Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good afternoon. I'm Jason Goldberg. I cover the U.S. large-cap bank stocks here at Barclays, and thank you for sticking with us. We have about 3 more banks to finish up the afternoon, and very pleased to have Truist with us, up next. [Operator Instructions] Without further ado, I'm very pleased to have Kelly King, Chairman and CEO of Truist Financial. Kelly?

Thank you, Jason, and good afternoon, everybody. Thanks for being -- letting us be with you and give you an update on Truist Financial Corporation. I'm very excited about where we are. I'll give you a quick update, and then we'll have time for questions and answers. I always start with what I consider to be the most important, which is our culture, our purpose, our mission and our values. And I can tell you that the culture at Truist is rock solid. It is very strong. We knew when we put the 2 banks together that we were very, very closely aligned. And now 18 months or so down the road, we know for sure, we are very closely aligned. And to be honest, the COVID experience has brought us even closer together. So we feel very, very good about our culture, our purpose, our mission and our values. And I'm personally very excited about our purpose, which is to inspire and build better lives and communities. We believe that, that's a fundamental role of banking in our society today. And we're very excited about what we're doing, and I'll share some things that we're doing at Truist to make the world better. We focus on our mission of helping our clients, our teammates and all of our stakeholders. And we live very clearly every day by our values of trustworthiness, caring, one team, success and happiness. Interestingly, in today's world with a lot of fear and a lot of anxiety, we're spending a lot of time with our teammates talking about happiness and how even in these difficult times, you can still be happy and that really is true, and we spend a lot of time talking about that. Everything else, if you think about it, is strategic and tactical. And so we focus primarily on the purpose to mission and the values, because strategies and tactics change all the time. And you'll see some of those changes as we go through our discussion. And so we've been living our purpose. I feel very good about the things we've been able to accomplish during this crisis. Our Truist Cares program has invested over $50 million in our communities in very direct investments in community organizations that are helping in the most critical needs. Our onUp program, which is dealing with financial well-being for families, has touched over 6 million people over the last few years. Our Lighthouse program since 2009, we've done over 12,000 projects, we've touched over 18 million people, which is really, really making a difference. And our Financial Literacy program, which we've been running since 2009 has now touched over 1 million high school students, making them better prepared to go forward into the world. And we've been spending a lot of time on racial inequity and social injustice. I'm very proud of the efforts that we have made in this regard. We think it is a very, very serious issue in our country. And we're doing all we can to promote social justice and eliminate racial and other forms of inequity. I'm very proud of the fact that we observed June 10 holiday. We actually had on that day, a holiday session with about 3,000 of our teammates and some outstanding speakers talking about social injustice. And that made a lot of difference for our team makes, and we were very proud to do that. We're doing a lot of other things in terms of town-halls, holding unconscious bias training, and making a difference in terms of helping our people recognize that at Truist, we believe there is no room for discrimination and hate in any of its ugly forms, and we're doing everything we can to try to promote social justice and eliminate racial inequity. We have a really good value proposition at Truist. We have a fantastic franchise. I'll show you some detail about that. We are positioned to be a high-performance company and we believe may be the top-performing company in our peer group, and we have very strong capital and liquidity. It's a very exceptional franchise. We are the sixth largest U.S. commercial bank. We're fifth in loans; very, very strong franchise in terms of our balance sheet, but really strong, which is the driver in our markets. So if you look at the slide there, you'll see in the 17 states that we do business in, in our primary core banking franchise, we are in the top 3 in 8 of those states and in good position in other states as well. But in very strong in the Mid-Atlantic and Southeast, very fast-growing markets. We have the #2 weighted average market share in the top 20 MSAs in which we do business. And so being in really good markets and have strong market shares is really important in the banking business. We're also proud of the fact that if you look at the overall best markets, fastest-growing markets in the country, projected over the next 5 years, there are 10 top fast-growing markets, and Truist operates actively in 7 of those fast-growing markets. So we're in great markets, and we're in the best markets. We're very proud of the fact that we've gotten some really outstanding recognitions. I just want to share with you. We were proud to be a top corporation in the 2020 Greater Women's Business Council recognition. Also, BB&T and SunTrust scored a perfect 100 in the Human Rights Campaign Foundation by the 2020 Corporate Equality Index. Our U platform was just ranked #1 by J.D. Power in terms of mobile banking platforms in the country. Our LightStream operation, which is our national unsecured consumer lending digital platform scored #1 in that space. And in our small business and middle market area, Greenwich recognized us for 8 top awards in terms of those areas. So I don't say that to be braggadocious. I'd just say it to let you know that Truist is off to a really good start. We have really, really good programs and products and services, and we are trying really hard to do a great job for our clients. We're really positioned to deliver great results for our shareholders and for those that are invested in us. You can see on this slide, just a few of the key metrics. You can see that our adjusted ROA is substantially higher than the peer median. Adjusted ROTCE, return on tangible common equity, is more than twice as high as the peer median. Adjusted efficiency ratio is substantially better than our peers. Our net interest margin is substantially better. And our nonperforming assets are substantially lower. And we're really just kind of getting started. As you know, we really just closed the transaction in December. So we've only had a couple of quarters under our belt. And we're already performing at a very high level, and we have much progress available to us as we go forward. Our digital performance, we're very excited about. As you know, this is a very digitally-driven economy that we're in today. If you look at this slide, you'll see a really, really strong numbers, 19% year-over-year increase in digital sales, 28% increase in mobile check deposits, 12% increase in active mobile app users. And even in statement suppression, which has been around for a while, another 6% increase there. This is very, very important when you think about a financial institution today because the world definitely demands a very high level, high-quality, secure, convenience in doing their business with the company. It invokes the concept we call T3, which is where to be successful today, you have to have the seamless integration of technology and touch, which results in a high level of trust, which ultimately gives you the best value proposition. We have that embedded throughout our culture. Everyone in the company understands T3 is the way that we will deliver the best overall service to our clients and prospects as we go forward. So we're well positioned in our digital investment, and we're continuing to make a lot of digital investments. As you know, a cornerstone of Truist is the investment in our Innovation and Technology Center right here in our Truist Center in Charlotte, North Carolina. It's actually under construction today. But even before it is built, we were making dramatic investments in our digital, agile development process and already making great strides in areas to improve services to our clients. In terms of the merger, just a couple of things to give you an update in terms of where we are, but I'd say generally, we are on track. We just released Truist Momentum, which is a continuation of our onUp Movement of helping and financial well-being. We just released, very proud to say, our first CSR report. I hope you'll read it. It covers a lot of the great things that we are doing. We just did our full conversion of Truist Securities, which went very, very well. And we did the branch divestiture, which is a big undertaking very well also. As we head into the first part of '21, we will be doing the full conversion of our mortgage origination area, our wealth platform. We will be doing our full core bank conversion now in the first half of '22. We pushed it back a few months from the latter part of '21, but it is on that track for a very, very successful conversion at that time. People ask me whether or not we remain committed to our long-term performance targets. And my answer is, yes. We said early on, we thought we could have a return on tangible common equity in the low 20s, we still do. Adjusted efficiency ratio in the low 50s, now that's a little tricky depending on what happens to the revenue. When revenues are down, that affects that ratio. But still, over the term, we think we'll be in the low 50s. And a common equity Tier 1 ratio in the 10% range, we are very close to that now. When things stabilize, that definitely gives us some capital opportunity for our shareholders as we look forward and see stable conditions that require less cushion in terms of capital. So in terms of our $1.6 billion net savings over the 3 years, we remain committed to that. We said at the end of the second quarter that we revised upward our percentage to about 40% by the end of this year, 65% by the end of '21 and the full reduction by the end of '22. We're on that track we believe and feel good about it. Now how we get a lot of that, I'll give you just a little bit of flavor of where that's coming from. We're having some really early wins in some key areas, for example, in third party spend. We are getting really, really good savings in those areas. We're a big client now of many of these vendors, and so we get some really nice savings in our current negotiations with them. Retail banking operation is moving forward with consolidations -- over 800 consolidations as we move through the whole process. Our non-branch facilities, we have a substantial excess there. We now are focused on eliminating about 300 facilities, which is about 5 million square feet, that is excess today at about $30 per square foot. We are having very good savings in technology rationalization. And I'm proud to say that in personnel, we've been able to reduce substantially through attrition about 8% of our FTEs since we announced the transaction by the end of this year. And at the same time, we're making investments for the future. We're investing heavily in digital transformation, marketing and branding, talent. We're bringing in some fantastic talent. I'm very happy that Truist is a place of choice for people to come and want to have a long-term career. And so we're able to attract some really, really high level of talent. And we're investing, as I indicated earlier, LightStream is doing so well. It's our national platform for digital delivery. We're investing heavily in that as we go forward. You can see on the next slide at your leisure all the details with regard to the integration. But I would just say to you, it is on track and going very, very well. Integrated relationship management or what we call IRM is a really powerful cornerstone in terms of our revenue synergies. BB&T had this program in effect for a long time. SunTrust had a similar program. We've now merged that into the Truist IRM program, and it is really already beginning to pay dividends. We're finding that the synergies that we saw upfront are really real and our clients and our teammates are really excited about it. We're already making a lot of calls, a lot of them virtually, but we're making a lot of calls. We're getting really good reception, already having really good delivery of new services to us clients on both sides, traditional heritage, SunTrust and BB&T. So we know that integrated relationship really works because it's about a client. It's about focusing on meeting all of the needs of the client all of the time. It's an attitude. It's a culture. It's all about doing most right for the client, and we live it every single day. We're very proud at Truist in especially these times, and we have a very resilient risk profile. Our credit remains relatively stable. We are having lower accommodations than we were expecting, to be honest. Our losses and nonperforming loss -- loan formation is less than expected. Accommodations are less than half of what they were at the end of June, and we're seeing very strong payments from those that have come off of the accommodation. So we feel very, very good about how credit is performing. It may well be that when this is all said and done, the credit performs better than many of us had expected. So we have very strong indicators to support that. If you look at the 2020 DFAST results, we had the third lowest projected losses at 5.1%. We have $9.2 billion in loss absorption capacity, that's about 2.9% of our loans. And so we feel very good about the credit quality of the company. So overall, we have a very strong franchise, very fast growth, great opportunity in the future, strong market share, top performance potential and already very strong top third performance pretty much across the board. Our conversion and integration is on track, and we have a very, very strong culture that is ultimately the key determinant of success looking backward or looking forward. I cannot feel better about the future of Truist than I feel today. We look forward to working hard for our clients, for our shareholders or other stakeholders, and doing all we can to make the world a better place. So Jason, I'll turn it back to you, and we'll talk about any questions you may have.

Thank you, Kelly. That was pretty informative. I guess there's a couple of points that you made that I'd like to delve more into. You kind of have been sticking with this $1.6 billion in kind of run rate merger savings. Although this year will be higher than we would have thought. And then I would think, just given the combined company's footprint in real estate and branches and people and -- marry with the success you've shown in digital adoption and some of the digitation initiatives in part due to COVID-19, I would think there's a lot more cost take out of this combined entity. I know that $1.6 billion, a net number, is there any kind of maybe upward bias to kind of the gross figure? And then maybe that brings it down to $1.6 billion net? Just how do you think about the overall scale opportunity given its probably more of post COVID-19...

Well, Jason, I think, that's a good question, given where we're going through now with regard to COVID. When we laid out the net $1.6 billion, that was, of course, long before COVID, and so we feel good about that given the kind of steady state of what we were seeing. But to be honest, as you think about COVID and the changes that we expect coming out of that, there could easily be more changes. I honestly think that as we see more changes, more transformation, more reconceptualization in the banking industry, certainly at Truist, I believe you're going to see substantially higher returns in banking. And the reason is because we are so information dependent, and we deliver so much of our services digitally. And as that increases exponentially, then you'll find us being able to have less cost in brick-and-mortar. Not just branches, but also in backroom support facilities. You'll see us be able to have more revenue per dollar invested through digital, which is highly profitable per dollar invested. So yes, I think that there's an opportunity for us and others, to be honest, to excel in terms of banking performance because the trajectory of what I see going forward is better service quality, delivered more efficiently, that delivers better returns for our shareholders and better opportunity to invest in our communities and our teammates and our other stakeholders.

Got you. And I guess, to me, the expense saves are great and required, but I think the true traction of the kind of the SunTrust-BB&T merger more came to me on the revenue side. It just seems like a lot of kind of easy wins. BB&T was very strong in insurance. SunTrust Robinson Humphrey is very good in the market investment bank. So it just seems like a natural marriage, to marry the products to each other's customer bases. I guess where are you in that process? Has COVID-19 delayed that? And maybe you kind of thought about potentially sizing that or putting up kind of a time line that we could maybe expect that to kind of bear fruit through the income statement?

Yes. So you're right. In the beginning, when Bill and I were thinking about coming together, we recognized that we were really a complementary, synergistic operation. I mean, just as you described, we have this really, really large effect of insurance operation. They have this very well-developed national corporate banking, investment banking capability. Many others, but those are 2 really, really big standouts. And so we thought that it would be obvious that we could transfer those services on either side. Well, what we're finding already is, that's exactly right. We're finding that our teammates are very excited about having new tools in the toolbox. And these are first-class products and services that we have to offer. So our teammates are excited. And now we're taking it to our clients, and we're finding that they're very, very excited. And no, we're not waiting for COVID to be over. We started on it even before COVID really broke in March and now we're back on the trail. We're doing lots of calls. We're doing a lot more calls, in all honesty, than we were doing before COVID because it's all virtual. Over time, we want to get back out and see the client personally. But for now, we're doing it virtually. And the reception from the clients and prospects is very, very strong. So these are core products, core services that virtually all of our clients need. And so it's very, very exciting to see how we can enhance these revenue opportunities for us, but more importantly, help our clients be more successful at the same time.

And then you had a couple of slides on credit quality. One of the things you mentioned was losses and NPL formation slower to develop than initially expected. I suspect part of that was due to these forbearance and stimulus programs. As forbearance kind of comes to an end, and that seems to be a good story for the industry. Stimulus is waning, I think remains to be seen. But just -- losses have been, I guess, slower to develop -- to develop initially expected. Do you ultimately think the ultimate losses will be better than we thought going forward? And maybe just kind of what you think is driving that change in time.

Well, there are a lot of opinions about this, so I'll just give you mine. Yes, I think, when it is all said and done, we will find less losses with the proviso that my own expectation, assumption, is that as we head into the first part of '21, I believe we will have found multiple vaccines and mitigation services and capabilities. COVID won't be gone, but I believe it will be substantially reduced in terms of its effect on our American population and the world population. As that happens, the fear factor will go down. More businesses will open, more people will be employed. Economics will just be better. And as economics are better, credit quality will be better. Here's another thing, Jason, I found interesting. Just in the last few days, I've been asking our relationship managers, what are you hearing from our clients and more than 1 time, they've said -- the client has said, well, this is not as bad as I feared it would be. Because I think when this all came out for the first 60 days or so, everybody was just expecting the very worst. I mean, unemployment went up 14%, and the world was coming to an end, and it was scary. But I think people are beginning to see in the short run, we're learning to live with it. We're learning to manage it. Although there's plenty of pain still out there, and everybody is beginning to feel confident that we'll find solutions as we go forward, that's given people confidence. But here's the other thing. Businesses have told me, look, we're doing better because of what happened with a Great Recession. We learned a lot during the Great Recession. And so when this hit we decided to hunker down. We decided to focus, get our expenses down and they streamline our operation. So they didn't wait around. They still remember the Great Recession. And so they made decisive corrective action really fast, and that allowed them to build this resiliency that you're seeing now. And so I think the fact is businesses are just doing better than we might have expected given the nature of the shock. And so then the question becomes, well, yes, but how fast will they be able to come back? Here's an interesting thing to me, Jason. If you look at what's going to happen, it's important to look backward. So if you think about the correction that we've all lived through, there's always a major precipitating event. In 2000 -- I mean in '91, it was a commercial real estate bubble; in 2001, it was a technology bubble; in 2008, it was a residential bubble; and now it's the COVID bubble. Well, before COVID, the economy was doing quite well. 10 years are doing quite well. 3.5% unemployment. There was nothing wrong with this economy, and then we shut it down. Not because of the economy, but because of the medical crisis. Well, if it doesn't necessary shut down too long, that is, we find a cure or a vaccination, then when you turn it back on and open it back up, it's not structurally fractioned that it can't come back. It can come back actually pretty fast. So I'm beginning to be encouraged that if we find this vaccine fairly soon, this economy may well be able to come back faster than most other thing.

Like me, Kelly, always the optimist. I guess, against that backdrop, you talked about a modest allowance build, I think in Q3. Could that be kind of the end of kind of the reserve building cycle given the CECL construct that we're under?

Yes. It really -- I mean, unless we have some event or something dramatic that changes the trajectory in terms of the remediation, yes, I clearly think you could see a flattening out as we go forward of allowance for losses, I think you could see losses stabilize. I think they'll stay up for a while. I don't think it's going to drop by and go back to normal overnight, but I think you could see a stabilization for a few quarters. You could begin to see as we head into the middle part of 2021. You could see beginning declines in terms of losses and NPAs because unemployment is going to be going back up. Businesses are going to be having more revenue, they'll have more capacity. Downgrades that are being done in everybody's credit portfolio today will be upgrades then because the businesses look better. Yes, I think it's reasonable to think that sometime soon, we could see the bottom of this.

Interesting. [Operator Instructions] Kelly, at my London conference in May when there's a lot of uncertainty about bank capital, you seem pretty confident banks would not have to cut their dividend, generally speaking; and generally speaking, you were spot on. I guess at the moment kind of the banks are hamstrung in terms of can't buy back stock, can't increase their dividend. You're kind of almost at your targeted capital level; at the same time, credit quality, you seem to have your arms around it. Just how do you think this whole kind of second round of stress testing plays out? And how long do you think the Fed is going to have kind of handcuffs on the industry?

Well, obviously, the Fed only knows that answer, but I can give you my opinion, Jason. The Fed has been in a tough spot. I give them a lot of credibility. I think they've made all really good moves. I think it became very difficult for them to rely on the traditional CCAR process because all the models aren't working right now for obvious reasons. And so I think they kind of called timeout and said, "Hey, we're not going to make a cut. We're not going to let you increase until we have some more confidence in terms of what we're heading into." But look, I think they want to go back to normal CCAR process as soon as possible. It's a really good process. It is actually developed over these years to be one that I feel good about. I can't say that 10 years ago, I did felt that good. They've made so many improvements, I feel pretty good about it. It's a sophisticated way of allowing our company to project its capital needs going forward and to be able to make its capital action plans accordingly. I believe, personally, as we head into the first half, maybe even the first quarter, I think you may well see the Fed go back to kind of their traditional way of running CCAR and allowing companies to make buyback decisions and dividend increase decisions, if they have strong capital. And that's why Truist is so committed to remaining strong with capital and liquidity. Dividend is our #1 commitment to our shareholders, and we feel very strong about that. As you've heard me say many times, and I'm very confident as we go forward, that the industry is going to be strong. It's going to do well and we'll be able to have a good strong capital return plan for our shareholders across the industry and certainly for Truist.

Helpful. I know Daryl is not with us today, but I'm going to get in trouble if I don't ask, on the second quarter earnings call, you guys provided an outlook for the third quarter. We've heard several banks, kind of, make some changes towards their outlook at the conference today. Any specific comments you feel like making or updates providing?

Actually, I was able to get Daryl to join me [indiscernible] here. I think he's on the line. I'm going to see. Daryl, can you hear that?

Yes, I heard the question, Jason.