PNC Financial Services Group's (PNC) CEO William Demchak on Q3 2016 Results - Earnings Call Transcript

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PNC Financial Services Group, Inc. (NYSE:PNC) Q3 2016 Earnings Conference Call October 14, 2016 11:00 AM ET

Executives

Bryan Gill - Senior Vice President & Director, Investor Relations

William Demchak - Chairman, President and Chief Executive Officer

Robert Reilly - Chief Financial Officer

Analysts

Scott Siefers - Sandler O’Neill & Partners L.P.

Betsy Graseck - Morgan Stanley

John Pancari - Evercore ISI

Gerard Cassidy - RBC Capital Markets

Brian Klock - Keefe, Bruyette & Woods, Inc.

Jason Harbes - Wells Fargo Securities, LLC

Jesus Bueno - Compass Point

Operator

Good morning. My name is Carlos and I will be your conference operator today. At this time, I would like to welcome everyone to The PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

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

Bryan Gill

Thank you, operator, and good morning. Welcome to today’s conference call for The PNC Financial Services Group. Participating on this call are PNC’s Chairman, President and Chief Executive Officer, Bill Demchak; and Rob Reilly, Executive Vice President and Chief Financial Officer.

Today’s presentation contains forward-looking information. Our forward-looking statements regarding PNC performance assume a continuation of the current economic trends and do not take into account the impact of potential, legal and regulatory contingencies. Actual results and future events could differ, possibly materially, from those anticipated in our statements and from historical performance due to a variety of risks and other factors.

Information about such factors, as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss, is included in today’s conference call, earnings release and related presentation materials and in our 10-K, 10-Qs and various other SEC filings and investor materials. These are all available on our corporate website, pnc.com, under investor relations. These statements speak only as of October 14, 2016, and PNC undertakes no obligation to update them.

Now, I would like to turn the call over to Bill Demchak.

William Demchak

Thanks, Bryan, and good morning, everybody. I know everybody has a fairly busy morning this morning with all the earnings out, so I’m going to keep my comments very brief before I turn it over to Rob to take you through the numbers.

Just to lead off, as you’ve seen this morning, PNC reported net income of $1 billion, or $1.84 per diluted common share in the third quarter. You hopefully also saw it was a good, clean quarter with results that are kind of representative of the consistent execution our shareholders have come to expect from us in recent years.

We grew loans by more than $1 billion, generated strong deposit growth. We had revenue up by $35 million, or 1%, driven by both higher net interest income and noninterest income. And we had expenses – expenses again remained well controlled, and importantly, overall credit quality remained stable with the second quarter.

Finally, and just briefly, I can assure you that we’re hard at work on the execution of the growth drivers that we laid out at the recent Barclays Conference. While the bulk of our consumer lending initiatives are going to take some time to execute, we’ve already started putting together the teams for the C&IB growth markets, and in fact already have Dallas up and running.

And with that brief update, I’ll turn it over to Rob, who is going to take you through a closer look at the numbers, and then of course, we’ll be happy to answer your questions at the end. Rob?

Robert Reilly

Great. Thanks, Bill, and good morning, everyone. PNC’s third quarter net income was $1 billion, or $1.84 per diluted common share. These results reflected revenue growth, driven by higher net interest income and fee income. Expenses remained well-managed and our provision declined.

Balance sheet information is on Slide 4, and is presented on an average basis. Commercial lending was up $597 million from the second quarter, reflecting growth in our large corporate client and our real estate businesses. Consumer lending was essentially flat linked quarter. We did see growth in auto, residential mortgage, and credit card, which totaled approximately $400 million during the second quarter. However, that was offset by declines in the non-strategic consumer portfolio and government guaranteed education loans.

Looking at our securities portfolio, we saw growth on both in average and spot basis, which was commensurate with a higher level of deposit. On average – on an average basis, investment securities increased linked quarter by $1.5 billion, or 2%, and total deposits increased by $4.9 billion, which was also 2%. On a spot basis, investment securities increased by $6.7 billion or 9%, and total deposits increased by $10.1 billion or 4%.

Securities purchases were primarily residential mortgage-backed and treasuries, a portion of which settled late in the third quarter resulting in the increase in spot balances relative to average. Importantly, our asset sensitivity was not significantly impacted during the quarter as a third of the purchases were converted to floating-rate.

Average shareholders’ equity increased by approximately $200 million linked quarter, as we continue to return substantial capital to shareholders. During the third quarter, our capital return totaled $772 million, comprised of $499 million in share repurchases, and $273 million in common dividends. This resulted in a payout ratio of approximately 85%.

Period-end common shares outstanding were $488 million, down $22 million or 4% compared to the same time a year ago. As of September 30, 2016, our pro forma Basel III common equity Tier 1 capital ratio fully phased-in and using the standardized approach was estimated to be 10.2%, which was unchanged from June 30, 2016. Our tangible book value reached $67.93 per common share as of September 30, a 7% increase compared to the same time a year ago. And our return on average assets for the third quarter was 1.1%.

As I have already mentioned and as you can see on Slide 5, net income was $1 billion, and highlights include the following. Total revenue was up $35 million compared to the second quarter, driven by higher net interest income, which increased $27 million in part due to an additional day in the quarter.

Noninterest income was up in the quarter, as business activity and improved equity markets drove fee income growth of $13 million. As expected, expenses continued to be well-managed. Noninterest expense increased by $34 million or 1% compared to the second quarter, reflecting increased business activity and the impact of the new FDIC surcharge.

Provision for credit losses in the third quarter was $87 million, down $40 million compared with the second quarter related to the stabilization in our energy-related loan portfolio. The non-energy component of provision, which was essentially all of our provision in the third quarter, was up $6 million compared to the second quarter, reflecting the gradual normalization of credit costs.

Finally, our effective tax rate in the third quarter was 25.4%. For the full-year 2016, we continue to expect the effective tax rate to be approximately 25%. Now, I will discuss the key drivers of this performance in more detail.

Turning to Slide 6, net interest income increased by $27 million or 1% compared to the second quarter. Core net interest income increased by $29 million, which was driven by an additional day in the quarter and higher earning assets that were partially offset by lower securities yields. Compared to the same quarter a year ago, core net interest income increased $61 million, or 3% and included higher securities and loan balances and higher loan yields.

Net interest margin of 2.68% declined by 2 basis points linked quarter, primarily reflecting the lower securities yields. Purchase accounting accretion was essentially flat linked quarter, as cash recoveries were higher than expected. For the fourth quarter, we expect purchase accounting accretion to be approximately $50 million.

Turning to Slide 7, noninterest income and importantly fee income grew over the second quarter. Compared to the same quarter a year ago, total noninterest income grew despite a sizable decline in other income. Year-over-year, we saw strong fee income growth of $77 million, or 6%, reflecting the continued success of our efforts across our businesses.

Asset management fees, which include our equity investment in BlackRock increased by 7%, both year-over-year and linked quarter, reflecting stronger equity markets and new business activity. Consumer services fees remained relatively stable linked quarter. Compared to the third quarter of last year, consumer services fees increased by $7 million, or 2%, primarily due to higher customer activity with growth in credit and debit cards.

Corporate services fees declined by $14 million, or 3% compared to the second quarter, as higher treasury management fees were offset by lower capital markets related revenue and a lower benefit from commercial mortgage servicing rights valuation. Compared to the third quarter of last year, corporate services fees grew by $5 million, or 1%, due to increased customer activity, which included higher treasury management and merger and acquisition advisory fees.

Residential mortgage noninterest income declined by $5 million, or 3% linked quarter as higher loan sales revenue driven by an increase in origination volume was offset by lower net hedging gains on mortgage servicing rights and lower servicing fees. Mortgage originations increased by 17% linked quarter.

Compared to the same quarter a year ago, residential mortgage noninterest income increased by $35 million, or 28% as a result of higher loan sales revenue from increased origination volumes, higher servicing revenue, and higher net hedging gains.

Service charges on deposits increased by $11 million, or 7% linked quarter, primarily due to seasonal customer activity. On a year-over-year basis, service charges on deposits remained relatively stable. Of note, with respect to other noninterest income, we had no sales of Visa shares in the third quarter. The year-over-year decline reflected the impact of the net Visa gains in the third quarter of 2015.

Turning to Slide 8. As you know, our expenses have declined three years in a row. And through the first three quarters of this year, expenses have remained well-managed, as we continue to invest in technology and business infrastructure. Third quarter expenses increased by $34 million, or 1%, which included increased business activity, as well as higher FDIC expenses of approximately $25 million, driven by the impact of the new surcharge.

As we previously stated, our continuous improvement program has a goal to reduce cost by $400 million in 2016. We’re now nine months into the year and we’ve completed actions related to capturing more than 75% of our annual goal. As a result, we remain confident we will achieve our full-year objectives. Through this program, we intend to partially fund the significant investments in our business.

Looking ahead, our fourth quarter will be impacted by seasonally higher expenses, which is consistent with prior years. We will also continue to make investments in technology, in our retail banking, and home lending transformation. As a result, we expect fourth quarter expenses to be up low single digits on a percentage basis compared to the third quarter. We continue to expect that our full-year 2016 expenses will remain stable with 2015 levels.

As you can see on Slide 9, overall credit quality was stable compared to the second quarter. While we experienced stabilization in our energy-related portfolio in the third quarter, our credit quality was impacted by these loans in recent quarters. And as a result, we are continuing to provide the breakout of this portfolio.

Total nonperforming loans decreased by 118 million, or 5% linked quarter, with declines across nearly all commercial and consumer categories. Total delinquencies decreased by $5 million compared to the second quarter. Provision for credit losses of $87 million decreased by $40 million linked quarter.

Our third quarter provision included $2 million for loans in our energy sector compared to $48 million in the second quarter. The remaining $85 million of our provision for our non-energy loans included the impact of increases on the consumer side, offset by a lower commercial provision, which was driven in part by changes in expected default rates. Because of the stabilization in our energy portfolio, we expect our fourth quarter provision to be in the $75 million to $125 million range.

Net charge offs increased $20 million, or $154 million in the third quarter. Higher commercial loan net charge-offs across various industries were partially offset by lower charge-offs related to loans in the energy sector. Our third quarter annualized net charge-off ratio was 29 basis points, up 3 basis points from the second quarter.

Turning to our energy book on Slide 10, not much has changed from the information provided last quarter. At the end of the third quarter, our oil, gas and coal portfolios continue to represent a small portion of our outstanding loans, approximately 1.4%, and we view this book as appropriately reserved. And as we stated previously, we continue to monitor market conditions, as well as impacts other businesses.

Borrowing any dramatic changes in energy prices, we believe the majority of the energy-related credit pressures we’ve experienced in 2016 have largely subsided. In summary, PNC had a successful quarter, driven by growth in revenue and well-managed expenses. We grew loans and deposits and continued to deliver significant shareholder returns. We believe the U.S. economy will continue to grow at a steady pace, and our plans assume a 25 basis point increase in short-term interest rates by the Federal Reserve in December.

Looking ahead to the fourth quarter and when compared to the third quarter reported results, we expect modest growth in loans, we expect stable net interest income, we expect stable fee income, we expect expenses to be up in the low single digits, and as I stated earlier, we expect provision to be between $75 million and $125 million.

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

Bryan Gill

Operator, could you poll for questions please?

Question-and-Answer Session

Operator

Sure. [Operator Instructions] And our first question comes from the line of Scott Siefers with Sandler O’Neill. Please proceed with your question.

Scott Siefers

Good morning, guys.

William Demchak

Good morning.

Robert Reilly

Hi, Scott.

Scott Siefers

Rob, I wonder within the sort of theme of the stable fee income, I look for the fourth quarter. Can you just…

Robert Reilly

Yes.

Scott Siefers

…maybe go through it a little bit of the puts and takes, I mean, I imagine mortgage begins to kind of normalize off sort of elevated levels. But what are sort of the big factors you see pro and con?

Robert Reilly

Yes. So, the guidance overall is for stable fee income, Scott. Within those components, we see asset management and consumer services up a bit. Corporate services and residential mortgage maybe down a little bit. Corporate services, because of the elevated M&A fees and residential mortgage more due to seasonality and a little bit of drop off in the refinancing volume.

Scott Siefers

Okay, perfect. I appreciate that.

Robert Reilly

Sure.

Scott Siefers

And then, Bill, maybe just a quick question for you. A lot has been made about this – the slowdown in commercial lending from the H8 data the last couple of months. Just curious if you can provide a little bit expanded outlook on sort of the trends you’re seeing and what kind of thoughts you have on just what’s going on out there?

William Demchak

Yes. We actually don’t expect a big change. We’ve kind of said stable, but slower growth for a while, and that’s what we’ve experienced and kind of what we see in the pipeline into the fourth quarter. I mean, I think, Rob can jump in here. If we look at the mix, we still got some growth on a large corporate on the back of M&A. We interestingly, for the first time in a while, saw some healthy growth in middle market which we hadn’t seen for a while, continue to see real estate balance growth.

So it’s – on the C&I side, it’s kind of steady as it goes. And I’m not exactly sure, what’s happened with peers and with the H8 data. But as it relates to what we’re able to do with existing and new clients, we seem to be on a steady path.

Scott Siefers

Okay. All right, that’s perfect. Thank you very much.

William Demchak

Yes, sure.

Bryan Gill

Next question please.

Operator

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck

Hi, good morning.

William Demchak

Hi, Betsy.

Robert Reilly

Hi, Betsy.

Betsy Graseck

Hey, couple of questions. One is on excess liquidity. Just wanted to get your sense of how much dry powder do you think you have?

William Demchak

I mean, depending what you do with it, right? So all of it in theory could go into level one securities…

Robert Reilly

All the Fed balances, yes.

William Demchak

All the Fed balances, yes. And then some subset of that, I don’t remember the percentage, Rob, that can go into level two.

Robert Reilly

Yes, about $1 billion – of that $26 billion.

William Demchak

Yes. And one of – just as an aside, one of the things you saw, the securities build this quarter, you’ve heard in Rob script that we asked to swap some of it. It’s probably something we will continue to do simply, because where swap spreads it flat or negative levels, you’re effectively taking treasuries at LIBOR plus and with LIBOR at an elevated level, you’re earning more than you are at the balances of the Fed. So that drove a lot of what that security shift was this quarter, and you might see us continue to do that.

Betsy Graseck

Okay, that makes a lot of sense. Okay. And then second question is just on the thrill of speech on how we’re thinking about the stress test in 2018? Could you give us a sense as to how you read that for you specifically? How much excess capital do you think it gives you versus where you are today? And the – and how you think about the soft divi cap being gone?

William Demchak

I’m sorry, the what?

Robert Reilly

The dividend cap?

William Demchak

Oh, okay.

Betsy Graseck

The dividend caps gone?

Robert Reilly

Hey, Betsy, this is Rob. So, we’ve read what you’ve read, which are sort of the proposed changes. In general, on the margin, we see them as maybe being beneficial to us, but of course, they’re not final. At first blush, in terms of some of the calculations, in terms of the proposed stress capital buffer, it looks like it’s a little bit more than what ours has been in the past. But we haven’t begun our capital planning for next year per se. So we’ll just have to address those issues when the rules become final so to speak.

On the dividend soft cap on that release that will be part of our consideration. We saw that – we see that as a good thing, and that will be part of our thinking.

Betsy Graseck

Okay. And so the stress capital buffers a little bit higher than what you’ve been experiencing, but still you’ve got to execute [Multiple Speakers]?

Robert Reilly

Yes, it’s the way that you want to do that there in terms of. So, 2.5% is more than what our stress test there.

Betsy Graseck

Yes.

Robert Reilly

Yes.

Betsy Graseck

Right, right, right, but you’ve got excess capital on top of that anyway at this stage?

William Demchak

Yes.

Robert Reilly

Yes, that’s right.

Betsy Graseck

Okay. All right. Hey, thanks a lot.

William Demchak

Sure.

Bryan Gill

Next question please.

Operator

Our next question comes from the line of John Pancari with Evercore ISI. Please go ahead.

John Pancari

Good morning.

William Demchak

Good morning.

Robert Reilly

Hi, John.

John Pancari

Just wanted to go back to expenses here. I know for the quarter, it looks like expenses on a couple of areas came in above your expectation not by a lot, but somewhat above it. And I know you’re maintaining your year-over-year view on expenses. But they come in a bit higher for the quarter. So just wanted to get a better feel about what came in above your expectation from your point of view, and why you have the confidence that you can still meet that year-over-year goal, in other words, the fourth quarter trend? Thanks.

Robert Reilly

Yes. Well, I would say in terms of our expectations, I think are the expenses that increase quarter-over-quarter were in line with our guidance in terms of being stable, because it wasn’t much. And the incremental amount around the FDIC surcharge, obviously, is a higher expense. So that’s sort of a quarter-to-quarter comparison. Like…

William Demchak

The HW had some compensation…

Robert Reilly

Some business activity, yes, that’s right. But I – you pointed out correctly, what we really focus on is the year-over-year. We’re still – our guidance is still for stable. So in any given quarter, we can have timing of things, particularly around the investments in our business. So it’s not uniform quarter-to-quarter.

John Pancari

Okay, all right. And then related to that and I’m sorry if you alluded to this, I hopped on a call late. But the – any help in how we should think about 2017 when it comes to the CIP program, and what type of number we could be looking at? And also how much of that could we actually start to see fall into the bottom line? So now you’re getting to a point with some of this back-office modernization effort and everything that you might be able to start to see and the rubber meets the roads here. So just want to try to get a better feel that as we at 2017?

Robert Reilly

Yes. We’re not in a position to give 2017 guidance yet. We’re in the middle of our budgeting process for that. So, we’ll have more on all of that for you at the end of the year. I will say though the continuous improvement program has been a important tool for us, and that will continue, as you know, it’s essentially generating savings that we used to fund our investments.

John Pancari

Okay, all right. And then lastly, if I may ask one more on the loan side, I think you alluded to it a little bit on the consumer side. But I just want to see the consumer loans inflected this quarter after a while of abetment given some run off. So just wanted to see what you’re seeing there and do you think that sustainable?

William Demchak

Well that’s one of our strategic focuses and we’ve talked about that at a recent conference, where we think we have opportunity simply through better execution of our existing products faster fulfillment make it easier for customers, not really having to change your risk spots. Maybe some of that attitude flowed through to the volumes we saw this quarter. But we’re in early stages and many of the changes we’re going to make and most of that will take hold as we get into kind of 2017 and even out into 2018. I hope it’s an inflection point, but I don’t know that I’d lock that down.

John Pancari

Got it. Okay, thanks, Bill.

William Demchak

Yes.

Bryan Gill

Next question please.

Operator

Our next question comes from the line of Gerry Cassidy with RBC. Please go ahead.

Gerard Cassidy

Good morning, guys.

Bryan Gill

Hi, Gerry, good morning. It’s Bryan.

Gerard Cassidy

Can you give us a little more color, you mentioned, Rob, about the noninterest income and the impact that the lower capital markets revenue had on it. And is there any color about what went on in the quarter? And then second what the pipeline, I know fourth quarter traditionally is a strong quarter for you guys in this area. Do you expect that to be the case?

William Demchak

Yes, I just think in terms of the quarter, I mean, obviously, the biggest increase in fee income came on the asset management side in part reflecting the higher equity markets. On the corporate services, we were down a little bit and most of that was related to the CMS, our valuation in the second quarter. So we’re moving along consistent with our objectives, as you know, Gerard, in terms of the strategies that we’ve laid out. So I would expect that to continue, but you might have some anomalies quarter-to-quarter.

Gerard Cassidy

Okay.

William Demchak

And then as far as the fourth quarter goes, I don’t know if you heard on the first question just in terms of what we see relative to our guidance around stable probably up a bit in asset management and consumer services, offset by some corporate services and residential mortgage.

Gerard Cassidy

Great. And then coming back to the new way we’re going to calculate the CCAR capital within stressed capital buffer, because of the variability of that buffer versus the old conservation buffer, how you guys are approaching? And would that – would you guys want to keep a little more extra capital now because of the variability of this new stress capital buffer?

William Demchak

Yes, I’m not sure I follow. So if you’re talking about – potential variability of their 2.5% minimum?

Gerard Cassidy

Correct. In case, as you know now, it’s going to be based upon how everybody makes it through the stress test and granted you’re below the 2.5%. But because of that variability, whereas in the past, there wasn’t the variability doing. Do you think that it would require you to keep a little extra to protect taking some…

William Demchak

I don’t – in many ways what they created and I’ll admit up front that I’m not expert on the proposal and it’s not inked yet. But as I read through what it look like to me is what we actually have always done in the sense that you’ve heard me talk about, we start kind of from the bottom up, as it relates to the amount of capital we want to hold.

So we run the stress against, but effectively being able to pass the severely adverse and then set a buffer on that, say, that’s the capital we’re going to hold now. As you know, we’ve been running a little bit above that. These new changes, the combination of the ability to truncate your capital actions the fact that they’re not going to grow your balance sheet in the back, and so your RWA is down. And the fact that our, at least, most recent loss has been below their 2.5 % kind of give us a lot room here.

Gerard Cassidy

Yes.

William Demchak

But we’ve got to get all those sort of modeled up to see the puts and takes and actually see the final rule. But all else equal, as Rob said at the start, we think that’s probably pretty good thing for us.

Gerard Cassidy

Very good. And then just finally, can you give us an update on the branch network? I think you guys pointed out that about 18% of the network operates under the universal model. What do you see that being at the end of next year, as a percentage of your total branches?

Robert Reilly

Well, you’re right. So at the completion of 2016, we’ll have about 550 universal branches out of the roughly 2,600, so that percentage is right. We like what we see in terms of the results there and we’re going to continue to improve that mix. But again, we don’t have the specific 2017 guidance in terms of a fixed number.

Gerard Cassidy

Great. Thank you.

Bryan Gill

Next question please.

Operator

[Operator Instructions] Our next question comes from the line of Brian Klock with Keefe, Bruyette & Woods. Please go ahead.

Brian Klock

Yes. Good morning, and thanks for taking my question, guys. I wanted to ask a little bit, your credit quality is still one of the strongest in the group. Just within the quarter, you’ve seen the improvements in the energy-related portfolio. It look like the 32 basis points of commercial loan charge-offs came from non-oil and gas or non-coal.

So is there anything in there that that beginning to be just normalization in that book, or were there anything special on that the commercial charge-offs for the quarter?

Robert Reilly

Well, it’s – yes, it’s a little bit of a mix. The majority of that is in our asset-based group, which is secured lending. And many of those instances, although, they weren’t per se energy companies, they served energy companies. So by extension, it was energy related.

Brian Klock

Got it. Okay. Then just thinking about for the fourth quarter, the guidance you gave for the provision, obviously, lower than what you’re guiding for in the third quarter. I guess thinking about the fall borrowing base, redeterminations coming up, and you’ve got oil prices being a little bit more stable, so is there an expectation that maybe there could be some reserve releasing out of that 6% oil and gas reserve?

Robert Reilly

No, I don’t think so. I think, we believe that as I said in my opening remarks, we’re appropriately reserved and we take all that into consideration.

Brian Klock

Okay. Thanks for your time.

William Demchak

Sure. Thank you.

Operator

Our next question comes from the line of Jason Harbes with Wells Fargo. Please go ahead.

Jason Harbes

Hey, good morning, guys.

William Demchak

Hi, Jason.

Robert Reilly

Hey, Jason.

Jason Harbes

Could you offer a little bit more perspective on some of the consumer loan growth trends? I know there has been a fair amount of runoff in the HELOC and the student lending books. But at a recent conference you laid out some pretty ambitious growth targets for card and some other consumer areas. So, I guess, the question is, can you maybe elaborate a little bit of – on what you’re seeing in terms of consumer borrowing and maybe how quickly you could start to see the benefits of some of the different initiatives that you laid out?

William Demchak

Sure. Specifically, what we talked about is a longer-term project basically streamline the fulfillment of many of our consumer lending products, make it easier for our customers, make it more digital. And we kind of opened ourselves up to our own criticism on the speed at which we do things today and the business we lose because of it.

On a prior question somebody said have we seen a turn in a corner and will we grow consumer from here? And I don’t know that that’s the case. But we have seen and continue to see growth in credit card in an auto. And importantly, inside of auto, we’ve seen continued accelerated growth in direct auto through our Check Ready product, which I guess and I think it’s in the first quarter of next year, we’ll actually have on mobile.

So, I think this will accelerate through time, but it’s not something that’s going to make a dramatic difference in the first-half of 2017. It’s just there and something we can execute on over the next couple of years that we think long-term we’ll have a pretty material difference in our ability to change the growth trajectory of consumer lending.

Robert Reilly

And our overall mix of total loans.

William Demchak

Yes, yes.

Jason Harbes

Okay. Thanks for the color. And maybe if I could follow up with a question on operating leverage. It looks like you’re on pace to achieve some this year despite very minimal benefit from interest rates. It may be premature to start speculating about 2017, given that you’re going through the budgeting process now. But assuming we do get that additional rate hike in December, would it be realistic to expect a continuation of that more positive trend next year?

Robert Reilly

Well, again, we’re not going to get into 2017 guidance. As I mentioned, we’re in the middle of our budgeting process. We have said before and we say again that, our objective is positive operating leverage over a multi-year time period and thought about in terms of our strategic plan, we see a path of positive operating leverage outside of rates.

William Demchak

Independent of rates and that was kind of the theme of that we went through in a conference that’s how can we do it without the help of rates. And that comes on the back of some of these initiatives inside of consumer lending and the continued growth we’ve seen in fees, which we think we can keep doing.

Robert Reilly

And to your point in terms of our year-to-date progress, we’re not that far off.

Jason Harbes

Thanks, guys.

William Demchak

Yes.

Bryan Gill

Next question please.

Operator

Our next question comes from the line of Jesus Bueno with Compass Point. Please go ahead.

Jesus Bueno

Hi, thanks for taking my questions. We saw your real estate – commercial real estate balances move up again in 3Q. And as it relates to warnings that we’ve heard from regulators recently on CRE, have you seen any impacts in the markets in which you operate recently?

William Demchak

Not really. Our real estate business has been fairly consistent for a number of years, where we kind of work with Class A developers and markets and products and that continues. Now, we have seen a slowdown in the origination of new projects and a pickup of balance related – balances related to permanent lending.

So think of the product that historically might have gone into CMBS is now being structured more like what we would call life insurance product, much lower leverage, better loan to value, and you’ll see that in our permanent lending line.

So we’re not seeing stress. In fact, our portfolio actually on a credit metric basis continues to improve. We would tell you that we monitor it pretty closely. We’re clearly seeing some signs of weakness in multifamily. In a couple of markets, we see some signs of weakness down in Houston on the back of oil and gas. But against our book, we feel pretty good about it.

Jesus Bueno

That’s great. Thank you. And if I could ask another question, just on your provision guidance, assuming kind of current trends hold and we see oil kind of stay around this $50 level. I guess, would you anticipate, I guess, coming in at the lower-end of your provision if that were to hold?

Robert Reilly

There was an earlier question in terms of the effect of some of the changes. We think we’re appropriately reserved in terms of our provision guidance, it’s all – all of what we expect to happen in oil and gas is part of that.

William Demchak

Yes. I mean part of the thing you have to remember is provisions have been so low relative to historical standards that to try to pinpoint inside of that range, we just can’t do it, because it’s one credit that’s going to move it.

Robert Reilly

Yes.

William Demchak

One way or the other.

Robert Reilly

And we’ve seen that for sometime now.

William Demchak

Yes.

Jesus Bueno

Understood. Thanks for taking my questions.

William Demchak

Yes.

Bryan Gill

Yes. Next question please.

Operator

And, sir, we have no further questions.

Bryan Gill

Okay. Thank you.

William Demchak

Very good. Well, thanks everybody for joining, and we’ll see you in the fourth quarter.

Robert Reilly

Thank you.

Bryan Gill

Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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