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PNC Financial Services Group, Inc. (NYSE:PNC)
Q4 2017 Earnings Conference Call
Jan. 12, 2017, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the PNC Financial Services Group Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press 1, 4 on your telephone keypad. If you'd like to withdraw your question, please press 1, 3. As a reminder, today's call is being recorded, Friday, January 12th, 2018. I would now like to turn the conference over to the Director of Investor Relations, Mr. Bryan Gill. Sir, please go ahead.

Bryan K. Gill -- Executive Vice President and Director of Investor Relations

Thank you, and good morning, everyone. Welcome to today's conference call for the PNC Financial Services Group. Participating on this call are PNC's Chairman, President, and Chief Executive Officer, Bill Demchak, and Rob Reilly, Executive Vice President and Chief Financial Officer. Today's presentation contains forward-looking statements regarding PNC performance. They assume a continuation of current economic trends and do not take into account the impact of potential legal and regulatory contingencies.

Actual results and future events could differ -- possibly materially -- from those anticipated in our statements and from historical performance due to a variety of risks and other factors. Information about such factors, as well as GAAP reconciliations and other information on non-GAAP financial measures we discuss, is included in today's conference call earnings release and related presentation materials, and in our 10-K, 10-Qs, and various other SEC filings and investor materials. These are all available on our corporate website, PNC.com, under Investor Relations.

Throughout this presentation, we refer to adjusted fourth-quarter income statement amounts, which reflect the impact of federal tax legislation and significant items, and additional details provided in the earnings release and appendix to our slides. Also, we have not factored into our forward-looking guidance the impact of any changes in customer behavior due to the new enacted federal tax legislation. These statements speak only as of January 12th, 2018, and PNC undertakes no obligation to update them. Now, I'd like to turn the call over to Bill Demchak.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Thanks, Bryan, and good morning, everybody. As you've seen today, we reported full-year 2017 results with net income of $5.4 billion, or $10.36 per diluted common share. Clearly, our results benefited from new federal tax legislation that was signed into law in December. The good news is that tax reform has produced both current and future benefits for our shareholders, including a significant increase in tangible book value per share this quarter and higher ongoing cash flow. Tax reform has also given us the flexibility to invest more in our businesses, our communities, and our employees, which helps drive our Main Street banking model. The bad news for this quarter -- if you can call it that -- is that it was a really noisy quarter for us, and I'm going to leave it to Rob to walk you through all the various adjustments there.

Excluding the impact of tax legislation and the other significant items, our full-year 2017 net income was $4.5 billion, or $8.50 per diluted common share. 2017 was a successful year for PNC, and I do want to thank all of our employees for their continued hard work, as well as our clients for their trust in us. We grew loans and deposits and added customers across our businesses. Importantly, we grew consumer loan balances -- albeit somewhat modestly -- for the first time in four years, and this has been a key focus for us going into the year, and I'm pleased that we're making progress here.

We generated record fee income for the year and in the fourth quarter, and we continued our focus on expense management, and this isn't going to change as we go into '18. We executed on our strategic priorities, including the expansion of our middle-market franchise into new markets, made important progress on our technology agenda, which is also driving the ongoing reinvention of our retail bank. We were particularly proud this year to earn the No. 1 ranking in JD Power's National Bank Satisfaction Survey.

After years of work to modernize and fortify our information infrastructure, we're now investing more in our customer-facing digital products and services, and in turn, those investments are enabling us to deliver a higher-quality, more convenient, and more secure banking experience. You will have seen that we announced several smaller -- but strategic -- acquisitions, with ECN Vendor Finance, Trout Investor Relations, and Fortis Advisors. All of this work, of course, is aimed at creating long-term value for our shareholders. And, in 2017, PNC returned $3.6 billion of capital to shareholders.

2018 is going to be an important year for us as we continue to execute on a number of initiatives, including the ongoing buildout of our digital products and services, the home lending transformation, and the further expansion of our middle-market lending franchise. With that, I'll let Rob run you through the results in more detail and share with you our guidance for '18, and then we'll be happy to take questions. Rob?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Good morning, and thanks, Bill. As Bill just mentioned, our full-year net income was $5.4 billion, or $10.36 per diluted common share. Fourth quarter net income was $2.1 billion, or $4.18 per diluted common share. Both periods benefited from the new tax legislation, partially offset by significant items that I'll talk about in a moment. Our balance sheet information is on Slide 4 and is presented on an average basis.

Loans grew $1.9 billion, or 1%, to $221.1 billion in the fourth quarter compared with the third quarter. Commercial lending balances increased $1.6 billion, and growth was broad-based across our C&IB businesses. Consumer lending balances were up $300 million as growth in residential mortgage, auto, and credit card more than offset lower home equity and education loans.

For the year-over-year quarter comparison, total loans grew $10.2 billion, or 5%. Commercial lending increased by $9.9 billion, or 7% -- again, broad-based -- and consumer lending was up $300 million. Investment securities decreased by $200 million to $74.2 billion in the fourth quarter compared with the third quarter on an average basis but increased by $1.1 billion, or 2%, on a spot basis. Average investment securities declined by $1.8 billion compared to the same quarter a year ago, as we faced a challenging reinvestment environment throughout most of 2017.

Our average balances at the Federal Reserve were $25.3 billion for the fourth quarter -- up $1.9 billion from the third quarter -- driven by an increase in liquidity from higher deposits and borrowings. Compared to the fourth quarter of last year, Fed balances increased by $600 million. On the liability side, total deposits increased $2.1 billion, or 1%, to $261.5 billion in the fourth quarter compared with the third quarter due to seasonal growth and commercial deposits. Compared to the fourth quarter of last year, total deposits increased by $4.4 billion, or 2%, reflecting growth in both our consumer and commercial businesses.

Average common shareholders' equity increased by approximately $300 million linked quarter and by $600 million year-over-year, driven by strong earnings even as we continue to return substantial capital to our shareholders. For the full year 2017, we returned $3.6 billion of capital to shareholders. This represented a 17% increase over the prior year and was comprised of $2.3 billion in share repurchases and $1.3 billion in common dividends.

Period-end common shares outstanding were 473 million, down 12 million, or 2%, compared to year-end 2016. As of December 31st, 2017, our pro forma Basel III Common Equity Tier 1 Capital Ratio was estimated to be 9.8%, inclusive of the impact of tax legislation, and tangible book value was $72.28 per common share as of December 31st, up 7% compared to the same date a year ago.

As you can see on Slide 5, net income was $5.4 billion for the full year and $2.1 billion in the fourth quarter. Clearly, these results were impacted by tax legislation and significant items that occurred in the fourth quarter. However, our underlying business performance remains strong. On a reported basis, total revenue for the fourth quarter was $4.3 billion, up $135 million, or 3%, compared to the third quarter. This was driven by higher noninterest income and stable net interest income.

Full-year revenue was $16.3 billion, up $1.2 billion, or 8%. Net interest income increased by $717 million, or 9%, primarily due to commercial loan growth and favorable loan yields. Total noninterest income grew by $450 million, or 7%, reflecting overall business growth. Expenses continue to be well-managed and remain a focus for us. The fourth-quarter and full-year 2017 reported numbers as shown on this slide include the impact of approximately $500 million related to the significant items in the fourth quarter. Provision for credit losses in the fourth quarter was $125 million, down $5 million linked quarter. Full-year provision of $441 million increased by $8 million compared to 2016. And, overall credit quality remained stable. Finally, as you can see, our income tax line benefited from the recent tax legislation.

Turning to Slide 6, highlighted here are the significant items that impacted the fourth quarter. As a result of the federal tax legislation, we recognized a $1.2 billion net income tax benefit, primarily due to the revaluation of our deferred tax liabilities, the majority of which are related to our equity stake in BlackRock. In addition, we had significant items that occurred in the fourth quarter, and they are as follows: As previously announced, a $200 million contribution to the PNC Foundation, which supports our communities and early childhood education. This amount was funded through a contribution of shares of BlackRock stock. And second, a $105 million expense related to benefits for our employees, which includes a $1,500.00 credit to employee cash balance pension accounts and a $1,000.00 cash payment to approximately 90% of our employees.

Other significant items not previously announced but reported today are a $254 million noninterest income from the flow-through of BlackRock tax legislation benefit as a result of our equity investment, a $197 million charge related to real estate dispositions and exits, including our data center strategy. As a result of the completed 2017 buildout of new data centers, we are now less reliant on some of our legacy sites. In total, these real estate dispositions will reduce PNC's managed square footage by approximately 10%. And lastly, $319 million for two negative fair value adjustments, one of which is $248 million related to our Visa Class B derivative agreements. This is primarily due to an extension of the expected timing of litigation resolution. And, the second, $71 million for our residential mortgage servicing rights fair value assumption updates.

Slide 7 shows the financial impact of tax legislation and significant items on our fourth-quarter and full-year financial results. We believe these adjusted results better represent our underlying business performance and will be used as the basis for our first-quarter and full-year 2018 guidance. As you can see, our adjusted full-year net income was $4.5 billion, or $8.50 per diluted common share, and for the fourth quarter, our adjusted net income was $1.2 billion, or $2.29 per share.

Turning to Slide 8, full-year 2017 revenue was $16.3 billion. Reported net interest income for 2017 increased by $717 million, or 9%, compared with 2016, driven by higher interest rates and loan growth, partially offset by higher borrowing and deposit costs. Our net interest margin increased in 2017 to 2.87%, up 14 basis points. The full-year improvement was primarily driven by higher loan yields, partially offset by higher borrowing costs. Compared to the third quarter, net interest income was stable and net interest margin declined by 3 basis points to 2.88%. These results included the impact of tax legislation related to leveraged leases, which reduced fourth-quarter NII by $26 million and NIM by 3 basis points. Full-year noninterest income was up $450 million, or 7%. Fourth-quarter noninterest income was up $135 million, or 8%. Both periods included broad-based growth in the majority of our key businesses.

Slide 9 provides more detail on our noninterest income. We continue to execute on our strategies to grow our fee businesses across our franchise, and those efforts helped to drive record fee income in 2017, even excluding the impact of tax legislation and other significant items. On both a reported and adjusted basis, noninterest income represented 44% of our 2017 revenue. For the full year, asset management revenue increased by $421 million, or 28%. This included the $254 million flow-through of tax legislation benefit as a result of our equity investment in BlackRock. In addition, higher average equity markets and assets under management -- which grew from $137 billion at year-end 2016 to $151 billion as of December 31st, 2017 -- contributed to the increase on a full-year and quarterly basis.

Consumer services fees grew $27 million, or 2%, for the full year, driven by higher debit card activity, brokerage fees, and credit card activity net of rewards. On a linked-quarter basis, consumer services fees increased by $9 million, or 3%. Corporate services fees increased by $117 million, or 8%, in 2017. On a linked-quarter basis, corporate services fees increased $52 million, or 14%. In both periods, results reflect stronger merger and acquisition advisory fees, as well as higher Treasury management and loan syndications fees.

Residential mortgage noninterest income declined both on a full-year and linked-quarter basis and included a negative $71 million impact related to updated fair-value assumptions for residential mortgage servicing rights. Beyond that, lower production and lower sales revenue contributed to the decline. Service charges on deposit for the full year increased by $28 million, or 4%, driven by client growth and activity. Lastly, full-year other noninterest income increased by $74 million, or 7%. On a linked-quarter basis, other noninterest income was down $152 million and included a net $129 million negative impact related to significant items.

Turning to Slide 10, expense management continues to be a focus for us, and we remain disciplined in our overall approach. As you know, we had a 2017 goal of $350 million in cost savings through our Continuous Improvement Program, and we successfully completed actions to achieve that goal. Our full-year 2017 expenses were $10.4 billion, compared to $9.5 billion in 2016, reflecting approximately $500 million of significant items in the fourth quarter. These include the contribution to the PNC Foundation, real estate disposition and exit charges, along with employee cash payments and pension account credit. Importantly, on an adjusted basis, our efficiency ratio was 61% in 2017. Looking forward to 2018, we have targeted an additional $250 million in cost savings through CIP, which we again expect to partially fund our continuing business and technology investments.

Turning to Slide 11, overall credit quality remains stable in the fourth quarter compared to the third quarter. Total nonperforming loans were essentially flat linked-quarter and continue to represent less than 1% of total loans. Total delinquencies were up $101 million, or 7%, compared to the prior period, reflecting increases in residential mortgage, auto, and credit card, in part, due to seasonality and the residual impact of hurricanes. Provision for credit losses of $125 million decreased by $5 million linked-quarter. The provision for the consumer lending portfolio increased due to loan growth, the auto and credit card delinquencies I just mentioned, and the impact of a home equity loan reserve release in the third quarter. These increases were more than offset by lower provision for commercial lending, reflecting stable credit quality and the reversal of hurricane-related qualitative reserves. Net charge-offs were essentially flat compared to the third-quarter results, and the annualized net charge-off ratio was 22 basis points.

In summary, PNC reported a very successful 2017, and we are well-positioned for 2018. Looking ahead to the rest of the year, we expect continued steady growth in GDP and a corresponding increase in short-term interest rates three additional times this year -- in June, September, and December -- with each increase being 25 basis points. Based on these assumptions, our full-year 2018 guidance -- compared to adjusted 2017 results -- as outlined on Slide 7 is as follows: We expect mid-single-digit loan growth, we expect mid-single-digit revenue growth, we expect a low-single-digit increase in expenses, and we expect PNC's effective tax rate to be approximately 17%. Based on this guidance, we believe we will deliver positive operating leverage in 2018.

Looking ahead at the first quarter of 2018 compared to adjusted fourth-quarter 2017 results, we expect modest loan growth, we expect total net interest income to remain stable, we expect fee income to be down low mid-single digits due to typically lower first-quarter client activity, and elevated fourth-quarter fees in certain categories. We expect other noninterest income to be in the $250 million to $300 million range, we expect expenses to be down low single digits, and we expect provision to be between $100 million and $150 million. With that, Bill and I are ready to take your questions.

Questions and Answers:

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Jennifer, could you please call for questions?

Operator

Thank you. Ladies and gentlemen, if you would like to register a question, please press 1, 4 on your telephone keypad. Please hold while we compile the Q&A roster. Your first question comes from the line of John Pancari with Evercore. Please proceed with your question.

John Pancari -- Evercore ISI -- Managing Director

Good morning. The 17% expected tax rate appears to assume that not much of it really gets competed away, but listening to some of the banks talk about the competitive environment, it seems like there is going to be a longer-term risk that some of that benefit does erode over time. So, I was just wondering if you can comment on your expectation there. Do you think that you see some of that benefit find its way out of the numbers? Thanks.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Rob, jump in here, but I think the tax rate is the tax rate. Whether or not the above-the-line numbers get reduced is a function of lowering spreads and/or higher deposit costs remains to be seen. So, it's not really in our tax rate, it's basic competition.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

It's the amount.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Yeah. Our after-tax return on equity is going to increase, and in theory and practice, you'll see some of that, through time, given to customers.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Just to broaden that question a little bit, it's early, obviously. Based on historical activity, we would expect that banks will compete some of that away, but it's too early to tell in terms of the extent of that.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

The other thing to keep in mind -- and, this jumps into theory -- our cost of capital actually increases because of the lower value of the tax yield from our funding, so you can't actually give it all away. And then, there's just pure risk return that you get on the loan book that is independent of what the tax rate is in some ways, so there's mitigating factors to some notion that you can just drop it all off to clients.

John Pancari -- Evercore ISI -- Managing Director

Got it. Okay. And then, on that note, I separately wanted to ask about loan growth, or at least on your outlook. At least for the quarter, I know loans were somewhat sluggish on an end-of-period basis, and it sounds like some of that may have been the mortgage finance. So, I want a little bit more color there, but separately, on the outlook, I would have expected your mid-single digit outlook for 2018 to be a little bit higher than the 2017 expectation, but it's in line; it's somewhat stable. So, why not see a real strengthening in loan growth in '18?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

We didn't assume a change in loan demand, in effect. If your question comes along the lines of did we expect an economic pickup as a function of tax change, there might be more borrowing, so we don't have that built into that number per se. Interestingly, in the fourth-quarter number, you're right in that we had a warehouse mortgage line for multifamily run off mid-quarter --

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

On a spot basis.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

-- on a spot basis that caused the numbers to decline, but what was interesting -- our originations in the fourth quarter in C&I were really healthy. What changed versus the third quarter was the paydowns on loans that were taken out by capital markets, and in the real estate market, real estate loans that were taken out by permanent financing on pretty aggressive terms. So, our ability to win deals and fund deals continues at pace.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

It's healthy.

John Pancari -- Evercore ISI -- Managing Director

Okay, great. Thank you.

Operator

Our next question comes from the line of Scott Siefers with Sandler, O'Neill, & Partners. Please proceed with your question.

Scott Siefers -- Sandler, O'Neill & Partners -- Principal, Equity Research

Good morning, guys. I appreciate the color on the adjusted numbers and everything like that. Rob, question on the tax rate: So, the 17% effective rate -- can you walk through what you would anticipate that implying for an FTE tax rate? I think there's typically been a 250-basis point gap between your effective and FTE tax rate. So, how does that change --

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, not a big swing there, Scott. You just would reduce that by the compression of the lower tax rate, so, not a big number to start with, and roughly 30% off of that.

Scott Siefers -- Sandler, O'Neill & Partners -- Principal, Equity Research

Okay. And then, any impact on the -- should we expect any visible step down in the FTE margin as a result of tax changes or anything?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, small... We gauge it at around 3 basis points.

  1. Scott Siefers -- Sandler, O'Neill & Partners -- Principal, Equity Research

Okay, great. Thank you. And then, more broadly, now that the tax change is official, any thoughts on how -- if at all -- the new world changes your capital return targets or aspirations?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Well, that's a popular question, obviously. The answer to that is what you're going to expect, which is that it's premature. We haven't received the Fed scenarios for this year's stress tests, so that's a key component in determining what the capital return will be. But, all else being equal, because we have a lower tax rate, in theory, if everything else stays equal, we'll have more to return.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Our bias inside of that -- as we've talked about before -- would be on the dividend side, but we'll finish out this -- what do we have, two quarters, Rob? -- on the remaining secor, and then see what they have in store for us on the next set. We have higher cash flow, and we'll be biasing that cash flow subject to our Board of Directors' approval, but toward the dividend, I think.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

As far as the mix between dividend and share repurchases.

  1. Scott Siefers -- Sandler, O'Neill & Partners -- Principal, Equity Research

All right. Terrific. Thank you, guys, very much.

Operator

Our next question comes from the line of Erika Najarian with Bank of America. Please proceed with your question.

Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director

Hi. Good morning. So, in context of the progress on consumer loan growth, Bill, one of your peers said at an earlier conference call this morning -- mentioned that underwriting standards still remain a bit tight for a residential mortgage, and clearly, everybody's waiting for potential rule changes from the agencies. I'm wondering -- this is a two-part question -- if you could give us an update on the home lending transformation in terms of the origination prospects for this year, and also, whether or not the expense base is now right size. And also, do you agree with the view that there is still some embedded conservatism in terms of underwriting standards for residential mortgage?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

On the underwriting standards, yeah. At the margin, I would say that everybody -- just given past history -- has been more conservative than you otherwise might be, given broad-based litigation risk and put-back risk. I'll let Rob comment a bit on the home lending transformation, but lead off by saying that we are not where we will be on expenses, as we're still running the implementation program, and in some places, dueling systems.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

I can add to that, Erika. We're on track in terms of what our plans are. We did move mortgage origination this quarter to our new platform. We have plans to follow that up with home equity and mortgage here in the spring, and then some more work in the later part of 2018. So, the expense savings portion of that will most likely be in 2019, but we feel good about executing on the plan, which, as you know, is a very complex work set.

Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director

Got it. And, just as a follow-up, Bill and Rob -- so, there's two dueling bipartisan SIFI bills. The House clearly doesn't have an asset threshold, and the Senate version still has an asset threshold of $250 billion. Should a dollar asset threshold prevail -- and prevail at $250 billion -- in terms of the "SIFI definition"? Does that at all change how you're thinking about capital management or strategy from here, generally speaking?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

That bill wouldn't change anything for us, so it doesn't change the way we're thinking. As a practical matter, our binding constraint -- or, in effect, the thing that we're most concerned about in terms of leveling the playing field -- is the LCR, which is not mentioned in that bill with that $250 billion threshold, but is mentioned in the Luetkemeyer bill. So, we'd like to see -- and, we think we will through time -- either through regulatory relief because it doesn't have to be through change in law, or through change in law, some less hard-lined approach to the way you set LCR exposure. We keep pushing on that and we'll see where it goes, but that is the single thing that impacts us.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

That may or may not be determined by the threshold.

Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director

Got it. I'll follow up offline for the potential benefits. Thank you.

Operator

Our next question comes from the line of John McDonald of Bernstein. Please proceed with your question.

John McDonald -- Sanford C. Bernstein -- Analyst

You have a nice outlook, Rob, for operating leverage in 2018. I was wondering -- and, when we look at the revenue drivers in the mid-single digits -- if you could give us a broad sense of what you're thinking about for revenue drivers and whether it's roughly driven equally by fees and NII. That would be helpful. Thanks.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, sure, John. So, mid-single digits...both NII and fees going up mid-single digits, and NII may be the higher end of mid-single digits and noninterest income or fee income in the middle there. So, both mid-single digits, a little more in NII than in the fees in terms of growth percentage.

John McDonald -- Sanford C. Bernstein -- Analyst

Okay. Where are you feeling good about the fee drivers as you size up the year?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

When we take a look at the year, just to break down the components of the fees, we would say up mid-single digits overall. In terms of the component's asset management, up high single digits, consumer services up mid-single digits, corporate services up low single digits, and the reason for that is because of the elevated performance in the fourth-quarter corporate services fees were a record, as you can see. And then, mortgage and service charges on deposits -- low single digits, up low single digits, all in to get you to mid-single digits for the whole piece.

John McDonald -- Sanford C. Bernstein -- Analyst

Got it. Very helpful. Thanks very much.

Operator

Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please proceed with your question.

Unknown Analyst -- Deutsche Bank -- Analyst

Good morning. This is Rob from Matt's team. Just a question on your excess liquidity -- I was just curious if we can get an update on your thinking now that loan rates have backed up some here.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Just quickly -- it's elevated this quarter because we accelerated some borrowings that we did a little bit. Obviously, we've seen a backup in rates over the last couple of weeks with then 10-year push in 260 and the two-year just crossing 2%, and you would see us -- at the margin -- start deploying more cash. Having said that, you've got to remember that the carry -- even with the higher backend rates -- is now reduced because the curve is flattened. But, it is likely you'll see us put that money to work. We'd like to put it to work in floating-rate assets, but as a practical matter, we remain short on duration and have an opportunity to redeploy into Level 1 securities if we choose to.

Unknown Analyst -- Deutsche Bank -- Analyst

Okay. And then, just separately as it relates to your branch footprint, you continued to reduce branch count this quarter. First, I was curious -- do you have a target number for branch consolidation this year? And then, second, I notice that your universal branch count has been trending lower in the last couple of quarters. I was wondering if you could speak to that.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, sure. A couple of things there: We've been running -- in terms of branch consolidations in the last couple of years -- on or around 100 branches a year. We would expect to be somewhere in that neighborhood in 2018. In regard to the universal branches themselves, in some cases, we've actually closed some universal branches because even though they're universal, they're measured the same way as our other branches, and if they're not performing to expectations, we'll close those.

I think the bigger conversation around universal branches, though, is that a universal branch has a set definition in terms of the configuration and the approach, but what we've learned is that the psychology and the method of interacting with our customers can be just as effective in our traditional branch format, so it's sort of an alternative format approach, which can include our universal branches and also some of our legacy branches.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

So, in effect, we change the role and mix of employees to have more people customer-facing and less tellers, but we don't spend the $50,000.00 to $100,000.00 to redo the branch.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

That's right.

Unknown Analyst -- Deutsche Bank -- Analyst

Got it. Thanks.

Operator

Our next question comes from the line of Terry McEvoy with Stephens. Please proceed with your question.

Terry McEvoy -- Stephens, Inc. -- Managing Director

Hi, thanks. Good morning. First question: CRE was flat to down a bit in '17. Could you just talk about any paydown activity in the fourth quarter, and then, your overall appetite and opportunities for growth in 2018?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

On the CRE in 2017, it's much of what Bill was saying -- the originations, actually, were pretty strong. It was more the take-outs that were elevated, particularly in the second half of the year. I think going into 2018, we still see some growth, but not at the rate that we've seen in the last couple of years.

Terry McEvoy -- Stephens, Inc. -- Managing Director

Thanks.

Operator

Our next question comes from the line of Gerard Cassidy. Please proceed with your question.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Good morning, guys. I had to jump off the call for a minute, so I apologize if you addressed this. On capital return, obviously, your stock has done very well in the last 18 months. With the new regulators -- I know in the past, there seemed to be some hesitancy by the regulators to allow banks to do special dividends as part of their capital return, but Bill, what's your thinking if you get the sign from the regulators that they would be supportive of that? How do you wrestle with that versus buying back your stock at elevated prices or on a valuation basis relative to a special dividend?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Rather than talk about special or non-special, I think the simple answer is given price-to-book ratios -- for us in the industry at this point, our bias would be toward dividends versus buyback, but would still have a pretty healthy buyback. We did get the question -- I sort of said at the margin, given the increased cash flow because of the lower tax rate, our bias would be to push that toward dividend as opposed to increase buyback, and all of that is common sense, given where our evaluations are.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Very good. I know that over the years, you guys have been an asset-sensitive bank, of course, and if we assume that this tax reform leads to stronger economic growth in '18 and '19, which would probably imply higher interest rates, how are you guys thinking about the balance sheet? Are you keeping it the way it is, making it more asset-sensitive, less asset-sensitive?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Look, the theory is simple, and the practice is hard. You get limit long in effect just prior to going into a recession, and we've been asset-sensitive or very short as the economy's been recovering. With rates going up, with the added fuel of the fiscal stimulus in effect coming from the tax program, you will see us leg in and close some of our negative duration over time. One of the things I mentioned -- the windfall in carry terms as opposed to value terms from that is less than it once was simply because the yield curve is flattened, but we will close that gap beyond an earnings measure as a pure risk management measure once we've approached...I'll call it the maturity of this economic run.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And, we've done some of that already.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. Thank you, guys.

Operator

Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please proceed with your question.

Betsy Graseck -- Morgan Stanley -- Managing Director

Hey, thanks so much. Bill, just wanted to follow up on your comments around the cost of equity moving up a bit because the tax shield's going down. Can you just give a little color there in how you think about adjusting that cost of equity, from what to what?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Without putting numbers on it, it's a mathematical calculation, so our tax shield on our percentage of debt as a part of our mixed funding basis is now less. By the way, that's theory, and practice often differs from theory. We look at -- the reason I bring it up is we measure our client relationships and our own performance as a function of total capital used to pursue a relationship in capital committed through credit, operating risk capital, and so forth. My only point in bringing that whole thing up is there's offsetting costs, in effect, to simply saying that we can take the entire tax benefit and compete it away without affecting business through our cost of capital.

Betsy Graseck -- Morgan Stanley -- Managing Director

Okay. I wasn't sure if you were also suggesting that the credit risk that you're taking in your core business is also a little bit riskier because there's less tax shield associated with that as well.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

No, I wasn't implying that, although if you really wanted to get into the math, the actual economic capital on credit increases in a lower-tax environment, but I won't bore you with why that is.

Betsy Graseck -- Morgan Stanley -- Managing Director

Okay. Maybe offline, you can bore me. I'd be happy to be bored with that conversation. The second question was just on the CIP target. I know it's lower than last year, so should we be interpreting that as, as we do more, there's less to harvest, or is there also an implication there of there's a ramp-up in other areas of investment spend.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

No, I think it's the former. Just by definition, in each year, we get more and more efficient, so by definition, there's less in total to get, but that's still a significant number. It's baked into our guidance in terms of total expense guidance, and it's a tool we've used to keep expenses in check for the last five years or so.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Betsy, we don't mix that with our investment. We use it to fund our investment, but that's a number that we focus on internally in terms of costs we're taking out, and part of what's happening is we've hit most of the easy things, and the longer-term opportunity we have -- and, we've talked about this -- is through automation in our back offices and some of the work we're doing in the home lending transformation. There'll be more work in retail, and then, all the work we're doing in A.I. and RPA. But, that's sort of a longer-term opportunity that's probably going to play out over a number of years as opposed to something we can quantify this year.

Betsy Graseck -- Morgan Stanley -- Managing Director

Okay. And, does the tax law change help you with ramping that investment spend up a little bit?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Our guidance for '18 is our guidance for '18. In theory, we could invest more, but as you've heard us say, we haven't shy about --

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

We haven't held back.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

-- the future of our company. Oftentimes, our decision to invest and take on new opportunities is driven as much by our ability to execute efficiently as it is to have dollars to spend.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And some of the sequencing that's necessary for that.

Betsy Graseck -- Morgan Stanley -- Managing Director

Got it. Okay. Thanks a lot.

Operator

Our next question comes from the line of Ken Usdin with Jefferies. Please proceed with your question.

Ken Usdin -- Jefferies & Co. -- Managing Director

Thanks. Good morning, guys. Also, thanks again for that Slide 7. Really helpful. Just a couple cleanup things on the full-year outlook: Rob, I presume that your total revenue is a non-FTE basis and it's all-inclusive. Can you help us understand -- are you baking in that $250 million to $300 million for other -- not just for the first quarter, but all the way through the year?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, we are. We didn't provide that guidance in that line, but that guidance hasn't changed for quarter-quarter for a long time.

Ken Usdin -- Jefferies & Co. -- Managing Director

Even though last year, it was largely above it for most of the year?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, it was largely above it last year. Most of that was -- as I've mentioned on previous calls, Ken, and we've spoken about it -- our performance in our private equity business.

Ken Usdin -- Jefferies & Co. -- Managing Director

Understood -- which could continue...good markets.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

It could continue, but we normalized that a bit in our outlook.

Ken Usdin -- Jefferies & Co. -- Managing Director

Understood. Got it. Secondly, just on credit, you're keeping to this $150 million. I'm wondering if you could just talk about your outlook for credit within your outlook for the year, but also, especially given that we might get some additional help on the tax stuff on corporate America and consumer America, just your overall views of credit quality and how you'll be thinking of that.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

I think it's pretty stable, as I mentioned in the opening comments there, Ken. So, we feel good about the book. On the consumer side, we're largely in the prime space and the consumer is pretty healthy. On the corporate space, credit has been pretty good, as you can see, particularly this quarter. As you say, with a lower tax rate, if that results in these corporates even going up in credit quality, that'll be better, but that remains to be seen.

Ken Usdin -- Jefferies & Co. -- Managing Director

Okay. Last little one: In the fees comment, you mentioned high single digits for asset management. Does that also presume that double benefit you'll get from the BlackRock pulling through off of their expected higher GAAP income as well?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Yeah, it does.

Ken Usdin -- Jefferies & Co. -- Managing Director

Okay. Understood. Thanks, guys. I appreciate it.

Operator

Our next question comes from the line of Kevin Barker with Piper Jaffray. Please proceed with your question.

Kevin Barker -- Piper Jaffray -- Principal, Analyst

Thank you. Within your guidance, you mentioned that you have three rate hikes combined with the slightly flattening yield curve, given the outlook. Could you just give us a little bit of color around -- I assume the yield curve stays where it is, where the 2/10 spread is just over 50 basis points, or are you saying further flattening from where we are right now?

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

In terms of our...

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

As a practical matter, I think the flattening trade as it relates to 2/10s is probably over. The carry trade with the very front end with three rate increases, as we have in our forecast, is going to in effect, drop the carry that I think we'll get from our typical investment portfolio. So, we would see a flattening trend from Fed bonds to 10-years probably continuing.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

By definition in terms of --

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Well, not by definition, but practically, yeah.

Kevin Barker -- Piper Jaffray -- Principal, Analyst

Right. Given shorter duration of your balance sheet and the outsize amount of liquidity compared to peers, you should benefit from the shorter end moving higher, right?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Well... So, the shorter end going higher increases yield on what is, by maturity, a floating-rate loan book. Value, ultimately -- we remain short on a duration basis, so we will invest into fixed-rate securities and swaps. The carry from that -- at least on initiation of the transaction -- will be less than what it once was as the curve flattens from our cost of funding to whatever maturity we put on the loan book.

Kevin Barker -- Piper Jaffray -- Principal, Analyst

Okay. And then, a follow-up on your comment regarding the system implementations and acceleration of consumer loan growth: You mentioned that you got the mortgage piece finalized on the new platform today, and that the home equity and a few other products will follow up in 2018. It seems a couple quarters later than normal. Was there a little bit of delay in the implementation of that, and would that put a little bit of a headwind in your projections for consumer loan growth in 2018?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

As a practical matter, the entirety of the project to redo home lending was harder than we thought, took longer than we thought, and cost more money than we thought. So, yes, yes, and yes. Having said that, it's all in what we've given you as guidance, and we remain pretty bullish on what we can do inside of the home lending platform -- home equity and mortgage on the same origination system with a strong digital front end. It's just been a lot of work to get there.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And, the time -- like he said, it's all built into our guidance, and the timeframe of the end of '18 is what we've been talking about for some time.

Kevin Barker -- Piper Jaffray -- Principal, Analyst

Okay, thank you.

Operator

Our last question comes from the line of Mike Mayo with Wells Fargo Securities. Please proceed with your question.

Mike Mayo -- Wells Fargo -- Managing Director

Hi, Bill. I'd like to challenge you on one point that you made, and that is that you would bore us with the cost of capital discussion.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Not the cost of capital, the... We had a...debate internally on what lower tax rates actually do to the economic capital units that you prescribe to a given loan, and the reason that the capital goes up is because you -- in effect, in a fat-tailed distribution -- lose the downside tax shield. That's the boring nature of it. We can take it offline, but in effect, if I had 10 units of capital for 100 units of loan at the old tax rate, I'd have 10.5 or 11 today.

Mike Mayo -- Wells Fargo -- Managing Director

Conceptually, it makes sense. Again, it's not boring -- we're a bunch of bank analysts. It's interesting to us. But, let's take that further as far as the impact of the lower taxes on corporate credit and... It seems like you could be guiding for faster loan growth than you are. Do you expect this change to increase corporate loan growth? Do you expect the CapEx cycle to change because of the tax change? Are you budgeting more people or resources for that demand, or do you think it's going to be kind of a yawn?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

I don't know that we would need to budget more resources. If that happens, that's terrific. I think at the margin, if you just play this out -- if I'm a corporate manager, I'm going to have more projects that meet my hurdle in terms of investments than I did before at the margin. In practice, you need to fund those. Now, they have more cash flow to fund those than they had before, but there's probably a willingness, and a desire, and a need to borrow as well. The other thing that we have that we don't really have our arms around yet is, of course, the cash repatriation coming back out of Europe.

Now, as a practical matter, most of those people aren't the people who have been borrowing anyway, so I don't know that that has a material impact on dampening credit. So, the long-winded answer: All else equal, a stronger economy, tax code change, increased loan demand -- we haven't built that into our guidance. At the same time, we see record type in active corporate bond markets, which would be somewhat of an offset to what we see on the loan side.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

And, that's just what we know today.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Look, if it happens -- you know how we do this. If that happens, that's terrific, but that isn't in our guidance.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

That's right.

Mike Mayo -- Wells Fargo -- Managing Director

You alluded to this before -- do you think credit gets better than you thought it would be otherwise without the tax cut?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

There's more cash flow, so all else equal, if people don't lever up as a function of it, there's trade-offs, but all else equal, notwithstanding the fact that we're kind of at an all-time high leverage for particularly investment-grade corporate America, this is going to generate cash flow that, at the margin, ought to help them.

Mike Mayo -- Wells Fargo -- Managing Director

Last question, just on the boring part: What is your cost of capital the way you think about it, and how has that changed over the past few years?

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

I'm not going to get into that. We measure it -- as a practical matter, we look at it every quarter for a number of different things. I don't actually know what it is this quarter.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

We can get to you on that, Mike. We haven't calculated it down.

Mike Mayo -- Wells Fargo -- Managing Director

Sounds good. Thanks a lot.

Operator

And, we're showing no further questions on the audio lines at this time.

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Okay. Well, listen: Thank you, everybody. I look forward to talking to you again in the first quarter for a strong 2018.

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Duration: 51 minutes

Call participants:

William Stanton Demchak -- Chairman, President, and Chief Executive Officer

Robert Q. Reilly -- Executive Vice President and Chief Financial Officer

Bryan K. Gill -- Executive Vice President and Director of Investor Relations

John Pancari -- Evercore ISI -- Managing Director

Scott Siefers -- Sandler, O'Neill & Partners -- Principal, Equity Research

Erika Penala Najarian -- Bank of America Merrill Lynch -- Managing Director

John McDonald -- Sanford C. Bernstein -- Analyst

Unknown Analyst -- Deutsche Bank -- Analyst

Terry McEvoy -- Stephens, Inc. -- Managing Director

Gerard Cassidy -- RBC Capital Markets -- Analyst

Betsy Graseck -- Morgan Stanley -- Managing Director

Ken Usdin -- Jefferies & Co. -- Managing Director

Kevin Barker -- Piper Jaffray -- Principal, Analyst

Mike Mayo -- Wells Fargo -- Managing Director

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