $9.08 billion |
Revenue rose 2%, as higher net interest income more than offset lower fee income. Net income fell 8%; higher expenses, credit-loss provision, and lower noninterest income outweighed the improvement in net interest income. The 2023 effective tax rate was 16.2%, versus 18.2% in 2022.
At year-end, loans were $321.5 billion, down 1%; deposits were $421.4 billion, down 3%; and borrowed funds were $72.7 billion, up 24%. Noninterest-bearing deposits declined 19%, while interest-bearing deposits increased 3%. PNC attributed deposit pressure to competitive pricing and inflationary conditions. Total shareholders’ equity was $51.1 billion, up $5.3 billion. Basel III CET1 was 9.9%, up from 9.1%; estimated fully implemented CET1 was 9.8%. PNC said it and PNC Bank exceeded applicable well-capitalized requirements.
Net charge-offs increased to $710 million, or 0.22% of average loans, from $563 million, or 0.18%. Nonperforming assets rose 10% to $2.22 billion. The allowance for credit losses on loans and unfunded commitments was $5.45 billion, or 1.70% of loans.
Material changes versus 2022
- Net interest income increased 7%, mainly due to higher asset yields and balances, while funding costs also increased substantially.
- Noninterest income decreased 7%, led by lower capital markets and advisory revenue, lower private-equity revenue, and negative Visa Class B derivative fair-value adjustments of $279 million, compared with negative $40 million in 2022.
- Noninterest expense increased 6%. It included a $515 million pre-tax FDIC special assessment and $150 million of workforce-reduction charges.
- Commercial loans declined, with lower commitment utilization and paydowns exceeding new production; consumer loans increased modestly. PNC acquired Signature Bridge Bank capital-commitment facilities on October 2, 2023, representing about $16 billion of commitments, including $9 billion of funded loans at acquisition.
- Operating cash flow increased, while investing activities used $6.38 billion and financing activities used $3.85 billion. These bank cash-flow categories reflect substantial movements in loans, deposits, securities, and funding and should not be read as conventional corporate free cash flow.
Outlook, management commentary, risks and unusual items
Management’s 2024 baseline forecast anticipated slower growth, GDP growth slightly above 1%, unemployment somewhat above 4% by year-end, and Federal Reserve rate cuts beginning in May, with the federal funds rate ending 2024 at 4.25%–4.50%. These are expectations stated in the filing, not guarantees.
For full-year 2024 versus 2023, PNC expected spot loans up 3%–4%, average loans up about 1%, net interest income down 4%–5%, noninterest income excluding securities gains and Visa activity up 4%–6%, revenue stable to down 2%, core noninterest expense stable, and an effective tax rate of about 18.5%. For first-quarter 2024 versus fourth-quarter 2023, it expected average loans down about 1%, net interest income down 3%–5%, fee income down 6%–8%, total revenue down 3%–4%, core expense down 3%–4%, and net charge-offs of $200–$250 million. Core expense guidance excludes the FDIC assessment and workforce-reduction charges.
Management said the workforce reduction was expected to lower 2024 personnel expense by approximately $325 million annually, pre-tax. PNC’s continuous-improvement savings goal for 2024 was $425 million. The company expected share repurchases to remain modest in early 2024 while assessing proposed capital-rule changes.
Key risks include interest-rate and deposit competition, economic deterioration, commercial real estate stress, regulatory changes, cybersecurity and third-party risks, and uncertain legal outcomes. Office CRE exposure was $8.0 billion, or 2.5% of total loans; 24.8% was criticized and 8.4% nonperforming. PNC reported a 65% updated weighted-average LTV and reserves equal to 8.7% of office loans; it noted particular stress in multi-tenant office properties and expected further sector stress.
Uninsured deposits were approximately 44% of total deposits ($190.3 billion). PNC reported $224.4 billion of primary contingent liquidity sources and $20.6 billion of available parent-company liquidity. It reported compliance with internal and regulatory liquidity limits and LCR/NSFR minimums. Securities remained sensitive to interest rates: held-to-maturity securities had $90.8 billion amortized cost and $86.9 billion fair value at year-end. AOCI improved by $2.46 billion during 2023 but remained negative $7.71 billion.
The proposed Basel III capital framework could reduce regulatory ratios if finalized; PNC expected to remain above current minimum capital and buffer requirements based on its year-end balance sheet. The FDIC assessment is expected to be collected over eight quarterly periods beginning after Q1 2024, subject to adjustment. PNC estimated reasonably possible legal losses above accrued liabilities of less than $300 million for disclosed matters it could estimate, but stated that this does not include every matter or represent maximum exposure. USAA patent litigation included jury awards of approximately $218 million and $4.3 million; appeals were pending. PNC also reported Visa interchange litigation and regulatory inquiries. The auditor issued an unqualified opinion, and management and the auditor concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether 2024 net interest income and revenue meet guidance as deposit pricing, funding mix, and interest rates evolve.
- Whether office CRE credit deterioration, criticized and nonperforming loans, and reserve coverage develop as management expects.
- Deposit stability and funding costs, including uninsured-deposit trends, use of borrowings, and contingent liquidity availability.
- The final Basel III capital rules, resulting capital requirements, and implications for dividends and repurchases.
- The realized cost and timing of the FDIC special assessment, workforce savings, and other expense-reduction initiatives.
- Outcomes of USAA patent appeals, Visa litigation and related derivative valuations, and other legal or regulatory matters.