PNC Financial Services Gr Reports Q3 2026 Results: Full Earnings Call Transcript
PNC Financial Services Gr (NYSE:PNC) reported third-quarter financial results on Thursday. The transcript from the company's third-quarter earnings call has been provided below.
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Summary
PNC Financial Services Group reported a strong Q3 2026 with a net income of $2.1 billion, or $5.09 per diluted share, reflecting a return on tangible common equity of over 18%.
The company experienced robust growth across all business segments, notably with a 5% average increase in corporate and institutional banking loans and a 17% growth year over year.
Retail banking added 215,000 net new checking accounts in 2026, with significant growth in credit card balances (up 12%) and brokerage assets (up 9%).
Asset management fees increased by 10% year to date, with assets under administration totaling half a trillion dollars.
The company maintained a well-capitalized position with an estimated CET1 ratio of 9.8% and returned $1.4 billion of capital to shareholders during the quarter.
PNC expects loan growth to continue, forecasting a 2.5% increase in average loans in Q4 and anticipates a net interest income growth of 4%.
The company remains focused on disciplined growth, prudent risk management, and continuous investment in capabilities, including AI and technology infrastructure.
Management expressed confidence in navigating a rising rate environment and plans to continue optimizing their funding mix while maintaining strong credit quality.
PNC does not foresee immediate impacts from AI on deposit costs but acknowledges ongoing technological advancements will enhance competition over time.
Full Transcript
OPERATOR
Greetings and welcome to the PNC Financial Services Group Q3 2026 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed into the question queue at any time by pressing Star 1 on your telephone keypad. As a reminder, this conference is being recorded. If anyone should require operator assistance, please press Star 0 on your telephone keypad.
It's now my pleasure to turn the call over to Brian Gill, Executive Vice President and Director of Investor Relations. Brian, please go ahead.
Brian Gill, Director of Investor Relations
Well, good morning and welcome to today's conference call for the PNC Financial Services Group. I am Brian Gill, Director of Investor Relations for PNC, and participating on this call are PNC's Chairman and CEO William 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 are all available on our corporate website, pnc.com under Investor Relations. These statements speak only as of October 15, 2026, and PNC undertakes no obligation to update them. Now I'd like to turn the call over to Bill.
William Demchak, Chairman and CEO
Thank you, Brian, and good morning, everyone. PNC delivered another strong quarter, reflecting the consistent execution of our strategy and the strength of our franchise. As you saw, we generated 2.1 billion of net income, or $5.09 per diluted share, as adjusted, while delivering a return on tangible common equity of more than 18%. Rob's going to take you through the financial results in more detail in a second, but I wanted to start off by highlighting the substantial client momentum we've been experiencing all year, which has continued through the third quarter.
All of our businesses are experiencing robust growth, in part driven by the high growth rates of our expansion markets and, most recently, the successful conversion of FirstBank. In corporate and institutional banking, our national platform continues to generate impressive growth. Expansion markets have added approximately 500 new client relationships year to date, contributing materially to a 5% average C&IB loan growth during the quarter and 17% growth year over year.
Beyond loans, capital markets fees are up 40% year to date and treasury management revenue is up 8%. In retail banking, we continue to grow clients organically, adding 215,000 net new checking accounts so far in 2026, with total accounts up 2% year over year, including 6% growth in our Southwest markets. And we continue to deepen relationships with credit card balances up 12% and brokerage assets up 9% year over year. At the same time, we continue to invest in capabilities to enhance our franchise with the introduction of both a new mobile app and a total rewards program, as well as our continued branch expansion.
Asset management fees are up approximately 10% year to date and assets under administration total a half a trillion dollars. Favorable equity markets have obviously helped here, but once again our expansion markets have accelerated our growth in these markets. AUM is growing five times faster than our legacy markets, albeit off a smaller base. When we step back and look at the year as a whole, we have grown considerably faster than we anticipated.
Coming into 2026, we are bringing new clients into the franchise, expanding relationships across businesses and markets, and converting that activity into durable growth in loans, deposits, and fee income. As we enter the final quarter of the year, we remain focused on disciplined growth, prudent risk management, and continued investment in the capabilities that strengthen our competitive position. As always, I would like to thank our employees for their hard work and commitment, and with that, I'll turn the call over to Rob to take you through the details of the quarter.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Thanks, Bill, and good morning, everyone. Our balance sheet is on Slide 5 and is presented on an average basis. For the linked quarter, loans of $372 billion grew by $9 billion, or 2%. Securities balances increased 3% to $151 billion. Average deposits increased $4 billion, or 1%, to $461 billion and the borrowings increased $7 billion to $86 billion. However, on a spot basis, deposits increased $17 billion and borrowed funds declined $6 billion, reflecting continued optimization of our funding mix.
Our tangible book value was $108 per common share, down 3% linked quarter, entirely driven by the decline in AOCI, and was stable compared with the same period a year ago. We remain well capitalized with an estimated CET1 ratio of 9.8%. We continue to be well positioned with capital flexibility. During the quarter we returned $1.4 billion of capital to shareholders, which included approximately $800 million of common dividends and $560 million of share repurchases.
Going forward, we expect fourth quarter repurchases to approximate the same level, and our return on tangible common equity was more than 18% in the third quarter. Slide 6 shows our loans in more detail. During the third quarter, average loans increased $9 billion, or 2%, to $372 billion. C&I balances increased $9 billion, or 4%, reflecting broad-based growth across our businesses and higher utilization. Commercial real estate balances increased $2 billion, or 4%, driven by strong new production.
Consumer loans declined $1 billion, or 1%, as growth in credit card was more than offset by lower residential mortgages as well as the transfer of our student loan portfolio to held for sale. You may recall we stopped originating student loans last year, and the transfer represents the final step in exiting this non-strategic business. We expect the sale to have a de minimis financial impact. In regard to loans, overall spot loans grew $11 billion in the quarter, contributing to the strong loan growth we've had throughout the year, all of which substantially exceeded what we expected at the beginning of the year.
Through the first nine months of 2026, we've added $47 billion, or 14%, while approximately $15 billion came through the First Bank acquisition. More than $30 billion of the growth has been generated organically, reflecting strong client activity and execution across our franchise. Slide 7 details our investment securities and swap portfolios. We continue to maintain a high-quality short-duration position. During the third quarter, average investment securities increased $4 billion, or 3%.
Our securities yield was 3.59%, an increase of 14 basis points, and as of September 30th our duration was 4.1 years. Looking ahead, we expect approximately $5 billion of fixed-rate securities to run off during the fourth quarter at a weighted average yield of 2.65%. Our received-fixed swap portfolio totaled $83 billion at quarter end with an average received fixed rate of 3.92%, which increased 17 basis points from last quarter. Importantly, we have a clear path for continued fixed-rate asset repricing over the next several years.
Overall, we remain well positioned for a rising rate environment, which will support net interest income, capital generation, and balance sheet flexibility. Slide 8 covers our deposit balances in more detail. Average deposits increased $4 billion to $461 billion during the third quarter, driven by growth in interest-bearing balances. Noninterest-bearing deposits were $101 billion and represented 22% of total deposits. Notably, period-end deposits increased $17 billion, or 4%, compared to June 30.
The strong growth was driven by commercial interest-bearing deposits, which increased $11 billion, or 7%. In addition, brokered CDs grew $7 billion. The commercial deposit growth was due in part to seasonality, but also reflective of both new and expanded client relationships. In regard to deposit costs, our total rate paid on interest-bearing deposits increased 7 basis points to 1.98%, including brokered CDs. Excluding brokered CDs, the rate paid increased 5 basis points to 1.96%.
The increase was primarily driven by mix, as growth was concentrated in interest-bearing balances. Turning to Slide 9, we highlight our income statement trends comparing the third quarter to the second quarter of 2026. Total revenue was $6.6 billion, a decrease of $313 million, or 5%, while noninterest expense decreased $347 million, or 8%, to $3.8 billion. Excluding integration costs and significant items from both quarters, revenue declined $61 million, or 1%, as higher net interest income was more than offset by lower noninterest income.
On the same basis, noninterest expense decreased $113 million, or 3%, reflecting disciplined expense management. We generated positive operating leverage and grew. PPNR provision was $189 million, stable with the previous quarter. Our effective tax rate was 20%. Third quarter net income was $2.1 billion, or $5.09 per common share, as adjusted to exclude the impact of $48 million of after-tax integration costs and significant items. Importantly, we continue to demonstrate strong momentum across the franchise.
Through the first nine months of the year, PPNR increased $1.2 billion, or 17%, compared to the same period last year, driving 19% growth in diluted EPS. Turning to Slide 10, we detail our revenue trends. Third quarter net interest income of $4.2 billion increased approximately $100 million, or 2%, driven by commercial loan growth and higher yields on interest-earning assets, partially offset by increased funding costs. Our net interest margin was 2.94% and decreased 2 basis points.
The modest decline in net interest margin was largely a function of the mix in loan growth and, to a lesser extent, increased funding costs. Consistent with what we've seen throughout the year, loan growth during the third quarter continued to be concentrated in high credit quality, lower-spread loans. Again, while these loans generate attractive overall economics through fee income and broader client engagement, by definition they constrain NIM.
Importantly, the underlying drivers of NII growth remain strong, and based on our expectations for loan growth, we calculate that our net interest margin will reach 3% or above in the fourth quarter. Fee income was $2.1 billion and decreased $137 million, or 6%. Looking at the details, asset management and brokerage increased $7 million, or 2%, driven by higher average equity markets and increased client activity. Capital markets and advisory revenue decreased $144 million, or 25%, reflecting elevated second quarter activity.
Card and cash management revenue decreased $3 million, as higher treasury management product revenue was more than offset by First Bank integration-related fee waivers. Lending and deposit services increased $12 million, or 3%, reflecting increased client activity. Mortgage revenue decreased $9 million, or 6%, primarily driven by lower residential volumes, and other noninterest income was $214 million and included a negative $25 million impact from significant items related to net Visa activity.
Notably, we continue to see strong momentum across our lines of business and throughout our markets and, through the first nine months of the year, our noninterest income totaled $7.3 billion, up $979 million, or 15%, compared to the same period last year. Turning to Slide 11, third quarter expenses decreased $347 million, or 8%, compared with the second quarter. Third quarter results included $27 million of integration costs compared to $261 million of integration costs and significant items in the second quarter.
Excluding these items from both quarters, noninterest expense decreased $113 million, or 3%. We remain focused on expense management and we're on track to reach our goal to reduce costs by $350 million in 2026 through our Continuous Improvement Program, which, as a reminder, is independent of the First Bank acquisition. And this program will continue to fund significant portions of our ongoing business and technology investments. Our credit metrics are presented on Slide 12.
Overall credit quality remains strong. Nonperforming loans increased $167 million, or 8%, to $2.2 billion. The increase was primarily driven by the pull-through of previously reserved CRE office loans as well as one large commercial credit. Total delinquencies declined $135 million to $1.3 billion and now represent 0.34% of total loans, down from 0.39% last quarter. Net charge-offs were $257 million, or 28 basis points of average loans, and included $35 million associated with the student loan transfer.
Excluding that impact, underlying net charge-offs remained consistent with our prior quarter. At the end of the third quarter, our allowance for credit losses totaled $5.4 billion, or 1.42% of total loans. To summarize, PNC Financial Services Gr reported a strong third quarter of 2026, and we're well positioned for the remainder of the year. Regarding our view of the overall economy, our base case assumes GDP growth to be above 2% in 2026, with continued modest job gains and the unemployment rate holding steady.
We expect the Fed to increase rates two additional times, with a 25 basis point increase at the December 2026 and March 2027 meetings, ultimately reaching a range between 4.25% and 4.5%. For ease of comparability with our prior guidance, our full-year outlook excludes the impact of First Bank integration charges and significant items. Considering our reported nine months operating results, fourth quarter expectations, and current economic forecast, our outlook for the full year 2026 compared to 2025 results is as we expect a full-year average loan growth of approximately 13.5%.
We expect full-year net interest income to be up 15.5%, we expect noninterest income to be up approximately 10.5%. Taking the component pieces of revenue together, we expect total revenue to be up approximately 13.7%, noninterest expense to be up approximately 9.5%, and we expect our effective tax rate to be approximately 19.5%. Our outlook for the fourth quarter of 2026 compared to the third quarter of 2026 is as follows. We expect average loans to be up approximately 2.5%, net interest income to be up approximately 4%, fee income to be up approximately 3.5%, other noninterest income to be approximately $250 million, we expect adjusted noninterest expense to increase approximately 5%, and we expect fourth quarter net charge-offs to be approximately $250 million. With that, Bill and I are ready to take your questions.
OPERATOR
Thank you, and I'll be conducting a question-and-answer session. If you'd like to be placed into the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions.
Our first question today is coming from John Pankari from Evercore ISI. Your line is now live.
William Demchak, Chairman and CEO
Hey, good morning, John.
John Pankari, Analyst at Evercore ISI
Appreciate the color that you gave on the margin dynamics. You saw the compression in the quarter and deposit costs up 7 bps, 5 bps ex-brokered. Can you maybe discuss, given the deposit dynamics but also your continued growth in the lower-spread, higher-quality loans, maybe just discuss the confidence in that 2% or higher margin by the fourth quarter and maybe just think of those dynamics impacting the margin as you look at 2027? And I guess maybe just a little bit of color on what the trade-off is, you know, how you're looking at lower-spread, higher-quality loans in terms of, you know, the impact on NII as you look out from here.
William Demchak, Chairman and CEO
Thanks, John. I'll hit it. I'm not going to talk about NIM because it's an outcome. So, you know, Rob kind of says, hey, we'll be over three. That's on a forecast. Many things could change that. I will talk about NII though. A couple things happened. One is 50% of our loan growth occurred in the last two weeks of the quarter. So we didn't get the benefit of that in NII, even though we sort of saw it in pipeline. So that rolls forward in kind of Rob's forecast.
The other thing, somewhat surprisingly, is spreads overall, where spreads on average declined around 3 basis points or something. And some of that was kind of high-yielding loans paying down. And some of it was just new production, as we've talked about, and kind of higher-quality stuff dropping the average, which surprised us at the margin. And then the third piece, we didn't have some escrow balances we thought we'd have, which would impact non-interest bearing.
So, you know, like if you stick a calendar end date on this stuff and you missed by something and you get it back, we're confident with the momentum and where we're going and the growth and all the above, which is part of our guide.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah. You know, all that's embedded in kind of what we put out there forward. You know, John, I just would add to that a little bit. You know, in terms of NIM, generally speaking, everything that we thought would happen in the quarter happened. You know, rate paid went up, exactly what we thought. On core deposits, the brokered CDs added to that a bit. But we didn't expect to do brokered CDs. As you know, we just toggle between the cheapest wholesale funding.
The difference was the high credit quality, low spread loans came in hotter than what we thought, and that constrained NIM. That's the biggest difference in terms of NIM relative to our expectations. When we go forward into the fourth quarter, you know, our calculation is to reach 3 or higher on NIM, even though we don't give NIM guidance. But the reason and the easy way to understand that is we see loan yields going up; we see that offset by deposit costs going up.
So they offset each other. And then the securities fixed-rate repricing will be the delta that lifts NIM. And that's just a calculation.
John Pankari, Analyst at Evercore ISI
Got it. All right, thank you for that, I appreciate it. And then on the lower spread lending and higher-quality loans, could you just maybe elaborate a little bit more in terms of the type of lending? And you gave a little bit of color there on the spread, but maybe the average origination yield. And I know you've talked about the trade-off on fee income as well, and then higher quality from the credit side. Maybe give us an idea of the type of credit loss assumption as you put these loans on your books.
William Demchak, Chairman and CEO
Sorry, credit loss assumption, very low. Yeah, it's a lot of growth in the corporate finance book, broadly. I think every category in our breakdown of corporate loans increased this quarter. Yeah, except other. Growth in, you know, paced by growth in real estate on a percentage basis. You know, also just paydown of higher-spread loans had an impact. Right. It's hard for new production to actually drop the total average spread by 3. And so what we saw was the mix of our existing loans with paydowns, you know, bias towards riskier stuff paying off, which is kind of a good thing, but it drops our spread.
Rob Reilly (Executive Vice President and Chief Financial Officer)
That's right. Yeah, no, that's right. And, you know, we're a leader in trade receivables, asset-backed, you know, that's been strong all year. But you know what we point to, John, and we said this on the second quarter call, you got to see capital markets fees are up 40%. So when you put that together, a lot of those loans are driving those fees. So together accretive to NII, accretive to earnings, accretive to ROTCE, not necessarily NII because of the fee portion of that.
So if you just look at NII and NIM in isolation, you're not seeing the whole transaction.
John Pankari, Analyst at Evercore ISI
Got it. Very helpful, thank you.
OPERATOR
Next question is coming from Scott Sievers from TD Cowen. Your line is now live.
Scott Sievers, Analyst at TD Cowen
Thank you, guys. Morning. For taking the question, I guess the first question: so you guys have had just a lot of really good lending momentum, particularly in C&I. I was hoping you could speak sort of broadly to client sentiment and how, if at all, their thinking is being impacted by higher rates. I'm guessing, I think, Bill, you mentioned a second ago, like half of the quarter's total loan growth occurred in the last two weeks. So I guess I'm guessing not much, but would love to hear your thoughts there.
And then is there sort of a tipping point in your mind where higher rates do start to impact the growth dynamic and client health, et cetera? How do you think about those crossroads?
William Demchak, Chairman and CEO
Yeah, you know, Rob and I were talking about this last night actually, just the, you know, what does this spurt at the end of the quarter necessarily mean or not mean? I don't think we came to a conclusion. You know, I would tell you part of the outsized—if not, we had loan growth everywhere. I was going to say part of the outsized, if not all of it though, just the pace of it is in our new markets, the new clients that we are onboarding at a record pace.
And our model is working. So that's just driving volume. Intuitively, higher rates as this goes forward is going to crimp capex and otherwise slow borrowing. But we're not seeing any instance of that yet. And our pipelines remain strong, and we'll see. You got to imagine some of that is in anticipation of rates going up on the margin, at least a piece of it.
Rob Reilly (Executive Vice President and Chief Financial Officer)
But we don't know.
William Demchak, Chairman and CEO
We don't know.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Pipeline's still strong.
William Demchak, Chairman and CEO
Yeah, pipeline is strong. That's true.
Scott Sievers, Analyst at TD Cowen
Okay, perfect. And then maybe to drop it down, I guess a little bit of a follow-up on some of the fee dynamics. I think at the larger banks this notion of a cooling in capital markets activity since, call it, post-Labor Day has been a big factor. Just curious how you're thinking about things like—particularly at Harris Williams, seems like very good activity—but just how you're thinking about the overall capital markets trajectory.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, yeah, no, we feel good about it. Like I said, we've had a very good year-to-date. We had a really strong second quarter that we didn't expect to continue into the third quarter. But the pipelines are good. We expect—I imagine we'll get into the fee walk-down—but we expect capital markets fees to be up almost 15% quarter over quarter in the fourth quarter, reflecting those pipelines. So it looks good.
Scott Sievers, Analyst at TD Cowen
All right, terrific. Thank you very much.
OPERATOR
Your next question is coming from Erica Najarian from UBS. Your line is now live.
Erica Najarian, Analyst at UBS
Yes, thank you. Hey, just as a follow-up on that, I got a few questions on the run rate of expense growth in the fourth quarter. But it sounds like I'm going to be answering my own question, Rob. With the capital markets trajectory up 15% quarter over quarter, that's really that related to cap markets. So that's not necessarily a pull-through as we think about expense growth in 2027, right?
Rob Reilly (Executive Vice President and Chief Financial Officer)
That's right.
William Demchak, Chairman and CEO
Well done.
Erica Najarian, Analyst at UBS
Yay. Gold star. And just on net interest income, some of your peers—unfortunately JPMorgan and BBVA—gave previews on net interest income growth for the year. And correct me if I'm wrong, Rob, but I'm calculating something like 10% ex-First Bank net interest income growth for 2026; the Street is at about 6.5%. Given the momentum that you have in your new market, you mentioned that you're well positioned for a rising rate environment, you know, should the rate of NII growth slow down by that much in 27—
Rob Reilly (Executive Vice President and Chief Financial Officer)
Did you say—
Erica Najarian, Analyst at UBS
Unfortunately the peers had talked about 27. Unfortunately, unfortunately, unfortunately—they, unfortunately, they've already previewed the 27. So now we kind of have to ask you about 27 even though it's still October. So that was a very long way to ask whether we had guidance on NII for 2027. I gotta try, I gotta—
Rob Reilly (Executive Vice President and Chief Financial Officer)
I think I can help you out there. So as you mentioned in regard to 2027 NII, obviously that's out there always, so it's a bit premature for guidance, certainly precision guidance. But in fairness, you know, given the certainty around the fixed-rate asset repricing, which has been part of our story in '26, will be in '27 and beyond that, and the magnitude of that, it does add some certainty that you typically wouldn't have this far in advance. So when we look at it, you know, clearly in '27 we'll exceed in net interest income our annualized run rate of what we project to finish 2026 in.
And when we look at the consensus in terms of where you are, you sort of hit it. That's a billion to a billion-one above 2026 in terms of growth. And I think we would agree with that range. When we get out into January, of course we'll have more precision around it. But the fixed-rate asset repricing and the mechanical nature of that is real. It continues for PNC Financial Services Gr and the magnitude is big.
Erica Najarian, Analyst at UBS
Got it. Thank you.
OPERATOR
Thank you. Next question today is coming from Anan Gosalia from Morgan Stanley. Your line is now live. Hey, good morning. Can you talk about some of the deposit beta dynamics you expect from here? Just given that the rate paid on core deposits was up, you know we're going to get further Fed tightening. Anything different going on with the start of this rate hike cycle relative to the prior one?
Rob Reilly (Executive Vice President and Chief Financial Officer)
Good morning, Anan. I don't think so. I think, you know, in terms of our expectations in terms of betas, you know, within an increasing rate cycle we'll see what we've seen in the past. So, you know, on the front—
William Demchak, Chairman and CEO
One exception, though, Rob. You got to remember that back in, you know, whatever it was, '23—I try to forget—yeah, the big change was driven by non-interest bearing moving to interest bearing, you know, most of that. Right. The excess deposits out of the system coupled with the kind of base balances are, I would say, pretty constant, and so now we're going to see, you know, face interest rate betas move in conjunction with history probably, but the impact of that being a lot less than it once was.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, I mean that was a special time for all of us when rates went up five basis points. So set that one aside. In terms of a typical rising rate environment, you know, we'll see increased betas on the corporate side for sure, on the wealth side less so, on the lower-end consumer retail side. But I think we'll settle out in some sort of cumulative beta in the mid-50s like we've done in the past.
William Demchak, Chairman and CEO
And part of the drive is just deposit flows from corporates, which come in naturally at a higher beta, higher rate. And we've seen growth, some of it's seasonal, some of it just coming on the back of loan growth—in effect, growth in deposits coming through corporate flows that at the margin raise your interest-bearing deposit costs, even though it's all profitable. Yeah, that's part of that big jump you said for spot. Yeah, that's at the end of the quarter.
Rob Reilly (Executive Vice President and Chief Financial Officer)
That's right.
William Demchak, Chairman and CEO
That's right. And that's good stuff.
Anan Gosalia, Analyst at Morgan Stanley
Yeah, got it. So I guess as we think about that comment you made on 50% of the growth coming in the last two weeks of the quarter, any more color on what drove that? Was it because long end of the curve went up, it became more expensive to borrow in the capital market? You know, any comment on the sustainability of that level of growth?
William Demchak, Chairman and CEO
You got to remember that, you know, somebody doesn't wake up and say, I'm going to do a syndication today. They're—you know, so they're in the works, and it's a pipeline, and, you know, they kind of hit on that point. So I can't—you know, things just don't happen quickly enough for one of the economic factors to have caused everybody to go in two weeks in the lending market. Right. That happens in the bond market, but not in the lending market.
OPERATOR
Very helpful, thank you. Thank you. Next question is coming from Ken Usden from Autonomous Research. Your line is now live.
Ken Usdin, Analyst at Jefferies
Hey, thanks. Hey, just one quick follow-up and Rob, I'll take you up on the fee line breakdown. But capital markets, yeah, capital markets were going to be up, but wouldn't that have been already contemplated in your full-year guide? So just wondering on that 5% step up in the expenses, you're also just maybe pulling forward some other investments into the fourth quarter too, or is there some seasonality in there as well? Just wanted to kind of, you know, flush that out and then, yeah, if you give the fee lines, that would be great too.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Thank you. Yeah, sure. Of course. Ken, why don't we do that—complete the fee forecast. So for the fourth quarter, we say fees will be up approximately 3.5% in size of that relative to our categories. Capital markets is the big mover, up about 15%. Mortgage will be down. Mortgage isn't a big category for us, but, you know, obviously given where rates are and the seasonality, that'll be down, and then the other categories, you know, asset management, credit card, treasury management, lending and deposit services, I would say are all stable.
Maybe they could do a little better, but that's just what we're thinking at the moment. So that's the fees. On the expenses part of it, it's taking up actually what we expect to do not only in capital markets, but also in our private equity. You'll see that our other noninterest income guide is up for the fourth quarter. We'll do a little bit better there than we thought. So there's some revenue-driven expenses as part of that, but also some seasonality.
The important part, obviously—and you know this—is the positive operating leverage that we're pointing to, you know, still in excess of 4%, between 4–4.5%, which is fantastic.
Ken Usdin, Analyst at Jefferies
Absolutely. And just to follow up with the AOCI move, it's no longer in your materials, but, you know, do you have what the CET1 was with AOCI? And I saw on the deck that you're going to keep the $600 million buyback in the fourth quarter. Anything to think about as we go forward, if you're obviously generating a lot of organic capital, and, you know, the push and pull between where your capital ratios are and your ability to continue that type of buyback.
Thanks, Rob.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, sure. So, you know, we feel good about our capital position. You know, we rounded down to 9.8. Our target is 10. And that was simply a result of loans coming in higher than we expected, which drove up RWA. So we did have a meaningful repurchase in the third quarter. We expect to do something similar to that in the fourth quarter. So feel good about it. On the AOCI front, naturally you got to think about the Basel III rules that are just around the corner or somewhere along those lines, which will increase us including AOCI.
But obviously the benefit of the private ratings will increase our capital ratings by about a point or so. So feel good about that positioning. You know, loading AOCI into the CET1 ratio is a little bit of a stale measure because of those Basel III considerations. But if we did that, you know, we'd drop to low nines, but certainly above 9 and still a pretty healthy TCE ratio.
Ken Usdin, Analyst at Jefferies
Got it. Great. Thanks, Rob.
OPERATOR
Thank you. Next question is coming from Ibrahim Poonawala from Bank of America. Your line is now live.
Ibrahim Poonawala, Analyst at Bank of America
Hey, good morning. I just wanted to go back. Bill, I think you mentioned you gave two stats in your opening remarks: 500 new commercial clients and 215,000 checking account clients year to date. Just talk to us in terms of, one, should we measure low-cost deposits as a way to measure whether or not that strategy is working out and client conversion is being successful? And tied to that, how hard or difficult is it to convert those clients into driving core deposit growth, low-cost deposit growth?
William Demchak, Chairman and CEO
So separate the two. Retail share has been a real focus, and so we're proud of the DDA growth. Part of that's coming on the back of the branch builds and just more presence in markets. Part of it's being good at what we do. Ultimately, yes, that drives growth in noninterest-bearing and interest-bearing and full relationships. You'll hear as we go forward some of the things we're going to do in credit card that kind of cement the full relationship with these new clients, but that's to come.
On the C&IB side, you know, we're adding the same kind of clients we always have had, right? We don't—this isn't sort of a new segment of something we're trying to do. We're just doing what we've always done in new markets and gaining share, all of which kind of just builds the franchise. So my whole point in the introduction is the client momentum and growth in this company has never been, you know, as fast as this, as good as this. Yeah. We're executing, and that growth effectively replicates, right?
We're not changing what we do. So it just replicates who we are in a larger size, which is what we've been pursuing.
Ibrahim Poonawala, Analyst at Bank of America
Got it, got it. And I guess maybe just moving to expenses. I think we debate whether AI deployment is going to boost productivity and maybe that leads to lower expense growth for the banks versus there's a lot of discussion about spend on cyber risk due to AI. Just, if you don't mind, where do you shake out and, sort of at least as you think about the next 12 to 24 months, is the cost drag a bigger deal than the productivity gains?
William Demchak, Chairman and CEO
No, I mean it's such a long answer to that. I want to figure out how I address it. We've looked at the incremental cyber costs associated with the AI frontier models. I think you see in our run rate today the cost as we work towards going to, call it, an agentic workforce—the fundamental transformation of the company into one that has an ability to deploy agents across workloads. Today you see that mostly in creeping depreciation expense on the back of all of our data center rebuilds, remembering that we put GPU chips in our data centers.
Much of the work in preparation for all this was done in past years. So our data lake and data configuration all in one place, one source of truth; digitized policies, procedures, papers; HR systems that recognize agents, employees; the risk framework on access control—all of that stuff has been built. What comes next is the reengineering of the company using AI harnesses, which would speed the development and ultimately lower the cost associated with technology development and maintenance, followed quickly by product development delivery that aids revenue.
We've been purposefully quiet on all of the above. I think one of our peers said it—you know, we'll show up when we have something positive to show you and quit talking about that till it shows up. But I would assure everyone that we have a well-thought-out program that isn't about bells and whistles, that will ultimately allow for a transformation in this company.
Ibrahim Poonawala, Analyst at Bank of America
Well, and especially when you talk about it in a two-year, three-year time frame. Yeah, that's helpful because I think there's a sense of banks kind of falling behind on agentic AI, especially on the revenue and the client side. But sounds like you're already far along in terms of maybe we wait and watch in terms of what's to come.
William Demchak, Chairman and CEO
Thank you. What I would say is that it's so easy to get hooked on the bells and whistles and cool toys that come with AI, but to succeed long term, I think you need to have the core infrastructure that allows you to do this at scale and, importantly, allows you to do it yourself without vendor support, without compute costs coming from third parties, and with your own personnel, you know, instead of vendors. And that's the path we're pursuing.
Ibrahim Poonawala, Analyst at Bank of America
Understood, thank you.
OPERATOR
Thank you. As a reminder, that's star one to be placed into the question queue. Our next question today is coming from Gerard Cassidy from RBC Capital Markets. Your line is now live.
Gerard Cassidy, Analyst at RBC Capital Markets
Bill. Hi, Rob. Morning, Troy. Bill, talking about bells and whistles on AI and all the toys that go with it, what's your guys' view—A lot of management have been asked this question on these third-quarter calls—about the AI agentic agents moving deposits around and forcing deposit costs up for the industry? What's your take on that?
William Demchak, Chairman and CEO
So, I mean, at its most basic form, there's no question that deposit movement is going to become more efficient. By the way, that's happened progressively for years and, you know, is it going to accelerate? Maybe. But at some point in time, you know, given the movement in technology, you're going to see more competition in deposits—not showing up in the moment. The current attempts at this with some of the new agentic applications that have come out where, you know, frankly they try to come in and transact on your behalf inside of your accounts— incredibly unsafe.
Not going to happen. Bad idea. And for that to ultimately take place, there's going to have to be laws passed on liability shifting. It's going to have to happen through secure connections and authentication and human-in-the-loop. So it's, you know, big splashy headlines, cool thing— not going to happen on my watch that something can come in here and transact on your behalf without you knowing it. It's an incredibly dangerous thing. You know, independent of the fact I run a bank.
I would just advise everybody that that's probably bad. But your basic premise—I mean, look, things have gotten more, you know, there's been capital market portals that allow you to shop money market funds for a basis point. You can sweep into a deposit account, you can put it in a money fund, you can move it here. All that stuff's going to get easier and this is going to happen over time. And to win in that period of time, we're going to have to offer our clients technology that is as good as these third-party providers so we can allow them to do what they want.
Importantly, we're going to need to produce it cheaply, you know, to keep their business and maintain the service aspects of a transaction account.
Gerard Cassidy, Analyst at RBC Capital Markets
Yeah, very good. And coming back to your opening comments, Bill, you were talking about coming into the year how the client momentum has been stronger than you had maybe originally anticipated. Can you try to frame out where—aside from the new business, I understand you’ve got the 500 new client relationships that you identified—but from the existing relationships, where's the economic—I know it's AI-related probably—but what are you guys seeing in terms of what's driving this momentum, and do you think it's sustainable going into '27?
William Demchak, Chairman and CEO
Look, I mean clearly we're not large in the data center finance space, but there is impact from the capital that has gone into data centers and tangential businesses, and that, you know, that's driven some of it. But I also think, you know, we see this in some of the activity in Harris Williams. I think people have basically gotten used to an uncertain world, and so they kind of have to get on with their business. And so everybody was kind of holding and waiting and waiting to see if—just figured out this is a new norm.
And the economy's ripping, you know, so, you know, there's opportunity sets for people. I think that's what's driving it. I mean, the clouds are as dark as they ever were, but the economy's, you know, still strong and people are investing into it. And I think it's more complicated than that.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Well, I'd add to that. So, you know, what Bill just described, I think all the banks are benefiting from. I think we're benefiting from that obviously as well. But in addition, PNC Financial Services Gr might be a little bit different because of the compounded success of our expansion markets, which just keeps showing up.
William Demchak, Chairman and CEO
It's just volume. Yeah, it just keeps—
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, it just keeps showing up. And it is driving our numbers higher than industry averages. You see it in the H.8 data. You see it in the momentum.
UNKNOWN Analyst
And coming back to that, Rob, on the growth, with those 500 new client relationships, are you replacing their banks or are you just a complement to maybe an existing banking relationship that these new customers have?
Rob Reilly (Executive Vice President and Chief Financial Officer)
It's both. It's both for sure. You know, we have a definition in terms of what is a primary client. And it's basically, you know, enough share of wallet to check that box as opposed to just doing ancillary business. Yeah, you know, the larger corporates, it's typically a multi-bank deal. The smaller middle market will be the new bank in some instances.
UNKNOWN Analyst
Great, thank you guys.
OPERATOR
Thank you. Next question is coming from Mike Mayo from Wells Fargo. Your line is now live.
Mike Mayo, Analyst at Wells Fargo
Hi. Just more questions on the commercial loan growth. Just maybe slice and dice a few different ways. So for every hundred dollars of additional commercial loan growth, how much would you say is additional industry growth versus market share? Because I think the industry is picking up the commercial loan growth. And then how much of it would you say is kind of a capex related versus non-AI capex related or other? And then the third part would be how much of this would be kind of new markets in, say, the Texas or the Southwest.
Thank you.
William Demchak, Chairman of the Board
Easy questions. Yeah, so let's do it this way. Rob, that might be a take-home assignment. What was the new markets growth rate? Was it two, three times the legacy markets in CNIB?
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, yeah, yeah, yeah. So, you know, take that, you know, all that excess growth rate is pure share is one way to think of it. It's hard to come up with an answer on how much of the AI capex is driving loan growth broadly across the economy because there's clearly potential effects on any sort of heavy equipment, transportation, energy, you know, component ecosystem. Yeah, that's driving it. So I just don't know that I have an accurate answer to that.
And maybe, maybe, maybe the negative of it, Mike, is the more worrisome thing. Right, so if the capex broadly slows down related to AI, do we think even though we don't lend directly to that, that it would slow our loan growth? Yes.
Mike Mayo, Analyst at Wells Fargo
And what's the size of the new markets versus the legacy? I guess it's growing two to three times faster off a smaller base.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Well right now in corporate banking the majority of our in-market loans are in the expansion market. So the balances are actually bigger. Yeah, yeah, yeah.
Mike Mayo, Analyst at Wells Fargo
Yeah. So you're growing two to three times faster in the new markets and the new markets at this point are bigger than legacy markets.
Rob Reilly (Executive Vice President and Chief Financial Officer)
Our national businesses. Yeah, that's true.
Mike Mayo, Analyst at Wells Fargo
And as far as Texas or the Southwest in particular, because that's been a hot area recently, is that—how fast is that growing? Is that the two to three times faster or is that even still faster?
Rob Reilly (Executive Vice President and Chief Financial Officer)
It's, you know, that's the obvious one and it's growing at that rate. But, you know, California is growing. Florida. Florida, yeah. You know the business we're getting out of Colorado.
Mike Mayo, Analyst at Wells Fargo
And then there is some industry tailwind though. Right. With capex picking up overall, I mean how much is that contributing and do you think this is kind of a multi-year change? Because just go back a couple years ago there wasn't much growth and now there's growth again. Is this like one quarter, one year, the next five years? I know nobody has a crystal ball, but you're closer to it than we are.
William Demchak, Chairman of the Board
Yeah, look, I think it has legs for the time being. I think there's a lot of things that could, you know, knock the legs out. You know, pipelines are strong, activity levels are strong and that's going to continue. But we all see stuff that can cause that to stop. I can't see out that far any better than you can.
Mike Mayo, Analyst at Wells Fargo
All right. Great, thank you.
OPERATOR
Thank you. Next question is coming from David Cavarini from Jefferies. Your line is now live.
David Cavarini, Analyst at Jefferies
Hi, thanks for taking the questions. Can you remind us of PNC sensitivity to rates and positioning of the balance sheet?
Rob Reilly (Executive Vice President and Chief Financial Officer)
Yeah, you know we're on record and you can see that in terms of our guidance, we've worked hard relative to short-term rates that we're pretty neutral. So, you know, anything that happens in the short term in terms of rate increases for '26 in particular, you know, obviously—and we've said this before and it's obvious—the steeper the yield curve in a good economy is better for us because of this fixed-rate asset repricing dynamic that if we can price these loans that are on our books at higher levels, that's accretive.
So we're well positioned for that environment and that's part of our confidence in terms of our NII growth.
David Cavarini, Analyst at Jefferies
Thanks for that. And then, hitting on credit quality, solid trends overall. You mentioned about the NPL increase, CRE office and one large commercial credit. If you're able to share or willing to share, what industry was the large commercial credit in, and your outlook from here on credit?
Rob Reilly (Executive Vice President and Chief Financial Officer)
Sure. On the one large credit, it's in the service providers—you can see that in our detail of loans. Nothing particularly thematic about it, just, you know, a company that's hit some cash flow issues. The other part of the NPLs that's important to point out is the continued pull-through of the already reserved CRE office loan. So, you know, we've worked that book down pretty well. We still have a lot of reserves but, you know, as we had said for years, that'll flow through non-performers and ultimately charge-off.
But again that's all been paid for. Outside of that, credit quality is good. Consumer—you can see that in the consumer numbers—delinquencies are down. CNIB corporate, with the occasional deal or two, very strong.
David Cavarini, Analyst at Jefferies
Graham, maybe if I can squeeze one more question, it's just on the M&A appetite, what your latest thoughts are there. First bank acquisition clearly is seeing some nice tailwinds and success there. But provide your latest thoughts on the M&A front.
William Demchak, Chairman of the Board
Sure, I'll take that. So a couple of things. One is our organic growth is surprising even us. You see that in the client numbers and the pace and size of pipelines. And two, as I look into the foundation we are putting forth on AI and the necessary organizational change and efficiencies that will come with that, I'm hesitant to slow that down, which would perhaps necessarily be the case were we to do an acquisition of any size. So, put differently, I think the world's going to change in the next couple of years and we want to lead that.
If that gets slowed down because we otherwise got into some big M&A deal, I think you could destroy massive value. That doesn't—you know, there's always small things, and Rob always says we see everything that shows up, and you can never say never and maybe there's some small thing. But at the moment, our momentum is fantastic and the transformation we're going to go through, I think, is strategically more important than bulk and needs to stay top of mind.
David Cavarini, Analyst at Jefferies
Very helpful. Thank you.
OPERATOR
Thank you. Next question today is coming from Chris McGrady from KBW. Your line is now live. Hello, Chris.
Chris McGrady, Analyst at KBW
There we go. Sorry about that. More of a question on risk tolerance. In your prepared remarks, you talked about the growth in the quarter was high quality, lower risk, I guess. Is there any change in either PNC's or client risk tolerance that you're observing with the changes in the macro and the rates recently? Thanks.
William Demchak, Chairman of the Board
None inside of, you know, the way we're deploying capital. I'm not sure I understood the client tolerance question.
Chris McGrady, Analyst at KBW
Maybe that's more of a demand. Demand for credit.
William Demchak, Chairman of the Board
Yeah, it's—you'll hear us say this over and over again for years. We kind of stay inside of our basic structures and types of clients and grow the book through increasing clients as opposed to, you know, jumping into new, risky buckets.
OPERATOR
Thank you. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
William Demchak, Chairman of the Board
Well, thank you all for joining our call today and your interest in PNC. And please feel free to reach out to the IR team if you have any additional questions. Thanks, everybody.
OPERATOR
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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