The PNC Financial Services Group, Inc. Q2 FY2027 earnings call

Overall Financial Performance

• Q2 2026 net income was $2.1 billion ($4.81 diluted EPS), or $4.85 adjusted diluted EPS after a $0.04 per share reduction from First Bank integration costs and other one-time items
• Adjusted net income grew 25% year-over-year
• Return on tangible common equity (ROTCE) was 17.9% in Q2; tangible book value per share was $111, up 2% linked quarter and 7% year-over-year
• Credit quality remains strong: non-performing loans fell 10% to $2 billion (0.55% of total loans, down from 0.62% last quarter); net charge-offs were $226 million (25 bps NCO ratio); allowance for credit losses totaled $5.5 billion (1.48% of total loans)
• PNC had the lowest start-to-trough capital depletion in its peer group for the fourth consecutive year in the Fed's latest stress test, demonstrating strong resiliency

Capital Return and Capital Position

• The board approved an 18% increase to the quarterly common stock dividend, raising it 30 cents to $2 per share
• In Q2, PNC returned $1.3 billion to shareholders: $690 million in common dividends and $610 million in share repurchases
• PNC is well capitalized with an estimated CET1 ratio of 9.9%, with an operating target CET1 around 10%

Strategic and Operational Milestones

• Successfully completed the system conversion of the First Bank acquisition, with all financial targets for the deal on track or better than expected
• Opened new branches in high-growth new markets, where growth continues to outpace legacy PNC markets
• Launched a new mobile banking platform, and continued advancing client-facing and infrastructure technology
• Maintained momentum toward the 2026 target of $350 million in cost reductions via the independent continuous improvement program, which funds ongoing business and tech investments
• DDA (demand deposit account) growth is healthy, with meaningful client acquisition growth across corporate and private banking businesses

PNC does not break out formal product segments in this call, but provides loan and revenue breakdowns:
Loans (total average $363 billion, +4% linked quarter, 5.47% average yield (-3 bps linked quarter)):

• Commercial & Industrial (C&I): accounted for virtually all of the quarter's $12 billion total loan growth, with broad-based increases across categories and rising utilization
• Commercial Real Estate (CRE): increased $690 million, driven by growth in retail and industrial exposures
• Consumer: declined $730 million, as credit card balance growth was offset by expected declines in residential real estate and auto loans

Deposits (total average $457 billion, flat linked quarter):
Average non-interest-bearing deposits grew 4% linked quarter, representing 23% of total deposits. The total rate paid on interest-bearing deposits decreased 5 bps to 1.91%.

Revenue (total Q2 2026 $6.9 billion, +12% linked quarter):

• Net Interest Income: $4.1 billion, +4% linked quarter, contributing ~59.4% of total revenue; net interest margin was 2.96%, +1 bp linked quarter
• Fee Income (Non-Interest Income): $2.3 billion, +10% linked quarter, contributing ~33.3% of total revenue, with broad-based growth across all categories:
  • Asset management and brokerage: +5% ($20 million increase)
  • Capital markets and advisory: +25% ($114 million increase)
  • Card and cash management: +5% ($34 million increase)
  • Lending and deposit services: +2% ($6 million increase)
  • Mortgage revenue: +22% ($26 million increase)

Expenses (Q2 2026 non-interest expense $4.1 billion, +9% linked quarter):
Excluding integration costs and significant items, non-interest expense increased 5% linked quarter, driven by higher business activity, marketing spend, and ongoing investments. PNC achieved 3% positive operating leverage in the quarter.

• Full year 2026 guidance (excluding First Bank integration charges and significant items) is updated as follows:

  • Average loan growth expected to be approximately 12.5%
  • Net interest income expected to increase 15% to 15.5%
  • Non-interest income expected to increase approximately 9%
  • Total revenue expected to increase approximately 13%
  • Non-interest expense expected to increase approximately 8.5%
  • Effective tax rate expected to be approximately 19.5%
  • Management reaffirms the target of ROTCE hitting an 18% annualized exit rate by Q4 2026, and that net interest margin (NIM) will rise above 3% by the end of 2026

• Q3 2026 guidance:

  • Average loans expected to increase 1% to 2%
  • Net interest income expected to increase 3% to 3.5%
  • Fee income expected to decrease 5% to 5.5%, driven by an expected pullback in elevated capital markets revenues from Q2
  • Other non-interest income expected to be between $150 million and $200 million
  • Adjusted non-interest expense expected to decline 2% to 3%
  • Approximately $50 million of First Bank integration expenses expected
  • Net charge-offs expected to be approximately $225 million
  • Share repurchases expected to be at the same approximate level as Q2 ($610 million)

• Longer-term: PNC expects ongoing repricing of fixed-rate assets will continue to support net interest income growth into 2027 and beyond, and the company is tracking toward its 18% ROTCE target

• Higher-than-expected deposit competition for retail deposits disproportionately negatively impacts smaller banks without large, established retail franchises, creating funding pressure that PNC avoids due to its scale
• Office-focused commercial real estate exposure still requires ongoing work, though PNC has already worked through most expected challenges and released reserves as credit quality improved
• Capital markets revenue is inherently volatile quarter-to-quarter, due to dependence on large deal closing timing
• There is moderate spread dilution to the overall loan portfolio from the current mix of new loans, which are concentrated in higher credit quality, lower spread borrowers
• Small pockets of credit pressure exist in niche sectors including healthcare, distilleries, and transportation (related to fuel costs), though these do not represent large or systemic risks to PNC's overall portfolio
• Unexpected branch traffic from First Bank customers needing in{"type": "object", "properties": {"title": {"type": "string"}, "segment_performance": {"type": "string"}, "management_statement_and_operational_highlights": {"type": "string"}, "guidance": {"type": "string"}, "risks": {"type": "string"}, "question_and_answer": {"type": "string"}}, "required": ["title", "segment_performance", "management_statement_and_operational_highlights", "guidance", "risks", "question_and_answer"], "additionalProperties": false}-person activation of digital services after conversion was underestimated, causing temporary customer confusion that PNC will address for future integrations

Q: Can you explain the cadence of recent strong loan growth, and how PNC plans to fund ongoing growth going forward?

A: Strong second quarter loan growth will moderate in the second half of 2026, with growth expected to align roughly with overall GDP growth. PNC expects non-interest-bearing deposit growth (which hit 23% of total deposits in Q2, higher than expected) to continue at a slower steady pace, and retail deposits are growing, which will serve as core funding to replace temporary wholesale funding from FHLB advances taken on in Q2. FHLB borrowing was just the lowest-cost funding option for the quarter, and PNC flexes funding sources dynamically to optimize costs.

Q: What is driving the strong broad-based C&I loan growth PNC is seeing, and does it tie to the AI CapEx super cycle?

A: Current C&I loan growth is broadly distributed across all sectors and geographies, so it cannot be pinned entirely to AI-related CapEx. While AI CapEx contributes at the margin, broader economic strength, a more robust M&A environment, and businesses growing comfortable operating after recent periods of market volatility are the main drivers. PNC is gaining market share broadly across new growth markets, rather than focusing solely on large AI-related mega deals.

Q: Now that First Bank integration is complete, what went better than expected and what surprised you negatively in the process?

A: The biggest positive surprise was that PNC was able to complete the integration of the large acquisition without slowing down ongoing strategic initiatives like the launch of a new mobile banking platform{1900 character limit is here}:

Q: After the strong Q2 capital markets result, what is the outlook for full year 2026 capital markets fees?

A: A portion of Q2's strong capital markets revenue came from deal closings pulled forward into the quarter, so Q3 capital markets revenue is expected to drop roughly 20% quarter over quarter, which drives the overall Q3 fee income guidance of a 5-5.5% decline. For the full year, capital markets revenue is still expected to be up 25-30% year over year, with broad-based growth across all business lines including M&A advisory, loan syndication, underwriting and trading. Revenue is naturally volatile quarter to quarter, but PNC is well positioned and winning share in the current strong market.