AmazonScience/document-haystack

1The concentration and mix of our assets could increase the potential for significant credit losses.2In the ordinary course of business, we often have heightened credit exposure to a particular industry, geography, asset class or 3financial market. As an example, loans secured by commercial and residential real estate typically represent a significant percentage of 4our overall credit portfolio. They also represent a portion of the assets underlying our investment securities. While there are limitations 5on the extent of total exposure to an individual consumer or business borrower, events adversely affecting some of our clients or 6counterparties, based on individual factors or the nature or location of their business, or asset classes or financial markets in which we 7are involved, could materially and adversely affect us. For example, any downturn in the condition of the U.S. housing market could 8result in significant write-downs of asset values tied to residential real estate. Declining economic conditions also may impact 9commercial borrowers more than consumer borrowers, or vice versa. In addition, we execute transactions with counterparties in the 10financial services industries. Financial services institutions are interrelated because of trading, funding, clearing or other relationships. 11As a result, uncertainty about the stability of other financial services institutions could lead to market-wide losses and defaults. Thus, 12the concentration and mix of our assets may affect the severity of the impact of recessions or other economic downturns on us.13Our business and financial performance are impacted significantly by market interest rates and movements in those rates. 14As a result of the high percentage of our assets and liabilities that are in the form of interest-bearing or interest-related instruments, 15changes in interest rates, in the shape of the yield curve, or in spreads between different market interest rates can have a material effect 16on our business, our profitability and the value of our financial assets and liabilities. For example:17• Changes in interest rates or interest rate spreads affect the difference between the interest that we earn on assets such as loans 18and investment securities and the interest that we pay on liabilities such as deposits and borrowings, which impacts our 19overall net interest income and margin as well as our profitability.20• Such changes can affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt 21instruments and can, in turn, increase our credit losses on those assets.22• Such changes can decrease the demand for interest rate-based products and services, including loans and deposit accounts.23• Such changes affect our hedging of various forms of market and interest rate risk and may decrease the effectiveness of those 24hedges in helping to manage such risks.25• Movements in interest rates also affect loan prepayment speeds and could result in impairments of mortgage servicing assets 26or otherwise affect the profitability of such assets.27• Increases in interest rates likely lower the price we would receive on fixed-rate customer obligations if we were to sell them.28The rates on some interest-bearing instruments adjust promptly in accordance with changes in market rates, while others adjust only 29periodically or are fixed throughout a defined term. As a result, the impact of changes in interest rates can be either increased or 30diluted due to differences in the relative variability of the rates paid on our liabilities in relation to the rates received on our assets. The 31extent to which we have elected to hedge interest rate risk through interest rate swaps also affects the impact of rate changes. We 32attempt to manage the balance sheet to increase our benefit or reduce negative impacts from future movements in interest rates, but 33failures to anticipate actual movements may have the opposite result. In addition, we do not generally hedge all of our risk and the fact 34that we attempt to hedge any risk does not mean we will be successful.35While higher interest rates generally enhance our ability to grow our net interest income, there are risks associated with a rising 36interest rate environment. As a general matter, increasing rates tend to decrease the value of fixed-rate financial instruments held on 37our balance sheet, as discussed in the Risk Factor headed “Our business and financial performance are vulnerable to the impact of 38changes in the values of financial assets.” Also, customers have and may continue to be less willing or able overall to borrow at higher 39rates. Higher interest rates also have hindered and may continue to hinder the ability of borrowers to support interest payments on 40variable rate loans. Higher interest rates have and may continue to indirectly affect the value of asset classes such as real estate 41typically financed through secured loans, with a resulting negative effect on collateral securing such loans. As another example, there 42are increased competitive pressures as rates on deposit products rise. The benefits of higher interest rates are best achieved if we can 43increase the rates on loans and other assets faster than the rates on deposits and other liabilities increase. We may not be able to 44achieve this result in a rising rate environment, especially if central banks introduce rate increases more quickly than anticipated. On 45the other hand, lower interest rates tend to have a negative impact on our net interest margin, and, unless offset by higher earning 46assets, on our net interest income.47We discuss the impact of governmental monetary policy on interest rates in the Risk Factor headed “The policies of the Federal 48Reserve and other governmental agencies have a significant impact on interest rates and overall financial market performance, which 49are important to our business and financial performance.”50Our business and financial performance are vulnerable to the impact of changes in the values of financial assets.51As a financial institution, a substantial majority of our assets and liabilities are financial in nature. Examples include loans, securities, 52servicing rights, deposits and borrowings. Such assets and liabilities will fluctuate in value, often significantly, due to movements in 53 54The PNC Financial Services Group, Inc. –  2023 Form 10-K  25