Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Thank you, everybody, for joining us this morning. I'm pleased to have with me today Kelly King, Chairman and CEO of Truist Financial Company; and Daryl Bible, CFO. Our disclosure comment for important disclosures, see -- please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. Well, Kelly and Daryl, thank you so much for joining me this morning.

We're glad to be here. Thanks for having us.

Kelly, I wanted to ask, in this COVID environment, work-from-home environment, how are you -- what are you really looking for from your team? Do you throw the budget out of the window? Do you rewrite it? Do you change the top line goals? Maybe you can give us a sense as to how you're managing the line here.

So it's really a -- it's really kind of a day-to-day basis, Betsy. I mean the world is changing so rapidly. We kind of reached an agreement early on, 90 days or so ago, that we were not going to try to encumber ourselves with trying to figure out what we would do 90 days from now or 60 days or even -- I kind of jokingly say, or even tomorrow. And so if I -- don't even ask me about this afternoon. I mean things are changing so fast. But in that context, which is really true, we've been trying to focus on what we can focus on. I mean clearly, we are dealing with lower margins and lower volumes. And so that's a negative headwind with regard to our profitability. On the other hand, we have expense opportunities that we are really focusing on. This is a real tailwind for us. And we're focusing on the areas of the business that are really kind of booming right now. I mean if you look at some of our businesses, recreational vehicles, autos. Our insurance is still steady. It's into a second quarter of strong seasonal quarter. And so we have a number of areas that are doing really well. So what we're trying to do is focus on what we can control. We can control expenses. We can emphasize the revenue areas that are booming, and we're maintaining the others.

Got it. So biggest opportunities here -- we'll get into the expenses in a little bit. But maybe you can give us a sense beyond the expense side and some of the loan categories. Is there anything else out there in terms of potential for benefit in this environment?

Well, I think the -- for us, fortunately, we have real positive in terms of the loan area because of our accretion. As the rates are lower, obviously, we're getting accelerated payoffs. So that enhances our accretion, which is a real positive. And then mostly in the lending area, of course, we've been really consumed with the PPP program, which we did really well. We did, I think, relatively more than our fair share in the PPP program. And so that's been good. We've been -- we've had the surge of loan line drawdowns, which is now subsided, but that's been a big thing over the last 90 days. So today, we're kind of focusing on how do we get the kind of the non-PPP lending parts of our businesses back going again. So we're spending a lot of time with our clients finding out how they're doing, what are they thinking about "restarting their businesses," what can we do to help them. And to be honest, those conversations have been very promising.

Now I know you recently doubled your community giving related to COVID needs. What issues are you trying to address there?

Yes. So what we've been trying to do is to really focus on the immediate human needs and then the needs of what we call kind of the lost people, the ones that are not getting the most focus. On the human needs, with the first $25 million of our $50 million, we focus more on the -- obviously, the United Way agencies, the various agencies to get right at meeting the needs in the community. And we kind of spread that money out, and we think we did a lot of good in those areas. Felt really, really good about that. And then just about 3 weeks ago, we doubled it, added another $25 million. And in those areas, we're looking at kind of the forgotten areas. And so we've been focusing on, for example, in technology. There, with the stores being out, what we found -- that you've read about is just a huge amount of the public out there that does not have access or even reasonable access to technological-based home school learning. And so we're really excited. We've been teaming up with a technology company that is focusing on an innovative way to bring the Internet and the hardware necessary to provide home learning in these communities. It's kind of a new technology, but it's very, very exciting. We've put a lot of money in the small business area. We're working through CDFIs because it turns out they're one of the best vehicles to get money to the smallest, particularly, minority firms that really need a huge amount of help. So we've been trying to be assertive rather than waiting for people to come to us. We've been assertive to -- assertively going out into community, finding areas that need help that we can focus on.

Okay. Let's switch gears and talk a little bit about the MOE and how that's going. One of the questions we get is, "Hey, if Kelly had known COVID-19 was coming, do you think he still would have done this deal?"

Yes, I would have just done it faster. So no, really, Betsy, this is -- and Bill and I talked about this. We actually got this question from our independent boards and then I got the question from the combined board, exactly your question, what if something bad happens, how you're going to feel about this? Well, the truth is we're just better. We have a stronger balance sheet. We have substantial inherent savings that we can not easily but directly bring to the bottom line. And we have huge revenue synergies putting these 2 companies together that neither one of us would have had separately. So there is no doubt that SunTrust and BB&T are much stronger together. And so we are really set, and we're sitting in a really good position relative to the environment. I wouldn't want to be in a different place than we are now.

You talked about the revenue synergies, I know that's not in the model that you presented at The Street overtly. But can you give us a sense as to the biggest opportunities there? And is it something that you can begin to capitalize on now in this environment? Or do we have to wait for the economy to improve before you can actually start to benefit from that?

No. Actually, that's going really well. For example, as you know, the difference between our 2 companies, which made it very synergistic, is that SunTrust was a very more national corporate investment banking firm. We were a more regional, main street community banking firm. And so for example, we're already way down the road in taking the SunTrust investment banking capabilities and importing it into the BB&T community banking model, and all those community banking clients where we just didn't have the capability to meet all the needs of -- from a capital markets perspective that they needed. On the other hand, if you take the BB&T Insurance business, which is the fifth largest in the United States, SunTrust didn't have that. So we're already transporting that over to the SunTrust clients. We are finding that SunTrust had a couple of very good national consumer models in terms of, for example, is LightStream, which is a digital, unsecured, higher-scored lending program nationally. We've been able to lever that across the BB&T footprint. So yes, we're not waiting. I mean even if in some of those markets -- the markets themselves are subdued, we're starting from a 0 market share position. So even if it's -- if that particular market is down some percentage, there's still a huge amount of business for us because we don't have any of it. So it's a pretty exciting area for us.

In insurance, you're the fifth largest insurance broker. And I know it's really soon to be talking about doing any kind of acquisitions, be they either tack-on or larger. But is the insurance business that you're running, do you believe, tapped out from an acquisition perspective? In other words, do you think all your growth is going to be organic there? Or is there anything that you could foresee at some point over the next few years?

Well, the primary focus always is on organic because that's our duty to our clients. But to be honest, I think there are pretty substantial merger opportunities for us. This industry is still consolidating at a very, very rapid pace. We weren't tapped out at BB&T, but we were close to our target approaching 20% of revenue. Now with the combination, we're still -- we're below 10%, and so we have plenty of room to substand organically and through mergers. And I would expect that we will have growth in both of those areas over the medium term. Could be short term, it's hard to know how these things happen. But we will certainly be receptive to grow through acquisition in the insurance area.

And then on other fee line items, is there any that you would want to call out for largest opportunities for growth in addition to insurance?

Yes. I would call out that like everybody, I'm sure mortgage is really very, very attractive now. I mean we're staffing up in mortgage. Most of us, we're trying to transfer people out of other areas that are not as busy right now into the mortgage area. But we are hiring some from the outside. Our capital markets and institutional business is really doing well. As you know, many, many companies are restructuring, shoring up their balance sheets, and we're being a very active participant in that. Our fee areas in terms of just normal service charges and credit card fees are coming back strong. We, like everybody, we did a lot of forgiveness of fees early on in the process and subdued our fee income. That's coming back now. So we're actually feeling pretty good about the fee income part of our business.

Okay. What about digital? I mean this was one of the reasons, I believe, for the MOE, the ability to invest more in technology and drive even better digital enhancements to your product set. And I know you announced an incremental $200 million in annual investments. Could you give us a sense as to how you're thinking of deploying that investment? Does it get a little bit of a backseat because of COVID? Or is this something that you would accelerate?

No, it is on track. It's -- as you said, it was a major driver in terms of this combination, really because the world has changed. Pre-COVID, the world started to changing big time about 10 years ago. There was a corporate kind of crisis about 10 years ago in the form of Amazon and others who responded to a dramatic paradigm shift with regard to consumer demanding more time and kind of inconvenience with regard to purchasing goods. And so we wanted to respond to that. And so we are not only investing in our normal kind of digital activity in terms of upscaling our mobile platforms. But we are standing up right now as we speak, our innovation and technology center here in our new corporate headquarters in Charlotte, that's very, very exciting. It's where we're going to really leverage what we call our T3 strategy. This is -- we think this is the most important change that is going on other than COVID and other issues we're dealing with in society today, social issues that are very, very important. But in terms of pure business, for those that are in the service business today, we think the most important thing is the shift with regard to T3, where T stands for Technology, Touch and Trust. And what's happening basically is that there is an absolute need, a requirement, I believe, for any business to be able to integrate seamlessly technology and touch so that they yield a high level of trust for the client. So yes, consumers are moving more towards digital, more towards the technological interface with their providers. But touch has not gone away and it's not going away, in my humble opinion. And so the trick is to enhance your digital, but at the same time, enhance it in a way so that it complements and supplements to your touch, which is what we're birthing in our innovation and technology center. And then all of that is designed to leverage the power of data. Data is becoming more and more important. If you think of it, we really are in the information business. And so by using our innovation technology, our T3 concept, we'll be able to substantially leverage the power of data, which allows us to provide the optimum value for our clients.

So that should help drive some fine acquisition, I would think, down the road. I'm wondering how to think about the operating leverage in the business model as we go through the next, not only a couple of quarters but years. I know you've got goals out here for medium-term targets. But we've had a lot changed since you put those out. So thinking through what's going on with NII, what's going on with the fees that you mentioned and expenses, is this an operating leverage environment? Or should we push that back into 2021?

No. I think it's a question of absolute versus relative. I mean I think if you think absolutely, in terms of NIMs and noninterest income, it's certainly going to be suppressed while we're going through this economic correction. But on a relative basis, it doesn't change our posture with regard to competing. And so we would have still expect, for example, our return on tangible common equity to be top tier, probably best in class. I think we were best in class in the first quarter. And while the efficiency ratio will be adjusted, of course, because of the denominator, we still believe low 50s makes sense as things begin to normalize. Remember, we still have $1.6 billion in net sales coming out of this and we still feel strong that we will be able to accomplish that. And so our medium term, let's just say, defined as 3 to 5 years, on an absolute basis has not changed. In the short run, the absolute numbers will be impacted but the relative performance will not.

And then when you say normalize, is that a comment around interest rates? Like what kind of interest rate flow are you thinking about when you say normalized?

Well, yes, normalized means somewhat of a return to normalized interest rates, normalized yield curves. Obviously, if we stay really low for a long time, then we will all have to adjust to different absolute terms. But we believe we will return to normalized economic conditions, normalized interest rate scenarios. And the kind of targets that we've said earlier, we think will still be very realistic.

So then on rates as they stand right now today, I mean, obviously, the forward curve has improved a little bit over the last couple of days. But can you give us a sense as to how you're managing through this low rate environment? Do you have any loan floors? I think you mentioned in April that 40% of originations and restructurings had loan floors at 75 bps. But is that -- has that moved up much? And maybe you could talk a little bit about how to offset some of that NII pressure through the expense side.

Yes. Well, I think loans floors is the biggest way for us to do that. And we've been very successful in terms of our loan floors in the last 90 days or so. I think, Daryl, we're up to what...

I'd say we're probably approaching 50% right now on current production.

Yes.

Production and anything that's being restructured.

Right. So remember, we're not helpless with regard to our NIM. So we are very focused on the loan floors. We're very focused on continuing to drive down our interest-bearing costs. We think we will be able to approach our short-term target of 25 basis points very soon. That will really help us. Daryl did a good job recently and terminated $10 billion of higher-cost Federal Home Loan Bank advances. We did $1.5 billion in preferred stock, which enhances NIM. We have increased fair value accretion that flows into NIM. And so we have a lot of positives with regard to NIM in spite of a very difficult general NIM environment.

So are you suggesting NIM is going to pull back but at a slower pace?

Yes, I'd say pull back at a slower pace. Would you agree with that, Daryl?

Yes. I mean the shock that happened in March was 150 basis point down, so the guidance we gave kind of holds for the second quarter. I think after that, I think we have enough tools and flexibility which -- to try to keep it in that level, maybe improve that level, but stay in that neighborhood for the rest of the year.

Right.

Okay. So 3Q, 4Q similar to 2Q NIM is kind of what you're expecting?

Yes.

Correct.

Maybe we could switch gears and talk a little bit about credit. Clearly, people are concerned about what the credit outlook is likely to be over the next couple of years here. Can you give us a sense as to what you're looking at when you're setting your reserve level? And how you're thinking about the 2Q reserve? And what the triggers are for raising that?

So we're -- I think we're all probably trying to figure out credit on a daily basis. So I'm getting actually daily feedback from our credit team. I would tell you, basically, that the feedback I'm getting in -- just in the last few days is substantially more encouraging than I would have expected 30 days ago. Our teams are actually going through the larger accounts one by one, and they're assessing what degree of difficulty the client is having and what degree of assistance we need to provide for the client. And what we're finding is that the vast majority of our clients are -- just struggling some, but they're doing fine. They've adjusted their expenses, and they've hunkered down, and they feel like they're going to be able to get through it fine with no assistance from us. We've only found a tiny percentage today that require any immediate assistance in terms of working out the credit, that kind of thing. So there's a little bit more of that in hospitality, as you would expect. But across the board, it's -- this feedback has been -- I'd say, relative to the environment, it's been very, very positive. Now obviously, if things tank tomorrow and we have huge job losses again, that could change. But the general feedback to date is that our clients are doing very well. I've heard now like 3 times in the last 24 hours, regional presidents and others say to me, our clients are doing fine relative to what's going on. They got trained up really well by the last crisis. That's a pretty encouraging comment, and that may be what we find. We may find that companies do a lot better than we might have expected, if this is a relatively short-lived crisis. Now if the cases keep going up and the deaths keep going up and the vaccines undeveloped, then there is a draconian case out there. But based on what we now see with the progress that's being made, I'm pretty encouraged.

Okay. When you think about the portfolio you have, I mean, obviously, with the recent MOE, you've got a little bit more of a skew to C&I than you've had in the past and -- as a stand-alone company. So just trying to understand how you think about the impacted industries. You brought up hospitality, but there's a couple of others that you have exposure to. Does the collateral, does the guarantees matter that much? Should we be thinking about that when we're running our assessment of how high reserve ratios could go?

So it's kind of interesting. If you look at our C&I book, the impacted areas, think hotels, hospitality, different categories, it's about 8.9% of our total loans. So not a huge portion, but 8.9%. If you look at that group, about 2/3 are secured. If you look at the unsecured portion, 3/4 of that are investment-grade or are equivalent of investment-grade. So very, very high quality in those categories. And so while there certainly will be some negative impacts on those based on the quality of what we're seeing, I would not expect it to be significant. And again, the anecdotal feedback we're getting from the relationship managers is that our clients are pretty resilient. And so obviously, all of that will inform reserves and charge-offs, provisions as we go forward. Now keep in mind that as we go through this kind of process, two things happen. One is you go through a natural internal grading process where you grade the client's loan based on the then existing circumstances. And so there will certainly be a downdrift in grades, which will cause some uplift in terms of provisioning. The models that we run to establish our ALLL usually inform us substantially with regard to that. But I got to tell you right now, the models are going berserko because they can't anticipate this kind of shock. And so we're having to make substantial manual adjustments to bring down the results that the models are showing because otherwise, it would just be 1/3 in terms of the provisions that people would take -- that we would take. And so our people are working through all that. So I can't tell you for sure whether there will be any reserve here, for example, in a second. I personally wouldn't expect it to be some kind of troponin level or something like that based on what we're seeing. But whether there was some uptick or not, I'm not sure at this point. But there's nothing that I see today or hear from our credit people that suggests to me that we're in for a dramatic and continued increase like you saw in the first quarter.

Okay. And that's because your customer base is performing okay, basically?

Yes. And because, remember, we got substantial marks on our SunTrust portfolio, and we've got reserve in the first. And so we tried to prepare our balance sheet. That was one of the beauties of the merger, it was being able to prepare the merger. We didn't know this is coming, but we prepared for bad stuff coming. And so thankfully, we did.

Okay. So we should expect some reserve builds, but not as much as 1Q. Is that basically the answer?

Yes. I was talking about what it would be like.

Okay. And then just lastly, I wanted to talk through how you're thinking about the dividend. I know we have the CCAR coming up. But just wanted to get a sense as to this is based -- does this pandemic increased baseline level of capital required? And what triggers would be for the buyback to restart?

So there is conversation about that, Betsy, but I've been outspoken. I do not believe there's any justification for discussion of broad-based dividend cuts in the banking industry, certainly not Truist, for several reasons. Some have said -- thanks all to reduce their dividend so they make more loans. That holds no merit. Thanks for making all the good loans they could find today, we'd like to make some more. If anybody has to get loan request, give me a call directly. And so we're making all the good loans we can find. And our capital and our liquidity are strong. We specifically at Truist, if you recall, went into this saying we have very strong capital, very strong liquidity to make sure that we could take care of our clients as we go through unforeseen circumstance. You never know what's coming, but we believe in running our company so that we're prepared for what there is. If everything is great and wonderful, we'll have some excess capital and liquidity. If everything gets tough, then we're prepared. And so we try to be resilient so that we don't have the risk of reducing our dividend. We have a huge portion of our shareholders who are dividend-dependent. And we have a very strong fiduciary, and I consider a moral responsibility, to our shareholders to provide, if we possibly can, a steady stream of dividends because they're living on it. And so we believe we have strong capital, strong liquidity, strong underlying fundamental earnings. Our dividend rate is still a small percentage of our total cash flow. And so we believe there's no justification for any discussion with regard to reducing our dividend.

Okay. Well, that was very straightforward and succinct.

Good.

All right. Well, with that, I'll thank you very much for your time, gentlemen. I appreciate you joining us this morning, and look forward to catching up again during July earnings.

Thanks, Betsy. I appreciate it. I hope you have a great day.

Yes. Thank you.

Okay. Bye.