PNC Financial Services' CEO Presents at Goldman Sachs Financial Services Conference (Transcript)

Dec.10.13 | About: PNC Financial (PNC)

The PNC Financial Services Group (NYSE:PNC)

Goldman Sachs Financial Services Conference Call

December 10, 2013 10:00 AM ET

Executives

Bill Demchak - President and CEO

Analysts

[No presentation session for this call]

Question-and-Answer Session

Unidentified Analyst

We’re going to start with our next presenter who is Bill Demchak, President and CEO of PNC. PNC has become one of the country’s leading super regional banks, with both the size and the scale to offer a wide array of banking products and technology to customers across the Eastern United States.

This is the first time that we've had Bill at our conference. He is just concluding his first year as CEO. This is going to be fireside chat, so I thought a great place to start would be if you could talk a little bit about what your expectations are for 2014. And I guess the back drop, so I mean if you think about ‘13, you’ve had a much better housing market for this we had rally in equity markets and debt markets, yeah it’s been a pretty tough operating environment for the banking industry generally.

When you think about ‘14, what do you think the key differences are going to be plus historically?

Bill Demchak

It’s a good question, but before we do that, Mr. Callihan up here has kicked me and told me I have to remind everybody that we've included our cautionary statements regarding forward looking and adjusted information in our website at pnc.com.

So having that behind me now I will. As we look into ‘14, the generic plan inside of us kind of things to ‘14 to look a lot like ’13. So we don’t necessarily see rates move, we continue to see big competition for credit assets, spreads continuing to move in. But there is this scenario, if you think about the situation the government getting through January and February and not tripping on itself again. We have seen corporate cash, we track corporate cash generation versus spend and for the first time, there was 18 months where they are generating, sorry, 18 quarters where they are generating, excess cash versus their spend, and that finally switched in the third quarter. So this is a scenario out there where corporates come back and start borrowing and start investing and they've been under-investing in capital because of hearing based on uncertainty or whatever the others excuses are, but it’s been there and eventually it has to catch up. So that’s kind of the both side of it, which we get pretty excited about because whether it happens in ‘14 or it happens in ‘15 there is a pent up demand on the corporate side for capital expenditure.

Unidentified Analyst

Obviously one of the bigger changes is most likely going to be tapering although I guess people -- that could have happened in ‘13 too, but it looks pretty likely that’s going to happen in ‘14 and there is some debate around what that means for the banking industry broadly. I mean how do you think about the implications of taperings quite broadly if you go business?

Bill Demchak

In its simplest form higher interest rates are good for banks great for us. I continue to think as we saw just to the hint of tapering in the summer that the actual reaction notwithstanding everybody else say that it’s planned down, I do think we've run the risk of some technical overreaction in the back in terms of rates going higher that’s find by us too. I continue to think we've seen housing tempered a bit and higher rates, but not a lot and I don’t think in the end that it’s going to have a huge impact on the housing market. I think it will bring some degree of certainty back to the corporate sector again because you’ll see that as a sign of the economy coming back and it will be good thing.

Unidentified Analyst

Okay. I mean are there any geographies or products that you’re particularly excited about the 2014? Is there anything -- I guess let me ask this question differently, I mean us to give you a marginal dollar and say investors in one of your geographies or in one of your product lines what would you put it in for ‘14?

Bill Demchak

I hate answering the question in terms of ‘14 as opposed to the next 5 years.

Unidentified Analyst

Yeah. Let’s say next….

Bill Demchak

And we’ve pretty explicit about what we are focused on right. We’ve just expanded into the Southeast, it’s a massive opportunity, it’s half as productive but growing twice as fast as the rest of our footprint and we continue to expect to see that go. I think the retail transformation is going to be a massive change for the industry and if the margin would probably accelerate that with more capital if we had it. We’re obviously focused on wealth and investing and had successes there and we are largely at this point done with the reconfiguration and clean up with mortgage, you have seen the recent announcement from Fannie and Freddie on settling up to put back stuff.

Unidentified Analyst

So can you talk a little bit about the competitive environment. And I guess what would be a little bit more interesting I guess this time relative to last year is specifically the competition you have seen from the non-banks and we were just talking about this earlier, it would be amount of MSRs that are shifting outside of the banking industry, so the volume of leverage loans that are now hold by non-banks, is really pretty remarkable. And I guess two questions the first is how much of that do you think is a result of just differences in regulation? And secondly versus this point last year or even two years ago how much more competitive are non-banks today versus banks?

Bill Demchak

Well I think there is different answers depending on asset class. So on MSRs it’s almost entirely regulation so that the MSR issue inside of the same bucket in Basel III makes that an expensive asset to hold. So you have had other people step in in all the asset. I think in leverage lending it’s little bit more interesting; investors basically have the risk on trade in search of yield given that kind of suppression in long end yields. And so we’ve seen I guess in nine months this year twice the volume of the record we saw in 2007 on leverage loans and high yield bonds largely held outside of the banking system. Other way we could chose I suppose to hold those if we wanted to. I think 50% of those are covenant light or non-covenant and we don't like to stretch it, so we don't hold it. So I don't know that's regulation as much as the environment of people searching for yield. I do think it's dangerous. But I don't think in the leverage lending side, that’s specifically driven by a certain regulation.

Unidentified Analyst

Okay. And then how would you characterize the competitive environment with your more traditional competitors compared to say 12 months ago in certain areas like C&I and CRE?

Bill Demchak

It's very aggressive. The banks that were downsizing and building capital, largely everyone is back in the game, the traditional commercial middle-market revolver which is the bread and butter of all the midsized banks in the country, there really hasn't been any growth in the stock of that loaned amount. I would say utilization rates for the generic middle-market cash flow revolver if anything has trended lower. And there are multiple points below where they would be on a normal horizon. We've managed to grow loans not that space, in fact if we dug into our loan book, so we've had higher C&I growth than most of our peers, but the middle-market commercial line has been basically flat, where we've grown as an specialty asset based lending, leasing, real estate, public finance, some of our securitization activities.

And I think that trend will continue, I think our specialty businesses will allow us to grow, but the competition for the very generic product, if you don't have the specialty product is fierce.

Unidentified Analyst

So if we switch quick gears a little bit and just think about the revenue environment for you specifically. You talked about adding 40,000 household on a billion of corporate loans in the Southeast over the last I think six to 12 months?

Bill Demchak

18.

Unidentified Analyst

18 months, [doesn’t matter].

Bill Demchak

We are counting.

Unidentified Analyst

Can you talk a little bit about the inbuilt revenue growth that should give you, if you think about the next few years?

Bill Demchak

Well, that’s I mean the opportunity overtime and it’s beyond the next few years, we want to turn the markets we adopted in the south that would be as productive as our more matured markets, but at best have that right now. When we look across all of our businesses across every product and every client segment, we are growing twice the pace in the Southeast that we are in the rest of the footprint. Off of a small base, we expect that trend will continue.

It is, to this point and somebody has shown me a statistic inside of our corporate bank. I think the fees [streams] there are growing four or five times faster than fees in the legacy markets, but the total fees in the Southeast for the corporate bank are still 5% of the total. So that gives you an idea of the math we are playing. We are starting to make a different and we will accelerate but it’s off a small base.

Unidentified Analyst

Has that revenue growth translated into the, I don’t pick a metric ROA, ROE metric between your Northeast and Southeast franchise starting to convert your best?

Bill Demchak

At the margin but they are still wildly different.

Unidentified Analyst

Okay.

Bill Demchak

I mean, you have to remember, we went into the Southeast and bought what was basically a fairly large community bank that didn’t have products and services beyond the very basic small business and consumer. And we added teams for our CNIB business, our wealth business, our specialty businesses and largely started from scratch building off of the brand equity you’ve got from that branch network. It’s worked better than we had planned, but it takes time.

Unidentified Analyst

Right, okay. So I guess what one of the other initiatives that you talked about was mortgage banking and obviously rates have moved dramatically, can you talk a little bit about the outlook for that business and how you see purchase applications, I guess developing over the next few years?

Bill Demchak

Well depending, you probably know better than I the industry forecasts some volume declines pushing 40%, 50%. We have grown our purchase percentage in our actual purchase volume, dollar amounts of purchase over the last couple of quarters [actually] focusing on that.

We never were a correspondent originator, so basically the volume we saw was originated straight through our mortgage loan officers and not through other channels, so that percentage drops that we were faced with were less than some of our peers. We continue to think notwithstanding the near term environment, mortgage is a product that is critical to our retail clients, it’s critical to our future retail strategy.

Mortgage has to become an integrated part of the bank in the brand, as opposed to a product that's done by some other channel inside the bank, it’s got to actually be part of our core offering declines and that's what we’re focused on. If you think about what you’ve seen us do in our technology offers and retail through virtual wallet or CFO inside, or wealth inside we will be rolling something out in the mortgage space that's like that leading edge client friendly, it will be integrated and is integrated into the rest of our banking network. In true time, it will be a contributor to the company.

Next year, it’s tough right. We’re cutting costs like everybody else. We’re consolidating platforms we’re doing everything you would do in a tough environment.

Unidentified Analyst

I mean, a number of your competitors have talked about easing underwriting standards at some margin in the mortgage business as the economy recovers in the housing market, looks as if it is on a better footing. How do you think about that and what do you think your (inaudible) demand from that could be?

Bill Demchak

Against the criteria that we underwrite for, for Fannie, Freddie, FHA, I mean no we’re not going to ease those, I think the more interesting question near-term long-term relates to QM and QRM and mortgage product that falls outside of those guidelines where I do think there is an opportunity for bank to provide financing and I think we’ll play in that space, but that’s kind of still developing.

Unidentified Analyst

Okay. So wealth management was another area that you’ve been focusing on; it just feels that that space has become pretty crowded as everyone focuses on the asset side of consumer balance sheet. Can you talk about how you differentiate yourself within that business and how you compete with either some of the niche players like First Republic or some of the bigger banks like JP Morgan that are making real push there?

Bill Demchak

Well first, we're in the local offices, right. I mean it’s just the most fragmented industry that we probably play in as the generic wealth management. But we compete on the back of having an offering for all of our clients and a seamless offering that works through our bank channels all the way through to our ultra high net worth. So we have a call center brokerage that deals with the people who are making their first investment through the brokerage and the branches through to wealth management through to hospital and which is our ultra high net worth offering. And we do it in a way that -- and you have to have worked in a bank that perhaps appreciate this, but we do it in a way that’s seamless. So we don’t have our brokers fighting with our wealth managers, right. We have a client and we help them get to the best service they’re looking for. We're agnostic to the channel they come through. That’s really hard to accomplish.

We have 55% of our sales in wealth management, which grew 20% compounded year-over-year, 55% of them came from referrals from other channels. It’s a huge number. If you think about that, we're growing 20%, half of that was given to us because of the teammates in the rest of the bank that were referring…

Unidentified Analyst

Typically where the referrals come from, which…

Bill Demchak

Oh as somebody coming into the branch? If somebody’s in a branch and they have big deposit or big balances, can I introduce you, should we make an appointment to meet a wealth manager. We had year-on-year growth in brokerage of managed accounts inside of our brokerage business of 30%; we had year-on-year growth in our (inaudible) earned of 83% of sales.

So, it is working. And I think it’s on the back bluntly. We have good products; we are open architecture. So, almost by definition, we are offering good investment products. We have very good service, we have good technology through wealth insight. We work as a team, so we get people in front of the right channels, and we focus on it as a company and it’s worked. And you asked, how do you compete with the JP Morgan? Well, we compete with JP Morgan everyday but we are really competing with thousands and thousands of people across all the markets we are in who are otherwise trying to manage money for our clients.

Unidentified Analyst

Okay. If you think about the more traditional retail distribution model, I think you’ve said that you think it’s unsustainable even in a higher rate environment. And I know the industry has been experimenting with different pricing structures and different delivery structures with different types of clients. What have you found to work best in terms of the pricing I guess first?

Bill Demchak

Well look, we are in the first inning at best of the transformation of retail while we are changing our physical form as part of what’s going on here beyond the regulatory change and the fee change, is changing demographics and technology. And so people tend to think about retail and they say well, you should close branches and take cost out because that’s a good thing to do. But it’s kind of missing the point of what we are really doing is building this network and connectivity for the future generation of retail. What we are thinking about in a simplest form of how you change value for servicing in the retail business is transparency and choice. So, we come from a world where everything was free; we trained everybody banking was free. But you’ve got caught in overdraft fees, you weren’t expecting or you got -- you were paying it through a swipe fee which we no longer get.

In the future, I think what you see is choice. If you want physical statements, you can have physical statements, but they are going to cost you something. But if you just want electronic statements, that's free, because that's easy. So think of a menu where you literally go through a choice in click boxes, this is what I want. We're going to disaggregate everything we offer and let you choose. This is the thing I want; I don't need physical checks, because I don't write them. So, I don't want those, right. But I really need the debit card and I want online banking. And I think what happens is through choice and transparency, and a lot of research we've done, people are willing to pay for things they value and want. They trust you once you have transparency with no surprises. And I think what you will see happen to the industry and our strategy, but I think it will happen everywhere is you’ll see consolidation of accounts. So think of how many years we've seen DDA growth, growing 20 times the pace of the actual population because it was just easy to leave accounts all over the place. I think you will see people starting to consolidate their accounts to their primary service provider, so bundle good so that we get a return on that relationship.

Unidentified Analyst

And you said you were in the first (inaudible)

Bill Demchak

I think we've made a lot of progress on planning; we've made a lot of progress on new branch format; we've been investing heavily in technology and connectivity across the digital channel and the physical space. But if you think about the path to a seamless digital physical relationship in the branch network, we've got a lot of work to do.

Unidentified Analyst

Right. And just I guess on the subject of expenses and you talked about 700 million of the deficiency, improvements that you were targeting. I think a meaningful part of that you’ve talked about reinvesting in the franchise. Can you give us a sense as to the types of returns that you're getting; where you're investing that; and again, when you think about the next couple of years, what are the major investments that you think is still outstanding that you need to make?

Bill Demchak

Yeah. So looking backwards, if you think about what we’ve done, big investment in the Southeast; we staffed levels in our wealth management and our C&IB business to full market potential even though we started with zero clients. That has worked for us, but the efficiency of that is a lot less than it would be in a mature market.

We’ve made technology investments, so we just put in teller image capture, which basically if you think about it, allows us to not have the trucks that drive all over picking up checks, and we just rolled that out, those are multiyear, multi-dollar…

Unidentified Analyst

Just take something like that, I mean when you make that type of investment, what sort of return do you expect to get out of that?

Bill Demchak

You would see somewhere inside of our building a full financial presentation that basically has a weighted average cost of capital and the net present value of a project. With utmost certainty, it will be a positive number, right. Practically whether that’s true or not, but truth is in the future with the decline of checks, you have to have image capability inside of the branch. And you could add any revenue stream you want and if you think through the synergies. We measure and think about return on the investments we make obviously. But when you think about the transformation, particularly in retail, particularly in technology generally, you kind of have to think about the future of the whole bank, not an individual product.

As we go forward, we talk about this issue of investing in our core infrastructure, but the need to automate a lot of the manual things that we put in place, both because of the change in regulation but also because of all the integrations we have done over the last bunch of years, where we kind of froze technical systems to integrate few banks, get it 80% right, you kind of say it yourself, well, I’ll get an 80% right and next year I’m going to go back and clean it up. But we then kept doing deals. So, we have been doing deals for seven or eight years. We have inherent inefficiencies built into our operating platforms; we have a lot of manual intervention on the back of big data, and CCAR and lots of other things we’re looking on. Investment going forward is going to be to automate that and take bodies, costs out of a core operating infrastructure of the bank.

Unidentified Analyst

Do you think you’ve seen peak spending on compliance and regulatory issues, or is that going to continue to escalate until the next few years?

Bill Demchak

I’d like to think for us, we're kind of at the peak, I mean see what they bring. But in terms of what we know and what we need, I think we’re there and we -- as I said, we need to automate now. And we’ll take some of the manual process out of it. One of the things, we got a lot agreed for about a couple of years ago, when we did National City and we became a Basel II mandatory bank, we were kind of the last bank in the Basel II, everybody been there five years before us. So, we had to throw lots of costs and bodies to be able to deal with CCAR and Basel II and then III and report. Well, we did all that, right. So now, we have an opportunity to streamline that. I think what you are hearing from some of the rest of the industry who were there first time through their CCARs they are kind of going through what we went through couple of years ago.

Unidentified Analyst

Right.

Bill Demchak

Yeah.

Unidentified Analyst

Okay. So then, I guess on credit expenses, how should we think about charge-offs as the economy normalizes? And I guess my specific question is, as you start to see a normalization of rate, as you start to see a normalization of loan growth, is your expectation that you should return to more normalized levels of credit expenses, or do you think underwriting standards in the last three or four years have been so tight that even as the economy continues to improve, there is going to be this disconnect between charge-offs and what loan growth looks like?

Bill Demchak

No. I think it will vary by sector. I think there are certainly parts of the corporate sector, the generic revolver stuff and the cash that sits on corporate balance sheet that are going to make credit conditions great in that space for a period of time. Having said that, I think there is a reasonable chunk of new credit origination that is susceptible to higher rates. If you think of some real estate, some of the leverage loans that have been done, whether getting EBITDA multiples in today’s rate environment that worries me a bit. Now that’s not a place we really plan. So I am thinking where we are, we’ll probably normalize out to more historic levels for us. But it wouldn’t shock me that a spike in rates causes some surprises in the credit cycle here.

Unidentified Analyst

Okay. So my last subject I want to talk about is on CCAR process. I guess this year we're going through this process by shifting from Basel I to Basel III, so hybrid you have next year is much more fully loaded Basel III test. Just can you take us through thought process in terms of what you think is a reasonable us going into this year and really what your aspirations are in terms of capital returns over the next two or three years?

Bill Demchak

Yeah. So, the short answer is we haven’t decided anything yet. But the process we go through, as you think about you’re starting Basel III ratio and we -- everybody tends to look at the starting ratio and say we have lots of room. The practical truth is you got to look at the ending ratio after your stress. And certain balance sheets will have your -- the drop from start to finish be more or less than others. As you saw us last year, our drop from start to finish was less than many of our peers and we're the same bank we were last year.

When we think about risk management and we think about what it means to be a risk profile we want to maintain. We want to be in a position, simple statement. I mean it’s severe, adverse case that we stay above the regulatory than amongst them. And that’s kind of how we define our starting point and just define the start from the end if that makes sense to you.

We think we are there. We think that even though we’ve talked about the opportunity to return capital in ‘14 you’ve heard me say that our buyers just do more rather than less. If you look at [precedents] from buybacks from other banks, the TrustBank have managed to approach and I guess exceed 100% of that case, but they had massive ratios when they did it and more of the peers of ours approach 70%, 80%. That’s, do you have the same information I have, somebody will ask the question, did I ever go to 100%? The answer is I don’t know and I don’t know that I want to find out, at least not this year.

Through time it’s got to happen. Through time it has to happen because we are all building our ratios higher and higher and higher and at some point you’ll say well I am neither getting loan growth, I am not going to buy anything that I am going to have to return 100 or more because I am at a level at this point that’s satisfactory.

Unidentified Analyst

I mean the fact that there is a 30% cap on what you can do on dividends. Do you think at the margin that’s making either you or the industry less price sensitive about whether willing to do buybacks as a result? How do you approach it? Do you think okay.…

Bill Demchak

I haven’t thought of it that way, there is obviously the cap on dividends. When we think about buyback in the ‘14 I think about where we are trading multiple to earnings where we are to book I think about what we see is a potential of our company. I think about the underperformance of our stock particularly last year when there was no bid for our stock because we have no buyback and somebody wanted to sell. So I think the buyback is a good thing for value for our shareholders in the near-term. I don't know that I connect that necessarily to the capital dividend.

Unidentified Analyst

Okay. So we've got some time as there are questions from the audience.

Bill Demchak

Sure.

Unidentified Analyst

(Inaudible) And you also mentioned the fact that the regulatory burden was much greater this time than it was in the past, it puts them under greater stress. How is that such a competitive dynamic? And does it affect your opportunity for retail level?

Bill Demchak

So in all the publicity the future of retail banking tends to go back to regulation and the burden of regulation and the impacts on community banks, which is all true. I actually think that that is less important than the changing dynamic of the demographic [accrue] as our clients and the technology.

So you could take all the costs out of the community bank if the community bank can't build a network that allows for seamless delivery of digital with physical. So the [mobile] deposit to online everything integrated together. It might not matter to my mother who is a client, but it's going to matter to my daughter. And so I don't -- the regulation is what the regulation is. We're in the midst of the changing, fundamentally changing retail delivery channel for these products.

And if you think about the people who will be able to compete in that space and what it takes to transform your physical branches, we think -- so today 90% of our physical branches are traditional branches. In five years we wanted to only be a third of them. We are going to change the world that will move tellers so that we have more automation have more universal sales people in the branch, have much smaller square footage, introduce technology, it will drop the operating cost out of it and it will deliver a service that [tomorrow’s] bank client expects. So regulation cost it doesn’t cost, but it’s almost relevant to what for the change I think we are to going go through in retail bank.

Unidentified Analyst

Yeah. Can you discuss the BlackRock (inaudible) the BlackRock position and you’re thinking about it?

Bill Demchak

Sure, it wouldn’t be an equity conference if I didn’t. Fair enough. So very simply, the BlackRock investment and it has become an investment, at one point it was a part of our company going back many years so we invested $250 million into a $10 billion plus or minus. Through time through their purchase of [stakes through] the Merrill Lynch to BGI they are no longer integral part of our company, they are an investment, a very valuable investment we hold on equity basis.

Our tax basis in that investment is literally zero so a disposition of those shares we [agreed] to do so would be on an after-tax basis. When we look at the return that we get and the diversified return from the fees that we get from that investment, we are hard pressed to figure out how we could or would ever do that in a way that is shareholder friendly.

Trying to replace those fees on an after-tax multiple generating goodwill we’re ready to buy something, it doesn’t work. And we looked at to every rich way to do it in a tax efficient manner and have not come up with one that’s satisfactory.

So at this point in time, we hold them, we get a good return on the capital we hold against them and that's where we are. I will tell you and I said this over and over again, we look at it and we will continue to look at it. We get the fact that we have a concentrated position worth $10 million, we’re not immune to that, we understand it, we focus on it and our objective is to through time figure out how to maximize the return we get from that on behalf of shareholders.

Unidentified Analyst

(Inaudible).

Bill Demchak

No, we talked. Historically we talked about return on assets of 1.3 to 1.5 or something. You give me an interest rate environment and I’ll tell you what our ROA will be. That's a bond trade not a value adding strategy.

I think ROE is going to be a bit more interesting as we go through time. Clearly the higher capital levels are going to depress ROE for the industry to be seen as whether the bade is on the stock or the riskiness of the stock drops to reflect that extra cushion and whether the industry can be intelligent about carrying extra capital without being stupid with it. Carrying extra capital is, you simply carry it and don’t invest it unlikely is okay. So I think ROE in the end, we and the rest of the industry are going to talk once we figure out what the regulations are and their totality.

Unidentified Analyst

Just going back to our loan growth, one of the bucket set, I think you and a lot of your competitors had that is actually growing them fast in the consumer bucket, particularly things like auto and involving credit and such. So I guess I just want to get your sense of the landscape there. There are some folks out there a little worried that the [fees] of the next hit to the income statement is lying in that part. How do you view that how are you pricing that risk, what do you see for growth there going forward?

Bill Demchak

It’s a good question. If you look at the growth in our indirect auto line it is quite substantial. We've spent a lot of time digging into that. One of the reasons it is as high as it is, is because the growth that’s come out of the Southeast. So we had a dealer networks in the Southeast, which have basically produced. It’s not as they’re for grabbing more share at least with the same pace out of our all dealer network. The other thing inside auto is if you look at unit production we've grown it at $16.5 million annualized level. So there is actually combination of higher volume out there. The [captives] giving up share in our case the Southeast is growing.

Having said all of that when we look at risk return inside of that portfolio I would tell you that we've seen tenders creep up we’ve seen spreads come in which causes us concern with the margin. So we are, while we expect to continue to see growth in the Southeast, we have definitely put the brakes on it a little bit in terms of where we're willing to price against that growth.

Some of the other growth you’re seeing home equity growth on the back of people taking that product versus more (inaudible) and paying down (inaudible). But largely inside the consumer space it’s kind of been in the auto.

Unidentified Analyst

Are there any changes you need to make to your balance sheet in the near-term to get compliant? And from a longer term perspective what do you think the impacts for the industry are and we have record liquidity at most banks and most banks are fairly or not compliant?

Bill Demchak

Well, as you’re seeing that somewhat to our surprise the re-proposal of the LCR rules was actually more restricted than the original proposal. So people who perhaps thought they were compliant ended up not being so. Changes to our business model you have seen us consolidate our markets pretty conduit and funded on our balance sheet. There are issues we will have as everyone will have with undrawn lines of credit, but pricing on that clearly has to change through time.

The mechanical fix to it, we can fix very quickly. It will cost a little money, but we could fix very quickly and get to 100%. Whether that’s an efficient thing to do versus pushing the business out of the bank undrawn commitments some stuff in the municipal space certain securities we’ll have to -- we and the rest of the industry are going to have to work our way through.

The other issue inside of LCR which astounds me that there is not more written about it, but the banks today have -- there is $2.1 trillion I think on deposit with the fed against the fed’s balance sheet of $4 trillion. And you will hear them say we will drop the reserve rate that will help increase the money supply if we needed to do that. We are not holding the cash there to earn the return; we are holding the cash there because of LCR.

So if you think what’s happen in the economy the velocity of money is contracted so we have a monitory policy that’s throwing money out into the system and a supervisory policy that’s sucking it straight back into the walls, and I think that’s an issue. If you go straight back to the federal reserve I guess 1913 I think that was founded as a system and the liquidity back stock that came from that through the discount window, they’re kind of suggesting that they’re going to obviate the need for the discount window. We want the discount window to exist on your own balance sheet.

I think that has profound implications long-term to the velocity of money and the money supply. People talk about the fact that capital -- there has been lots written about excess capital and how that's going to change loan spreads and you’re going to have lower returns maybe that will happen or maybe it won't. You're going to take trillions of dollars of the money supply through the LCR. And it’s taken on deposit with the fed and that's going to have an impact.

Unidentified Analyst

Can I just ask a follow-up question which is kind of related, which is you are the smallest advanced approach bank within the U.S. How much of a competitive disadvantage is that or do you don't think about it in that way?

Bill Demchak

Okay. We got a little pride issue. So I guess the question is, you are the smallest advanced approach bank in the U.S., do you view that as a competitive disadvantage or you kind of in different to it. You win some of these things you lose some of these things. As they come up with all these rules we all knew that it was going to be very difficult for them to draw different lines in arbitrary. And if it was a hard line or a soft line, boy what happen if you just cross your next dollar asset throw you into the next spot.

So at the margin we are not as you say, that's a good thing. We're not subject to the enhanced supplementary leverage, that's a good thing. The new LCR proposal because it went after advanced approaches, because we're over $250 billion, we're hit with the 30 day requirement not a 21 day, that's a bad thing.

And we are absolutely no different in our operating model at complexity than the guys the next step down, but that's where we are. Can't control it, we run over the (inaudible) and try to win by the new rules.

Unidentified Analyst

I think we're out of time. So Bill, thank you very much for the time.

Bill Demchak

Thank you. It was great.

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