Pod Insights Odd Lots What It Takes to Build One of the World's Biggest Banks About this episode One of the mega-themes of the economy is that the big keep getting bigger. You see it in technology, where the megacap software companies are outperforming their smaller peers. And you see it in finance, where the world's biggest banks keep growing their share within the industry. Across multiple fields, there are clear advantages to size and scale that keep accruing. But what does it take to get to the very top, and what are the real advantages to size and scale? PNC Financial is one of the biggest banks in the country, though not quite as big as names like JPMorgan or Bank of America. So what does it take to grow in such a mature industry? And what kind of advantages accrue to the large players? On this episode, we talk to CEO Bill Demchak in a wide ranging conversation about the state of the industry. He explains why they're still building physical bank branches, why it's not a good time to make acquisitions, and how one bank stands out from another. We also talk about the changing regulatory environment, and what the firm is seeing right now in terms of useful applications of generative AI. Subscribe to the Odd Lots NewsletterJoin the conversation: discord.gg/oddlotsSee omnystudio.com/listener for privacy information.
Transcript 12,608 words · 7 speakers
Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.
0:00 Tracy Alloway? There are some market stories where you want every detail. Joe and I have made quite a few podcasts on that basis. But sometimes you've only got 10 minutes and just want to know what's moving markets fast. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what's happening and what to watch next. Concise, focused, and brief. Search Barclays Brief wherever you get your podcasts.
0:26 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
1:08 Speaker 01 and hiring practices, but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at chatgpt.com.
1:52 Speaker 01 Bloomberg Audio Studios. Podcasts, radio, news.
2:07 Joe Weisenthal? Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.
2:12 Tracy Alloway? And I'm Tracy Alloway.
2:13 Joe Weisenthal? So Tracy, one of the motifs, I guess, of some of our recent conversations-
2:17 Tracy Alloway? Motif is a good word.
2:18 Joe Weisenthal? It's a good word, isn't it? Thank you. One of the motifs of some of our recent conversations. And also, I guess, one of the mega trends of our time is this idea of just like, scale is a competitive advantage. Size, returns to size, returns to scale, the ability of someone to like, pick up a phone and say, I need a lot of money right now. And the advantage that accrues to financial players. It's, we see it across a lot of sectors, but it really, it stands out a lot in our finance conversations.
2:47 Tracy Alloway? It feels good to be big in business, right? Like, once you get big, you have all this competitive advantage that allows you to get bigger. The place where this is most noticeable, I would argue, and it's been this way for a while, is the banking industry, right? Like, the long run trend among US banks is the big get bigger. And we've all seen those charts of like, all the little banks that compose Bank of America or JP Morgan. I love those charts, by the way.
3:14 Joe Weisenthal? I do, too.
3:15 Tracy Alloway? And that's the direction the industry seems to be heading, right?
3:18 Joe Weisenthal? Right. It's so interesting to me to like, to think about like, these analogs with tech, because it's the same in tech, right? If you look at big tech, and we talk about the Mag 7, etc., they've really outperformed middle tech or small tech. It is truly incredible. And we have intuitive reasons for understanding of that, network effect, lock-in and so forth. And it's so fascinating that some of our story that we tell in tech must be a little bit insufficient. Because we see the same story replicated, as we're talking about with banks. And with banks, it seems to be a couple-fold. It's like, one is balance sheet capacity, right? And the ability to do big deals and so forth. And then, of course, there's the other thing, which is just like, the sort of, the menu of services that you can offer a client if you're a big bank.
4:01 Tracy Alloway? Right. And also just the fact that you have, well, balance sheet, you have a lot of money. So if a juicy deal comes up, you can deploy it quite quickly and you get like first dibs on issuance, which has been good in the recent credit market.
4:15 Joe Weisenthal? So we haven't done like a ton of pure banking episodes, although we've done some, but you know, we did the most probably right in the wake of Silicon Valley Bank, obviously. And we talked about like the challenges of some of the community banks or the sort of smaller regional banks, et cetera. And then we know like the huge scale of like the JP Morgans of the world, but also like, what about the banks like just sort of like sub JP Morgan scale, not
4:39 Tracy Alloway? Super regionals, I believe they're called.
4:42 Joe Weisenthal? Super regionals, interesting perspectives of their own. And so, and I've always said, I love talking to bankers, people who understand how banking works, just like they're, I think they're usually some of our, our most interesting guests.
4:54 Tracy Alloway? Have you looked at the KBW Bank Index, by the way?
4:58 Joe Weisenthal? Not today, actually not in a few days, or maybe not in a few weeks. Yeah. How's it been doing?
5:03 Tracy Alloway? It's up quite a lot. In fact, I think over the past 12 months, it's outperformed the S and P 500. So that kind of tells you how people feel about banks and bank regulation at the moment.
5:12 Joe Weisenthal? Absolutely right. One of the things when Trump won, who is the sort of like the deregulation trade, and that was one element. And arguably, I would say in finance, by and large, although 10% credit card caps does not scream deregulation, I would say that's one of the areas in which the expectations of Wall Street have actually been met by and large by this administration. Anyway, I'm very excited to say we really do have the perfect guest to talk about the banking world in 2026. We're going to be speaking with Bill Demchak, CEO of PNC Financial, which is the sixth biggest bank in the country, I guess, a super regional. So, Bill, thank you so much for coming on Outlots.
5:49 Speaker 03 It's, it's great to be here, but I'm going to correct you. We're a national bank.
5:53 Joe Weisenthal? National bank.
5:54 Speaker 03 Yeah.
5:54 Joe Weisenthal? Why did I say super regional? Were you once that?
5:58 Speaker 03 Um, no, because we have the mega banks and people don't know what to call somebody like us.
6:03 Tracy Alloway? I always thought super regional was just like that category below the mega banks.
6:08 Speaker 03 But I mean, a regional bank is a bank that operates in a region.
6:11 Joe Weisenthal? Okay.
6:11 Speaker 03 We're across the country. We're in the largest MSAs. We're in every state. We so we're just, you know, one sixth the size of a JP Morgan.
6:20 Joe Weisenthal? Got it.
6:20 Speaker 03 But we're still a national bank.
6:22 Joe Weisenthal? Excellent. Well, since we're just in the, since we're in the correcting the record phase of the conversation, I'm certainly familiar with the PNC brand. You see it on things elsewhere, probably like a stadium somewhere. Is there a stadium somewhere?
6:34 Speaker 03 Uh, we have PNC Park for the Pirates.
6:37 Joe Weisenthal? PNC Park. So there you go. Um, but why don't you just give us the big overview? Like, what is PNC Financial?
6:43 Speaker 03 We are a traditional bank. We used to call it Main Street Bank. Maybe that fits. Maybe it doesn't. But, you know, we help people save. We lend money. We do investments. We move money through payments. We're a bank that aspires to be, you know, coast to coast with a, with a retail presence as retail share consolidates in the US. You know, our sweet spot is larger middle market, smaller, large corporate, but of course we do commercial and, and business banking. We're active in the capital markets across basically every product but new equity issuance, but more of a traditional bank. So when you, we talk about, you were talking about scale in your intro. Think of JP Morgan. They've got to be in 50 countries.
7:27 Speaker 03 You know, they're in multiple lines of business beyond traditional banking. We have scale in what we want to do. So there's scale in the things you choose to attack versus scale just measuring balance sheet size.
7:42 Joe Weisenthal? Got it.
7:42 Tracy Alloway? You have been growing though. You made an acquisition recently, um, First Bank. Is the ambition to be, you know, as big as some of the, the G sibs, like the national giants, let's say?
7:55 Speaker 03 The ambition isn't about size. The ambition is about being relevant. So one of the things going on backdrop to the US market in particular is there has been consolidation in retail share and banking, you know, ever since they got rid of interstate banking laws. That continues a pace with the mega banks largely winning at the expense of the very small banks. And so at some point in the not too distant future, I suspect that there's going to be five or six players who control retail in the US.
8:25 Tracy Alloway? The Canada model.
8:27 Speaker 03 Yeah. And our aspiration, and we're on pace to do it, and we think we can do it, is to be one of those five or six banks. What size that leads to, I don't care. You just need to. Be relevant to consumers everywhere in the in the country. And you shouldn't be disadvantaged because you don't have presence in a particular market.
8:48 Joe Weisenthal? Well, maybe we should just answer the really simple question is like, what is? How would you articulate why the really big banks continue to win share of the retail market? I could come up with some answer, but what's the real? How would you describe it?
9:03 Speaker 03 It's ubiquitous market presence, you know? Once you get over 7% branch density in a particular market, you tend to outperform. Under the assumption you have an OK reputation and decent products. You know that you don't have to have the best, but you have to have the menu of all the digital applications, digital signature branches in the right place, you know, electronic transfer, all the things you come to expect from the bank you guys probably bank at. You get there and you grow. And if you think about that definition, there's only three or four banks today, actually only two, that fit that definition.
9:41 Joe Weisenthal? JPMorgan.
9:42 Speaker 03 And B of A. Now Wells, you know, has the potential, you know, now that they've gotten rid of the asset cap and so forth, to continue to grow. And then you have some aspirants who'd like to get in there. We're clearly one of those and one of the, one of the people who's been after this game probably longer than most.
9:59 Joe Weisenthal? Just sorry, what was the metric that you cited 7% branch density? What is that?
10:03 Speaker 03 Yeah, so, so, by the way, we use 7%. Other banks will talk about eight, but it's somewhere around there. You get to a place where if you have presence in a market, seven or 8% of the share of just physical presence with decent products, you control a disproportionate share of the actual deposits and economics coming out of that market.
10:25 Tracy Alloway? So I'm actually surprised to hear that because the story, you know, that's dominated since the financial crisis has basically been that physical branches don't matter that much.
10:36 Speaker 03 Yeah. So you've seen across the US, you know, net closures of branches is off the charts relative to new builds. But what you see behind the scenes is somebody like PNC where we are, if you think about our very dense markets where we've been for 165 years, we're thinning those branches because you don't need as much. But we're building aggressively in Houston and Dallas and Miami. We were building in Denver till we bought First Bank. So going to all these growing markets where the population's moving.
11:09 Joe Weisenthal? Man, it just occurred to me, I already, after we do this episode, I want to follow up and like do an interview with like whoever your main person doing site selection is, because we've done episodes on like retail drive-through site selection, grocery store site selection.
11:25 Speaker 03 We have a great team. We're building. By the way, you know, we've announced we're building 300 branches in these new markets. And as an aside, once we knock 100 off, we'll add another 100. So it's going to keep going. We're probably a thousand short of where we ultimately want to be, but we don't have to be there tomorrow. But just building 100 branches a year is a massive exercise on site selection.
11:46 Tracy Alloway? You're a construction company.
11:48 Speaker 03 Yes. I mean, exactly right. So you need to pick the right location. You need to choose whether you're going to do a drive-through or you're going to be at the end of some shopping, something where you're kind of an end add-on to a new development. The physical, you know, we have preset designs, so we know what we're building, but you still need a contractor. You need somebody running at the physical plant that you move into the branch. We have pods now. New branch opens, truck with a pod shows up and everything that that branch needs to run, from computers to paper to pens is in a pod. Just deliver it right into the branch, which is what we're going to do when we do the First Bank conversion as an aside.
12:27 Tracy Alloway? That's really interesting.
12:44 Joe Weisenthal? There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee, so search Barclays Brief wherever you get your podcasts.
13:10 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices,
13:53 Speaker 01 but according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.
14:33 Tracy Alloway? Let's talk about bank regulation because I think
14:35 Speaker 03 Oh, fun.
14:36 Tracy Alloway? Yeah, very fun. This is part of the consolidation story, I think, is that even though post-financial crisis, there was more focus on the significant banks, the G-Sibs. At the same time, those G-Sibs seem to have benefited from some of the regulation.
14:54 Speaker 03 Yep.
14:54 Tracy Alloway? Is that how you would characterize it?
14:56 Speaker 03 I don't know that they, I don't know they benefited from regulation. They had to carry extra capital. They clearly, you know, in times of crisis have done better than the broad swath of smaller banks, as we saw with Silicon Valley and some others. But they were sort of walled off from competitors. So, you know, I've talked for years about just the need to be able to compete. Some of that competition comes from M and A. Some of it just needs to, you know, the ability to do certain activities. And in theory now, we're in an environment where it's easier to do that. And I think practically, that's probably true. Although I would tell you, I think we could have done large deals had we chosen to back during the Biden administration.
15:38 Speaker 03 I think people tend, like, one of the soundbites that comes out of regulators is good deals are okay, bad deals aren't. But they won't tell you what a bad deal is. But a good deal is typically when you have one good bank, somebody's in charge.
15:52 Joe Weisenthal? Yeah.
15:52 Speaker 03 You have technology that can actually absorb the other bank and you can protect consumers and so on and so forth. Those could have gotten done in the last administration.
16:01 Joe Weisenthal? That's interesting. Well, let's talk about more about your philosophy of M and A because, so, Peter, your stock has done very well, but it has, for a while, especially in the last year, up until recently, had been underperforming some of the other banks. And your, like, quote is like, everyone thinks we're gonna do some, like, I don't, that's not an exact quote, but it's like something, why does everyone keep saying-
16:23 Speaker 03 The whole world's betting I'm stupid.
16:24 Joe Weisenthal? Yeah, right. But- So like, but then how do you grow? So, okay, all the market, they don't want to pay up for your stock because they think that you're gonna do some stupid deal.
16:35 Speaker 03 This isn't, this isn't complex. We'll just start with the basics.
16:38 Joe Weisenthal? Yeah, all right.
16:38 Speaker 03 Last year, we outperformed, I think, everybody, including JP Morgan, in top line revenue growth and EPS, PP and R growth.
16:48 Joe Weisenthal? What's PP and R?
16:49 Speaker 03 Uh, sorry. Um, you can go. No. Pre-provision net revenue.
16:55 Joe Weisenthal? Okay.
16:56 Speaker 03 Yeah. Fantastic year. We set records in new client acquisition, revenue growth, expense control, great new tech rollout and stuff. Then we underperformed. Part of the backdrop of that was the mega banks outperformed as people correctly thought regulation was going to drop and they could return more capital than they historically had. So take that bucket. They're doing great because they have all this capital and they're free to do whatever they want to. Smaller banks went up in value because, you know, people like Bill Demchak with the big mouth said there's going to be consolidation. So everybody's going to buy them. So they go up in value. And because we are a likely acquirer, given our historical performance and being good at integration, we get crushed.
17:39 Joe Weisenthal? Did you get penalized from the perception of a more liberal M and A attitude?
17:43 Speaker 03 Absolutely. But it was, part of it's my fault. And, you know, because I talk, you know, I talk about the need for scale. I talk about the consolidation that's happening in retail. I talk about why this makes sense. And people make this leap and therefore end the sentence with "at any cost." And that's a terrible assumption. Um, not at any cost. We can do this organically. It just takes longer. And, you know, today, with everything flying in value and us underperforming, it's extremely unlikely we find something that makes economic sense for us. Plus the fact, just as a side, the environment is so good right now. Nobody, none of the reasonable sized banks want to sell. This is like a,
18:26 Speaker 03 this is like a sunny day in, in August, man. You got, you know, rates are going the right way. The curve is steepening out. Credit's great. Regulation's coming down. Nobody sells their bank in that environment.
18:39 Tracy Alloway? Do you wake up every morning and check the PNC share price? I always wonder about this. CEOs of public companies, you're graded instantaneously by the market.
18:49 Speaker 03 Yes, but the market at times is an unfair grader, so I don't pay attention to it. You know, when we, I look at metrics all the time. Are we winning clients? Are we automating things and getting more efficient? Are we, is our marketing campaign reaching people? What's our traction level in digital? You know, all these things that ultimately will lead to a share price performance, but not in the day.
19:15 Joe Weisenthal? Well, let's talk then a little bit about, okay, so a lot of banks are doing well. They don't, they're not, they don't want to sell. You're not a stupid guy, so you don't want to make like a dumb deal.
19:26 Speaker 03 So there's not going to be deals.
19:27 Joe Weisenthal? What?
19:27 Speaker 03 So there's not going to be deals.
19:28 Joe Weisenthal? There's not going to be deals. Okay, so yet you have this aspiration to be one of the really big banks. And so, okay, that leaves organic growth. What is the?
19:37 Speaker 03 But it also, I mean, in perspective, right?
19:40 Joe Weisenthal? Sure.
19:40 Speaker 03 We're in this, the weird window in regulatory change isn't the Trump administration. It was the Biden administration. Anytime before Biden and now after Biden, deals get done all the time. We're 165 years in business. You know, the little chart you talked about with all the banks?
19:58 Joe Weisenthal? Yeah.
19:58 Speaker 03 We've got to have 150 banks under us through time and that'll continue. But it doesn't have to happen now, right? The weird thing about now is just we ended the four years of strange period under Biden.
20:11 Joe Weisenthal? Got it.
20:11 Speaker 03 Now we're just back to the old game. This will go for, you know, go on and on and on.
20:16 Joe Weisenthal? So what is the essence of the organic growth strategy to differ? If it's, yeah, to grow.
20:22 Speaker 03 So, so far I've been talking about retail. Let me talk about the reason for retail. So ultimate reason for retail is retail deposits. Retail deposits are low cost, they're sticky. They allow you to support your corporate community and consumers with loans.
20:39 Speaker 03 We've been able to win in what we call our CNIB business, a corporate institutional bank business, gain share every year for the last, I don't know, 15 years in what is a very fragmented market. You know, we talk about the mega banks gathering retail share, but in corporate, commercial, nobody has any real share. It's shotgun everywhere. And we win in that space. And we do it by, you know, going to market locally. We organize, and this will all sound kind of silly, but we don't have P and Ls by product. We have P and Ls by client. We go into the market. We have a regional president. We have product
21:19 Speaker 03 expertise and we choose the most important and impressive clients to cover in that market. Not anybody else. We don't do business with somebody necessarily who walks through the door because that's all that we'll do business with. We'll call on the same grade A client, you know, that you know you want to cover if you're in Miami or you're in Texas. We'll call on them for 10 years until they call us back. Patience, persistence, consistency, good product ideas, our real low banker turnover, and we win. And you just, you know, rinse and repeat. Go into new markets, add people, keep growing.
21:56 Tracy Alloway? Just on acquisitions, I'm really curious how difficult it is to integrate another bank with your company because you just said you're good at integration. What does that actually entail?
22:08 Speaker 03 That's a great question. So integration, there's a mechanical component and then of course there's a cultural component. Mechanical component should otherwise be easy but has proven difficult for some people over time. The mechanical component, let's just talk about First Bank for us. We simply take all of their data records. So, you know, record field data items for one of their checking accounts and we import that data, but we don't import that application. All that data comes into PNC and then over a weekend, we simply open up a million new accounts on our existing products and services. Sounds pretty simple. If you can move the data, you can just effectively open new accounts.
22:50 Speaker 03 My team will scream, it's not that easy, but that's basically what you do.
22:54 Joe Weisenthal? Looks easy to you.
22:55 Speaker 03 Yeah. Now, all of a sudden, okay, now we have all these customers with new accounts. How do they, how do they log in? How do they learn? Like, our online is different than somebody else's online. So now you're getting into training modules, communications with clients, training their branches with First Bank. Tremendous frontline set of people, incredible bank in history. We're keeping all their client-facing employees. Now they all of a sudden have to know the difference between PNC products and their old products. So how do we do that? That's what integration ultimately means. There's a mechanical piece of it. Get the systems to work. So you turn it on and the lights go on. There's delivering pods to the branches. So they have all the PNC equipment and the signage and all that other stuff. But there's a lot of time with people. We send in branch buddies.
23:40 Speaker 03 So we'll take branch managers from all around the country and go have them spend, you know, a couple of weeks in each, you know, sitting with the branches at First Bank.
23:49 Tracy Alloway? That's the cultural aspect of integration.
23:52 Speaker 03 And the learning. And it's, I mean, banking, you know, in some ways is simple. In some ways, it's wildly complex. An employee in a branch, the problems that you might walk in, right? You say, oh, I rarely go into a branch or I don't think about it. But when you go into a branch, something's really busted.
24:07 Joe Weisenthal? Yeah.
24:08 Speaker 03 So the employees, so the employees, right? They need to know how to fix it. And that's, when we say we're good at integrations, it's because we focus on making sure that our new teammates know how to do their job and can help their clients. Because they have the same clients they've had forever. They don't want to look bad in their new role.
24:31 Joe Weisenthal? Can you actually just talk more about that? So it's like, okay, they need to know how to like sell or be familiar with the PNC product now. Like, talk a little bit more about like what that difference is? What actually changes functionally? Why wouldn't be what it is about either culture or products such that it's not just replacing the logo and the pens and the note pen?
24:52 Speaker 03 Well, everything works at the margin slightly different. I mean, checking accounts are checking accounts. But imagine you're in a branch or you're in the care center or you have a problem. You made your car payment. You sent it through, it was time stamped the right time, but it went through snail mail and got lost. You got penalized a fee and you go into the branch and you say, you know, it's really not fair. I sent this. And you're hitting me with a fee. And the branch person, what do they do? Right, it's, there's, there's some answer to that. What's our procedure? Well, you know, now with AI, you can just go into a large language model that is built off of all of our customer service protocols and say, what do I do? This just happened. It'll tell you, you know, credit the customer, the fee and send a note to the, you know, whatever the answer is for that particular problem.
25:37 Speaker 03 But the person sitting there needs to know, like, which system do I query? What's my browser? What am I, who do I talk to? You know, if I'm going to make an exception, do I go to the branch manager? Or can we do that here? Or do I go to call somebody in some strange room in a back office in Philadelphia? All of that with us, because we automate so much of it, is now sign of query and self-learning in the branch. And then importantly, more and more with our customers self-curing. You know, they got locked out, you know, just, just be able to fix the problem yourself.
26:09 Tracy Alloway? One thing I've wondered for a few years, does local expertise matter anymore when it comes to actual underwriting, either in retail or commercial? Because I think most of America used to have this very romanticized notion of the banks, the sort of it's a wonderful life model where your, your branch manager knows you and knows your entire life and business and all of that. My sense is that doesn't exist so much anymore, but tell me if I'm wrong.
26:38 Speaker 03 You're wrong.
26:39 Tracy Alloway? Okay.
26:41 Speaker 03 It's harder to accomplish when you become a larger bank. But, you know, how's credit evolved through time? Consumers, consumers now, if they're an existing client of you, are scored based on their cash flows that you see. So not a FICO score. You can actually see when did somebody pay the rent? Are their spending patterns predictable? You can build models to say, you know, this person is a really diligent good credit, even though it might not show up in a FICO. Local market business, you're going to lend to this small developer. You're going to lend to this store on the corner. Branches really matter and local bankers matter for small businesses because they see where the foot traffic is. They know the reputation of the person who's running that business. Do people, you know, are they a
27:25 Speaker 03 community influencer in a good way where they're, you know, people want to support them? All that stuff still matters. And all that stuff, the more you can give somebody.
27:36 Speaker 03 Voice locally in the decision, I always kind of call it putting a thumb on the scale a little bit on a yes or no, that's otherwise mechanical, the better your credit underwriting is.
27:46 Joe Weisenthal? Well, since we're talking about consumer credit, what happens to America or the industry if there's a 10% cap on credit card rates as President Trump has proposed?
27:55 Speaker 03 So the only thing I know for sure, if that happens, is that all the credit card businesses in the country lose money if run exactly the way they are today. So we have, you know, credit card business, I get swipe fees, I give most of those away with rewards, I earn credit when somebody is revolving a balance, I lend credit when somebody pays it at the end of the month, right? I'm fronting that money for you if you clear your account every month, but hopefully I'm getting some swipe fees to make that good. After all that, you charge interest rates, you have losses and you get a margin, maybe you make 4%. And assume interest rate, I'm making up numbers here, but assume maybe the average rate is 18% and I make four at the bottom, now I'm going to take my 18, I'm going to drop it to 10.
28:39 Speaker 03 Uh oh, I just made minus four. And so all that math is going to come out, which is why I don't think this goes, like there's almost no way this can happen. You'll just simply shut down consumer credit in the US. They can't force, they could say the cap is 10% and I'll say, fine, I'm out. Like, why would I do it if I'm going to lose 4% a year on that? Something's going to change, fees are going to go up, lines are going to get cut, rewards will go away, you know, and something will emerge out of the dust, but it's not going to look at all like it does today.
29:11 Tracy Alloway? What do you think the genesis of the proposal or the rationale behind it actually is if, you know, everyone in the industry says this basically ends credit cards?
29:20 Speaker 03 Yeah, I think because, first of all, the emotional appeal of it, it's, I mean, it sounds absurd that you're charging somebody 18% for revolving credit. I think that sounds high. That happens to be the rate that you need to charge to make money, but it sounds, which is why I never revolve a balance, I paid off every month. So there's this emotional appeal, geez, you ought to be able to lend, like, I'll lend money to you at 10%, I'll lend money to you at 10%.
29:45 Tracy Alloway? Thanks.
29:46 Speaker 03 Right, but I can't necessarily figure out who you are in a sea of people, right? There's a bunch of people, I'll lend money at 4% because they'll never depol, you know? So it, that's the issue, when you try to get to the broader population and extend credit to the consumer that drives our economy. Science isn't so exact to say you get nine and you're 22. I don't know about you.
30:08 Joe Weisenthal? Well, actually, I want to press this further because intuitively, I would think you'd be able to do that. You just mentioned the fact that you have granular access to propensity to pay back that is not even captured by FICO. You have incredible amounts of data and predictive capacity on the difference between whether me or Tracy are going to revolve. So when someone says 18% seems high.
30:33 Speaker 03 Yeah.
30:34 Joe Weisenthal? Are we supposed to just like believe, oh, just trust me, it's high. This is what I need to charge in order to make money in this business. I mean, I could trust you, but like, how would you?
30:42 Speaker 03 But the math is the math.
30:43 Joe Weisenthal? Okay.
30:44 Speaker 03 The end result, right, you say, when you run your models and you look at propensity to pay you back, you basically, you know, whether you're looking at FICO or anything, FICO is only as good as whether that person has a job next week. Right, they, they, you know, you can look at predictability and yes, this person has been paying their rent. They have a steady expenditure thing on food and on gas and on entertainment. And their savings account balances always stay pretty steady. That ought to be a good credit. Well, it isn't a good credit if they get fired or lose their job because the economy's in a downturn. And all of a sudden, well, I thought that was a really good credit. I should charge 5%. Turns out I just wrote the whole thing off because there's no recovery value in that credit.
31:29 Speaker 03 That's, that's where the science fails. There's, there's exogenous variables you can't model. And the wider you cast the net, right, the bigger the dispersion on outcomes. However, if we've settled there, that interest rate kind of sets a reasonable profit margin. The largest card issuer in the country, you can figure out who this is, right? Best at it, best computer models, best finding credit, best expend, you know, extending credit to non-prime borrowers. They trade at one times book value.
32:06 Speaker 03 If this was a genius business like that's way too much, I'd drop the rate by 1%, you know, and grow share. The problem is it's not so great, actually.
32:16 Tracy Alloway? I want to talk about private credit a little bit because obviously this is an area where we always hear about banks face new competition from middle market lenders and all of that. But at the same time, we also see banks teaming up with private credit now and it seems to have...
32:32 Speaker 03 We have also.
32:33 Tracy Alloway? Yeah. Okay. Talk us through that relationship.
32:36 Speaker 03 Yeah. So traditionally standalone, high yield credit, if all you did was walk around and just lend money with no particular expertise, but across, you know, leveraged clients at a single big credit, that's a really lousy return on capital, right? You know, all the science going back to when Moody's started tracking this stuff in the 80s, you get kind of a 35% recovery, you have a 10% default rate, you go through cycles, sometimes a lot worse, sometimes a lot better. It's not a particularly good business. It becomes a better business and sometimes a fantastic business if you couple that with the wallet that goes with that company beyond
33:17 Speaker 03 just the credit. So IPOs, M&A fees, bond feel, you know, whatever the stuff is that goes along with it, all of a sudden it becomes a pretty good business. What's happened in the last couple of years, we've seen this drift into more and more credit leaving banks, going into private equity and other alternative forms. At PNC, it manifested itself where we'd have a client that we might have banked for 100 years owned by third generation family that just got sold to private equity and our client's gone because I don't want to make that loan at that leverage ratio. And whoever does make the loan is going to demand the treasury management relationship and all the other stuff that goes with that client.
34:00 Speaker 03 So where we come out at it is I don't know that I necessarily want to make the loan. I will sometimes, but I want to keep the relationship. So our partnership with TCW is an example is when that happens now, we, you know, we put capital in the TCW fund, as did a bunch of other people, but happens now, we'll keep the client, you know, we'll diversify the credit risk, but keep the fees. So the return on equity on that thing, you know, goes way up. The whole notion, remember like private credit in the last three years, oh my God, it's a new, new thing. We're great at it. We're going to make you a fortune. Why is that? Private equity kind of hit the skids. Nothing was getting sold. They need to raise new money. We haven't had defaults in 10 years.
34:44 Speaker 03 So a manager shows up and says, look at my track record. I can earn, you know, with two times leverage, I'll give you 10% return after fees. This is fantastic. Private equity sucks. Come with me. Of course, we haven't had a credit cycle in 10 years, so those stats are all garbage.
35:00 Joe Weisenthal? Yeah.
35:01 Speaker 03 You know, actually go through a credit cycle, you have two times leverage on that thing, and you start having defaults, which we've had a few of. All of a sudden, it's not really exciting.
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36:48 Tracy Alloway? Can I ask one macro question in this conversation? Which is, where do you think we are in the credit cycle at the moment?
36:55 Speaker 03 I've given up trying to predict it. Credit today is pretty good, better than pretty good. A lot of the leverage that's in this system that everybody complains about are actually with things that are very good enterprise value. So I don't worry so much about the disappearance of a company. I think about it in terms of reallocation of the ownership structure. Right? If they're overlevered, they go down. Either a private equity firm bails them out, or they say, no, here are the keys. And now the debt holder owns them. And then the debt holder restructures the debt and sells them again. Somebody lost money, but the company's still a good company. It was just overlevered to go. Most of the noise you're hearing right now on credit beyond the fraud, you know, the cockroaches that Jamie said come out when things get stretched.
37:40 Speaker 03 Most of it are decent enterprises, just overlevered. And then, of course, you have the fraud. You haven't had anything that's really going down today because the economy just crashed in a spot other than some isolated issues with tariffs.
37:53 Joe Weisenthal? There is a cyclical element to fraud, right? Because in good times, people look the other way and...
38:01 Speaker 03 I don't, I don't think it's cyclical. I think it's always there. I just think, you know, the... Who's it said, you know, when the water goes out, you can figure out who's swimming nude?
38:11 Joe Weisenthal? I think that was Buffett.
38:12 Speaker 03 It was Buffett, yeah.
38:13 Joe Weisenthal? Yeah. Well, Galbraith, however, talked about the bezel, right? The, the, the, the, the...
38:19 Joe Weisenthal? Pensity of flimflams and scams to exist during the good times. And people are just like, don't, and that accumulates and accumulates.
38:27 Speaker 03 But that could be.
38:29 Joe Weisenthal? We've had like 20 years, as you said, like we haven't had a credit cycle. I mean, we're, it's almost 20 years since the financial crisis now.
38:34 Speaker 03 Yeah, the finance always finds its way, finds a way to blow itself up. I mean, it's, it's, I mean, duh, you know, it's not a opinion. And just look at history. I, I think what happens is you get, you get, you know, we find good things and then you write them. And you, in every instance where something's going wrong, you just keep pushing on something till you take it over the edge. Right? Finance is an industry where historically you can make a lot of money at it. Right? You're playing with other people's money. You know, pennies and nickels coming off of other people's money. I'm just going to keep pushing, I'm going to keep pushing and keep pushing. When it finally falls, it falls hard. Uh, we haven't had that, you know? What's the new, new thing?
39:18 Speaker 03 Now it's fintech and it's crypto and it's, you know, banking has been kind of throttled by regulation for 10 years.
39:26 Tracy Alloway? Well, speaking of finance, always finding a way to blow itself up. Can we talk about Silicon Valley Bank in 2023? Cause you know, they managed to blow themselves up for a variety of reasons. But one of them was they just had too many bonds, which is kind of, you know, an unusual one. What was that experience like for you, first of all?
39:47 Speaker 03 Let's, well, let's go back to Silicon Valley. I actually think they had a great institution. Um, they had a.
39:52 Joe Weisenthal? Who's been saying that? Who's been saying that many times on this podcast? The Silicon Valley Bank respecters. Okay, keep going.
39:59 Speaker 03 No, it's just, it, it's, it was a unique business model with a very loyal client base that they.
40:06 Tracy Alloway? Not that loyal in the.
40:07 Speaker 03 No, I mean, look, you know, if you're dying, loyalty goes out the window. But they blew themselves up in something that was not at all core to their basic business. Right? Interest rates are super low. They got as long by some calculations as like long-term capital was back in the 90s. I mean, they were really, really levered and underestimated the negative convexity deposits. Right? If you think, you know, on average through the cycle, they're going to be there seven years. Oops, they're gone tomorrow. And so they just, they blew themselves up on rates that had nothing to do with their core competence or what they were as a franchise. And it's, it's unfortunate. It was a rookie mistake. There was nothing, it's just crazy position to be in.
40:48 Joe Weisenthal? How scary, you know, those, those days afterwards and then people started hunting for like any, any bank that had the word California in the name, like people were shorting it or people were selling it.
40:58 Speaker 03 Or, you know, you had headlines where, you know, the regional bank index, the regional bank index. That's why I'm a national bank. We are not a regional bank because the next time they put regional bank headlines in there, I don't want to be associated with it.
41:09 Joe Weisenthal? Yeah, I get it.
41:10 Speaker 03 No, we actually benefited during that, you know, we're, we're a safe haven and we actually gathered deposits and opened thousands of new accounts during that period of time. And then every day, somebody would flash the regional bank index and we'd get blasted on our valuation, which is fine. It always, you know, valuations are short term. It all came ripping back after that.
41:32 Tracy Alloway? So one of the issues that came up during the 2023 banking drama, I guess, is the discount window and banks reluctance collectively to use it. And this is something that the Fed's been trying to change, right? And actually, do you remember in late 2022, there was a big spike in tapping, tapping usage of the discount window? And it turned out that wasn't any of the banks that like ended up getting into trouble. It was Beal Bank down in Texas.
42:00 Joe Weisenthal? It's a weird bank.
42:01 Tracy Alloway? Yeah, it's a very weird bank. But anyway, regulators trying to get banks to use the discount window more, feel more comfortable with it. How do you feel about it?
42:11 Speaker 03 Well, that's a great question. So before the financial crisis and before regulation and LCR and long-term debt proposals and all that other stuff, there was a very active Fed funds market. So in a given day, the excess reserve a bank would hold deposited in its Fed account was tiny. And we would trade Fed funds around with each other. If I needed 2 billion, you'd give me 2 billion. Next day I might give you 2 billion, like big size Fed fund positions. And that's how you balanced your books at the end of every night. And then they come out and they say, hang on, we don't want you doing that anymore.
42:51 Speaker 03 There's an LCR requirement. You have to have this much liquidity stuck aside instead of going into the Fed funds market. That gave rise to all these excess reserves. Fed fund market is basically dead. The Fed sets that rate. Nobody trades on that rate. It's as dead as LIBOR. It's gone. I don't even know why they talk about it anymore. Now you have, they basically said, you don't use the discount window and hold all this cash. You just froze the economy because you stopped the circulation of capital transformation. Home loan banks step in. Because I have to hold all of these treasuries and mortgage securities, I can pledge them to home loan and they'll lend me money at a pretty good rate. So that's going to be my outlet.
43:35 Speaker 03 I'm going to go to home loan and I'm just going to borrow there at a pretty good rate. Or I'm going to repo my treasuries that I hold. Silicon Valley happens and they had home loan lines. They didn't have any discount window lines. Now, the discount window will lend against treasuries and agencies pretty simply because it's basically settled electronically through effectively the Fedwire system. If you're pledging loans, it's really hard to pledge. So if all I have is securities to pledge, I should just repo them or I'll give them to the home loan bank. Discount window will do more than that. But if I want to draw against my loan balance, I need to give them physical wet signature
44:19 Speaker 03 loan docs in a vault. Wow, really? Guarded, audited 24 hours a day. Like, there's got to be a guard and I have wet signatures stacked up. So they know that when I draw against that loan, I actually have that loan. Because it doesn't settle Fedwire like a bond does. This is a loan, right? I lent you money, you sign the thing, I put it in the drawer somewhere. Then you say, all right, let's preposition these loans. We spent, PNC spent millions and millions and millions of dollars. So the vast majority of our CNI loans are now at the discount window. We don't borrow under them, but they're there. If we wanted to borrow under them, I got to call, it's gotten a little better. But basically, like during COVID, you know, or post-COVID, when nobody was coming in the office, you'd call, like the
45:03 Speaker 03 way you borrow from the discount window is you call Cleveland, they're, they're Fed 12th this, and then they say, okay, yes, you're in good shape. We'll allow Washington to allow you to use the discount window. And then they'll call Washington and then maybe like a day or so later, you can have money. When nobody is coming in the office, nobody would answer the phone. I got to draw in the discount window. That just rings. Nobody's there. God, there's no system. It's not like I can type in and draw. It's not like I can do a Fed funds trade through a broker and draw the money. It's, it's unusable.
45:33 Tracy Alloway? But now you're prepositioned to borrow against loans if you need to.
45:38 Speaker 03 Yeah, we have enough liquidity on hand, basically, to cover anything that can happen because we positioned all of our collateral in the optimal spots.
45:46 Joe Weisenthal? Are you talking about physical spots? When you say you, because you're talking about like wet signature document.
45:53 Speaker 03 Yeah. So the only place you can borrow against CNI loans in effect is the discount window. So, okay, so they're going to go over there. That's wet signature. I can borrow against securities in the repo market, at the home loan, or the Fed. So this is kind of the confusion that happened with, where was stuff pledged with Silicon Valley? I have, you know, 50 billion of cash sitting on the Fed's excess reserve book. So that's instant liquidity and I own a whole bunch of treasuries that I can sell if I had to. So you just, you, you figure out, how do I optimally? Earn whatever I can on these assets I'm prepositioning, but get them in the right place. So if I need liquidity in an emergency, I can get it.
46:37 Speaker 03 Silicon Valley did not do that, and the Fed did not make it easy for them to do that.
46:41 Joe Weisenthal? And I'm just trying to be clear. When you say get them in the right place, you mean like a physical place?
46:46 Speaker 03 Some of it's physical, like the loans, the wet signature loans. I literally think we take them down to like a vault and spin a dial, you know, with the big, the big crank and they get locked in there. But no, securities by CUSIP, you would say like this batch of CUSIPs is prepositioned with the Fed. So I just know where they are. I know the balances. I know I can send them right over Fedwire and draw on that. So it's, it's, it's that thing. Yeah.
47:10 Tracy Alloway? One thing I always wondered with the discount window. So part of the reluctance historically to tap it on the part of banks has been they're worried it'll get out into the market, right? And there'll be rumors that they're tapping the market. How does that actually happen? I don't understand like how that info leaks.
47:26 Speaker 03 So in theory, because let's imagine somebody drew on the Fed. So the discount window is regional Fed. Let's assume somebody took down 100 billion from the, or even 20 billion from the discount window through the Cleveland Fed. It can only be PNC. So the people can figure out who it is. So why are you doing that? And then I got a story and I got to explain it where I think this should go. So go back to the original where I said Fed funds is dead. Nobody trades it. We ought to just trade the discount window, right? The discount rate ought to be, I'm just lending and borrowing all day long. I can leave money excess reserves, right? If I have money to give and I can borrow money, discount window, and I need money. And there ought to be like a five basis point bid offer on that.
48:09 Speaker 03 You'd put more liquidity into the system here to grow the economy if you did that, you know, in a great way. But it's like they wiped out LIBOR, they wiped out Fed funds through all their LCR. You know, now you have the discount rate, just bid offer on the discount rate. And then all of a sudden, discount window becomes right way transaction. It's happening every day.
48:29 Tracy Alloway? Yeah, the stigma goes away.
48:30 Speaker 03 Yeah.
48:30 Joe Weisenthal? So you have to forgive me because there's a lot going on in the world these days. I can't pay attention to everything. I have no idea where you stand on yield bearing stable coins, which I understand to be a big thing of debate in the sector. And I'm. Again, I have, I've been paying attention to the other things, but I see headlines about this pop up.
48:53 Speaker 03 Yeah. So, stablecoin legislation, Genius Act comes out, they left a little loophole in there. They said, no interest, but it kind of got run around by offering rewards, promos, same thing. Clarity Act is what's being debated right now. They're trying to close that loophole. They being kind of banks and people around banks, keeping the loophole open as crypto. You know, why not? If you can pay interest, it's going to drive volume. I want to pay interest. Banks say, I don't want you to pay interest because you're going to potentially suck deposits out of the system and you're messing around with a capital system that's worked for 250 years. You sure you want to mess with it? At the end of the day, I think of, I think the following.
49:33 Speaker 03 Stablecoin has been built, launched, marketed as a payment mechanism. It's somehow, by the way, I'm not sure it will, but you know, it's going to make payments easier, faster, cheaper, whatever. Not as an investment vehicle, right? An investment vehicle is a different animal and needs different regulations. So all of a sudden, like a stablecoin that's buying T-bills, that pays you interest, that looks an awful lot like a money fund to me. And that's fine if it's a money fund. Then regulate it like a money fund. Can't break the buck. You got to have this much liquidity on hand. You know, all the disclosure rules that go around with it, then do what you want with it. You know, go ahead and pay people in money funds. I just think they're mixing things.
50:18 Speaker 03 And I think, you know, my, my uninformed worry is we're not done blowing up in crypto yet. Right? It's in fits and starts as you learn these things. Why do we need to start everything at once? Let's figure some stuff out. If it works and there's a logic to doing it, then go ahead and do it later. I just, I don't know that you need to do it all at once.
50:41 Joe Weisenthal? What's the rush?
50:42 Speaker 03 Yeah.
50:42 Tracy Alloway? Um, you know, we are coming up to the Super Bowl. And when I think of the Super Bowl, I always think of the Basel endgame proposals and that ad that they ran in 2024.
50:56 Joe Weisenthal? It was surreal, wasn't it?
50:57 Tracy Alloway? It was a very effective marketing tool, at least for me. And we are expecting a re-proposal of the endgame. What's your sense of what might change between, you know, the original document or suggestions versus now?
51:13 Speaker 03 I have no inside information on that. But the original proposal that was written was in contempt of math. They basically, they had a goal of raising capital. And then they used bad math to cause that outcome, which was a lot of what the outrage was over. Because if you start making up rules and capital allocation, you inadvertently cause risk to emerge in places that shouldn't.
51:42 Speaker 03 So I think the math is fixed. You know, the lawsuit on the stress test and the fact the models need to be public. So the math is going to be a lot better on what they measure. You've heard about indexing G-SIB scores to inflation and some of the boundaries. I don't know what they're going to do on operated risk capital. It's been a fight. I think they're going to give some credit on credit risk ratings that Europe gives that we don't. And my guess is there'll be something in there for everybody. And then everybody will collectively be disappointed about something. They're not going to give away the shop, but they're going to try to make it directionally correct and based on real math instead of made up stuff.
52:23 Joe Weisenthal? I want to go back to something you said about the bank integration. And you actually gave a very rare, I would say, actual 2026 application of generative AI implementation, where you mentioned that the person at the local bank branch can actually like, ask a question about the policies and learn. So that wasn't just a hypothetical. That's a real thing that's happening right now.
52:47 Speaker 03 Yeah, that's true.
52:48 Joe Weisenthal? Can you talk, this is a theme that's been, we've been talking about on the podcast lately, which is, you know, not just AI. Per se, or implementing, or we're gonna like implement AI, but like, you know, the changing relationship between a company and their software vendors and, um, you know, does AI change some of these relationships? Do you have leverage because there are certain like niche functions that you could like build yourself? Can you talk a little bit about how you're seeing some of these things play out within your firm?
53:16 Speaker 03 Yeah, this is fun because there's so much bad information about that. So start with the basics. In order to utilize AI, you need clean data, defined data with a single source of truth. We've spent 10 years doing that in a fortune. So, you know, silly as that sounds, think how many different places inside of a company you might have. You know, a checking account balance that's then morphed into the average checking account balance over seven days. Or the median, or the this, or the that. And so when someone's trying to pull data to run a report or build a model, they don't even know what the real, they don't even know what they're pulling. So you gotta get it clean at the base source and in index.
53:57 Speaker 03 Now you have the capacity to build a model, whether it's large language or analytical, large language models, there's open models out there you can just use, which is what we tend to do to build our document sorting. We're using it on our own data, our own documents. I don't need their data. And I don't need to retrain their model per se, other than running it on my own data, which is this much smaller compute factory. Right? I don't have the whole internet down downloaded. I just got this thing, right? And then once we train the model, running the model doesn't take a lot of compute. Training the model takes a lot of compute. When we implement, talk about AI, some of it's the, the fancy object thing. Oh, I'm going to implement Copilot.
54:39 Speaker 03 And now people can write emails for me. Everybody knows when Copilot wrote my email because it's way too polite and the punctuation is correct. Does that make us any money? Probably not, you know, but it's cool. And that's, so when you hear most people say, no, we're using AI, they just plugged in Copilot and paid somebody 20 million bucks a year for licenses. Where it starts to make a difference is when it can answer questions in a hurry for our employees or our clients and where it can automate process, the same way we've been on this automation journey for 20 years now, right? Starting with internet and then kind of microservices and applications. AI is just the next stage of that.
55:19 Speaker 03 You know, we've got, we, we, we over the last 10 years probably get 30 points of productivity efficiency in our operating environments, probably less than seven years, actually. AI is going to give us another 30. And it's going to come through time. But it's, think of it as a automation. All it is is even when people talk about AI, they'll say, oh, you know, it's an AI model. It's not an AI model. It's just a decision tree. You know, it's automating a script and an answer, moving data in a way where somebody doesn't have to swivel, you know, pretty basic stuff.
55:53 Tracy Alloway? What about on underwriting? Would you use AI to automate that particular process?
55:58 Speaker 03 It's actually not legally allowed today. So there, there's, I mean, it's truth in lending or something, you know, one of, one of these laws where if I tell you no, you applied for your credit card, they just capped my rates at 10%. So I said, no, I've got to give you the three reasons, you know, of why I said no. With an AI model, we look at a thousand variables and the weight of each of those variables is dependent upon their interaction in your particular profile. So the weight of rent might be very heavy for one person and not for another based on the profile. I can't give you three reasons. The model told me no. Yeah. The model told me yes.
56:40 Speaker 03 So what ends up happening today in credit decisions, this is crazy, but it works, is we'll set with our normal criteria, this FICO, this debt to income, you know, whatever else you look at, we'll say yes or no. And then if we tell you no, we use AI to try to tell you yes. Because I could still use my original excuses, no. But if I turn you to say yes, after the fact, you're not mad at me.
57:07 Joe Weisenthal? So the point is.
57:08 Speaker 03 It's crazy.
57:09 Joe Weisenthal? But the point is that legally speaking, if you say no, you have to be able to articulate a reason.
57:16 Speaker 03 Yeah. So what ends up happening is everybody sets this bar way too high. This is the one of these silly rules that needs to be looked at. I mean, we do use, it's not so much AI. There's a lot of decision tree models on automation that help with underwriting, but it's not necessarily a machine learning application.
57:35 Joe Weisenthal? Tracy and I, I mean, I find, I get this idea of like AI as another form of workflow automation, very intuitive.
57:42 Speaker 03 Yes.
57:42 Joe Weisenthal? Tracy and I used to publish transcripts of the podcast, but it was a very labor intensive process to like clean it up, et cetera. And so I thought like AI was going to be the panacea. It's like clean this text. It just, when we were doing it, it wasn't there yet. It was like creating fake, it was creating sentences that weren't there. But I understand this intuition that AI can then be like trained on a repeatable process. Right now, and again, the things that we call AI, which these days, large language models, those workflow automations, like are they, are there certain workflow automations that today, workflow processes that you could say, we've been able to automate them in a way we couldn't have five years ago.
58:21 Speaker 03 Oh, absolutely. But let me, let me just give you kind of some scope and some numbers and what's actually happening. And I, we have a pretty clean tech stack. So maybe we're a little further ahead at this than, than some, but we have, we focused on a billion four of addressable spend inside of our care centers and our operating environments. This is just solving problems for customers, moving loan dot, all that stuff. A billion four we spend. We've come up with 171 different ways to use AI.
58:55 Speaker 03 In reducing that spend and the addressable piece of the billion four, we think is probably 40% of it. Of the 171 use cases, we prioritize five that are live. And so what is, you know, what does one of those look like, for example? So imagine inside of our wealth business, you know, we got a bunch of trust lawyers. So my grandfather, it's actually with PNC, my grandfather created this small little trust, skip generations, and it's written, beautiful, it's handwritten on like three pages. Maybe it was my great grandfather. Some lawyer every month has to look at that thing and say, you know, this qualifies or doesn't, or we're going to do this distribution. All of those things are manual. Now just read them into the document writer and all of the
59:38 Speaker 03 things that are mechanical outcomes from those millions of pages of trust documents are right in front of you, right? Payment on this date, here are the beneficiaries. It just, it makes it real simple. So document reading, expression of what's in documents on the basic stuff, you know, now I don't have to just go and search and find and human error. That, that stuff will make a difference. I worry, we have too much focus on the cool fun toy. Chat GTP, I mean, this is, you know, it's a new Google search, it's cool, give me the answer. That, that isn't going to make the world better, if that's all it's used for.
1:00:15 Tracy Alloway? How did you get a clean tech stack? Because this is something that also goes hand in hand with bank consolidation. You always hear that, you know, banks end up with this tangled mess of technological systems, maybe some that include COBOL or like old languages and things like that. Cobol? Cobol? I can never remember.
1:00:33 Speaker 03 You can't even, yeah, you weren't even born yet when we were programming in Cobol.
1:00:38 Tracy Alloway? So how did, how did you manage to do that?
1:00:40 Speaker 03 Honest answer, we, right in the middle of the financial crisis, right? We merged with National City under duress from both firms, kind of a regulatory wedding. Neither of us had the capacity to run a larger firm. I mean, I distinctly remember
1:00:59 Speaker 03 You know, talking to the combined organization, we have to rethink how we run something. You can't manage by walking around anymore. And neither tech stack could survive on its own. And so we saved less money than we said we would in the announcement, or actually, we saved what we said we would save. But quietly, we reinvested $2 billion a year for 10 years.
1:01:25 Tracy Alloway? Wow.
1:01:26 Speaker 03 Yeah. So literally all knew, we went from single server stack, you know, so this computer runs that application and each computer is different because whoever the application owner was, went to dinner with Dell that day or HP the next day. Yeah, we had 11 data centers. None of it was in a virtual environment. So building our own first cloud environment, and then secondly, writing everything in cloud language, you know, microservice application. So it's cloud native. That's forever. But we spent a ton of dough and just have invested, invested, invested, and got to a place where our tech stack is as modern as any fintech you'll find out there.
1:02:07 Joe Weisenthal? All right. Well, Bill Demchak.
1:02:09 Speaker 03 This is fun.
1:02:10 Joe Weisenthal? This was a lot of fun. Thank you so much for taking the time. We had a lot.
1:02:13 Speaker 03 Thank you for being interested.
1:02:14 Joe Weisenthal? Yeah.
1:02:14 Tracy Alloway? That was great.
1:02:15 Joe Weisenthal? That was great. Really appreciate you coming on Odd Lots.
1:02:18 Speaker 03 Good to be here. Thank you.
1:02:31 Joe Weisenthal? Tracy, I really enjoyed that conversation. I learned a lot about banking in that conversation. We hit a lot in that. But I just wanted to keep going. There were so many interesting angles.
1:02:41 Tracy Alloway? Bill actually answered the questions.
1:02:43 Joe Weisenthal? Which cannot be said for every CEO.
1:02:45 Tracy Alloway? No.
1:02:45 Joe Weisenthal? I would say most of our guests are very good at answering questions. Not every CEO is great at always answering questions, but I was like, oh, I'm like learning something with each one of these things. Let's keep going.
1:02:55 Tracy Alloway? Also, genuinely, he seemed to have a good handle on like the granular and practical aspects of running a bank. So I was really interested to hear how they redesigned their tech. Um, after the financial crisis, I guess they got a head start on everyone else. Um, and then also the pre-positioning of collateral at the discount window. I knew that the Fed had been encouraging banks to do it. I did not realize that you had to send the actual mortgage docs if you want to borrow against those.
1:03:24 Joe Weisenthal? It is crazy how much is not just done automatically electronically, right? And here was, I didn't ask it, but I was gonna ask, does blockchain solve this question? But the idea of it like, okay, all of these things really are electronic-ish, although there's clearly this physical component. But the idea that here is something which is theoretically monetizable, which has liquid value, is a liquid instrument, but because of the way that the system is structured, cannot actually be liquidated or turned into liquid assets immediately if it had it or not prepositioned, et cetera. That actually does still seem a little bit wild to me that that is the case.
1:04:07 Tracy Alloway? I always thought that mortgage assignations were like one use case for blockchain, right?
1:04:13 Joe Weisenthal? Right, yeah, yeah, yeah.
1:04:14 Tracy Alloway? You could reasonably see blockchain, you know, helping out with that problem versus, I don't know, tracking the origins of lettuce and things like that. Always seemed kind of ridiculous.
1:04:23 Joe Weisenthal? Well, it seems like one of these things, which is in banking, and again, is like integrated databases. So there's like, it'll be a central bank database, there'll be a home loan bank database and the regional bank and the bank database, right? And the question is like, why can't they just all see?
1:04:40 Tracy Alloway? Talk to each other?
1:04:41 Joe Weisenthal? Yeah, or see the relevant parts of the database, right? And I suppose that's easier said than done. I really liked hearing him talk to about practical applications of AI, which again, maybe feels a little different than some of our conversations last year, or it feels like now there's more articulated examples of this is a sort of labor-saving or time-saving technology. So that's another thing I think we have to pay more attention to in 2026.
1:05:08 Tracy Alloway? Also, the database issue in the context of AI is kind of interesting because we were talking about how so much of programming nowadays, so much of the tech issues are those coordination problems, right? And so even if we have something like Claude, we recorded that episode recently, even if you have Claude writing software, it doesn't necessarily solve that coordination issue.
1:05:32 Joe Weisenthal? Totally. You know, bank branches, how crucial they are.
1:05:37 Tracy Alloway? Oh, yeah, that was surprising.
1:05:38 Joe Weisenthal? I had heard that, you know, there's, and again, it may be just like one of those sort of things people say, like, people are less likely to switch banks than they are to get a divorce. And so therefore, it still makes sense to build out a physical branch. But like, the strategy of that and thinking about where and how the fact that they're building hundreds of branches still, even if the total number of bank branches is actually declining, that's just like a super interesting, real part of the business.
1:06:06 Tracy Alloway? It is true that I've had the same bank since college. I don't know about you.
1:06:12 Tracy Alloway? And I hate them, and I still won't leave.
1:06:14 Joe Weisenthal? But since I moved to New, yeah, since I moved to New York, I think I've had, so that's 21 years. So basically, yeah, one bank. It's kind of wild.
1:06:22 Tracy Alloway? I'm gonna switch. I'm gonna prove the anecdote wrong.
1:06:25 Joe Weisenthal? I'm just gonna switch for the hell of it.
1:06:26 Tracy Alloway? Yeah, absolutely. Okay, shall we leave it there?
1:06:29 Joe Weisenthal? Yeah, let's leave it there.
1:06:30 Tracy Alloway? This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
1:06:36 Joe Weisenthal? And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Armadash, Albin at Dashbot, and Kale Brooks at KaleBrooks. And for more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.
1:06:57 Tracy Alloway? And if you enjoy Odd Lots, if you like it when we look into the business models of banks, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.
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