Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

So good afternoon. I'm Susan Katzke. I cover the large-cap banks at Credit Suisse. And next up for the banks, we turn to Truist. I'm pleased to be joined this year, once again, by President and CEO, Bill Rogers. We're going to talk macro just to level set, then we're going to move on to merger, integration and the evolution of Truist. So let's get started. And by all means, if you've got questions along the way, please e-mail them to me, and we'll try and work in those questions into the conversation that Bill and I are going to have.

So thank you for joining us. It has been a long year between when you and I last sat down to speak in person and today. So let's start really to level set with the macro and how you see the path of recovery in the U.S. economy and in your footprint.

Great. Thanks, and great to be with you virtually even though, as we said, the last one we did together technically was -- your conference. So it's great to be back. On a macro level, we do see the U.S. economy recovering. I mean I'm probably -- I don't even know that I need to quantify it. I mean I'm optimistic about where we're going. We've seen real GDP growth here in the last few quarters. We've seen more people entering workforce. There are certain businesses that are actually doing great. I mean you saw Lowe's and Home Depot report their numbers, I mean, really good on that side. Freight and some of the health care and technology companies are doing well. So I'm optimistic about where we are and where we're going. It does have a vaccine dependency. I mean we can't sort of escape that. There is a vaccine dependency. But if we look at sort of the Moody's analytics and some of the work that we look at, I mean, you get just much more positive outlook about where we're going. Consumer's in generally good shape. Savings rates are really high. Businesses are in good shape. I think probably much better than any of us would have thought if we'd had this conversation 6 months ago. I think everything is in much better shape than where we thought it would be. It has been uneven, though. I mean I think we also have to recognize that, that there's a difference between small businesses and large businesses. There's a difference between the consumer who was doing well, is continuing to do well and those who were more disenfranchised continue to be so [indiscernible] of the workforce. And we do have to acknowledge that inequality exists. But on a macro basis, we're leaning in and feeling more optimistic. And our clients, I think, are sort of ready to get back at it. And I think -- and you also said, unique to our markets. I mean we also see this migration to our markets. So we see companies either announcing or have already moved to our markets. We see individuals moving to our markets for all the reasons that these are great places. So I think we also have a -- maybe a little bit of a unique geography-based perspective as well.

Okay. So let's talk about kind of over the course of last year, whether or not as you look at the banking industry and the cyclicality, is there essentially a new playbook for recession in the U.S. having seen the efficacy of Fed support and fiscal stimulus? And what are the positives and negatives that you see from a -- really the evolution of the competitive landscape, having not seen any of the normal cyclical cleansing of excess that we've typically seen?

Yes. There's clearly a new playbook because there was a new recession. I mean this isn't something we've ever experienced before. So the suddenness of the recession, the suddenness of the pandemic, I think, warranted a strong sudden response. And I think the stimulus provided that. I think the Fed's support has provided that. And I think on balance, that's been positive. But I think the playbook will be dependent upon what the next recession is. This playbook probably work for this recession but may not work for the next one. And then I think back to the other thing, it's also been unequal. So I think we also have to recognize -- and we see things like the emphasis on PPP and maybe this next stimulus plan, which are focused on some of the small businesses and some of the individuals that really haven't benefited from this recession. So there's some equalization there, which I think is going to be really important. Your comment about -- this has probably allowed more companies to survive or more competitors to survive. But I don't know that it's allowed more to thrive. So when I think about sort of coming out of this and certainly where we're positioned from a competitive standpoint, I think -- I don't think there's a huge disparity on there, less competitors or more competitors. It probably didn't weed out as many. But those may not be thriving in the new environment in terms of capital and what's required to really take advantage of the next round of growth.

Okay. And so let's spend a minute on the bank's appetite for risk, whether it's your credit underwriting standards and what you've seen over the course of the last year with lower loss rates than most of us had anticipated a little bit less than a year ago today. Well, how does that impact your appetite for risk?

Yes. Some of this is idiosyncratic to Truist. So we entered into this -- the merger was really sort of an offensive opportunity, but it just also was an incredible defensive opportunity. So we entered into this with a highly diversified portfolio. So I think the denominator impact of merging 2 companies, these businesses didn't necessarily overlap, so just, by definition, lessened the exposure to a lot of different businesses. So we entered this into a little bit different place. So that being said, I would say, globally, it hasn't really changed our view of risk. Now like others, and to your point that you made in the sort of early part in the spring and early summer of last year, I mean, yes, we were all -- didn't know. I mean the crystal ball was a little less clear. We would have done things like fewer automated approvals. We would have had fewer exceptions. We certainly were looking at and continue to look in the businesses that are probably more acutely hit by the pandemic. But I would say on a global basis, we didn't really sort of change our overall risk parameters because we entered into this in a really diversified basis. And I think it will also be the propellant for us coming out. So we're not hampered. We're not carrying extra things in our portfolio. And then we also had the opportunity because the markets were good. When we merged, we did some things with our portfolio. And during the year, we did some things with our portfolio to make sure that we're going to come out of this in the most athletic position possible.

Perfect. So one of the topics of debate, although I'm not sure it's really a debate, over the last 1.5 days that we've had with the bank is around loan growth. And for the most part, no one's seeing much loan growth out there. Why don't we talk about what Truist is seeing and maybe start with consumer loan demand, focusing perhaps on demand outside of mortgage, which has remained fairly strong? What's the consumer doing?

Yes. It's different pockets. Overall, despite some of the inequities we talked about, overall, the consumer is doing really well. I mean our savings rate in the country is some 14-some percent. Nationally, it's usually about 8%. So a lot of the stimulus actually went into savings. So they're sort of poised, I would say, something like a coiled spring. Consumer confidence is increasing. But overall, consumer went into this -- in good shape. They paid down debt. So that's been an interesting phenomenon. So they increased savings, paid down debt during this process. On the selective things, and again, you took mortgage out of the equation, things like recreational where we're interestingly well positioned, things like RVs and watercraft and those type of things that are pleasure-oriented investments, we see good activity there. The auto side has rebounded nicely during the second half of the year, and we're very well positioned there. So there's selected pockets. Everything to do with home improvement. You saw Lowe's and Home Depot's numbers were fantastic. I mean everything to do with home improvement is good, and we've got some strong partnerships, and we play well in that home improvement space. So there are pockets of places where the consumer is active. But in terms of that global place, it's just going to require more quarters or more months of consumer confidence to really get out and change spending habits more significantly.

Okay. Fair enough. And on the wholesale side of the equation, what, if any, demand are you seeing now? Having gone from the huge volume of drawdowns to paydowns, where is the demand now ex PPP?

Yes, okay. Part of it's been -- I'll state it a little bit by what's going on in capital markets. So some of the demand has really shown up in the capital markets side versus necessarily on the balance sheets in terms of loans. So the good news for us is we're participating in both sides of that equation. So we're really well positioned to participate in the capital markets side. So it isn't like it necessarily went away. It just sort of shifted. And I think what we see in terms of pipelines, what we see in terms of conversations, what we see in terms of future capital investment, there are certain industries that I think are, as we talked about before, are sort of extremely well positioned. But globally, if we look at our client base, we look at our markets, we look at the opportunities, the things that you look as leading indicators are good. I mean they're positive. They, I think, will take a little while to materialize, just like we talked about. You sort of have to see some momentum, consumer confidence, consumer spending. People started to take that investment off the shelf and put it -- buy that extra truck, build that warehouse, all the things that go along with that. But they've got the plans and the positive propensity to move forward. And then I also think -- I think you've got a chance to see some shift with what's going on with the yield curve. I mean you may see some shifting of corporates to move back to shorter term. So -- and bank loans are the most attractive short-term funding vehicle possible. So I think there's some global economic things. And then I think there are also just some rate and market things that would be a more positive harbinger for loan growth.

So I'm curious, you mentioned the shift to the capital markets, which we've been pretty keenly aware of here. And we think about someone like Truist with the capital markets capability since being advantaged because you're really indifferent in certain respects to how your customers finance. Do you think -- you just talked about a preference maybe for shorter-duration lending. Where do you think we are in terms of a shift to just disintermediation? And when you think about whether it's CECL or CCAR, is your preference really to keep the loans off your balance sheet and let it get done in the capital markets where maybe you are kind of less than indifferent about putting it there?

Yes. Where we start is what the client wants and what's important to the client and where their preferences are. And as you can imagine, they're pretty indifferent to CECL and SCB and all the other acronyms. That doesn't factor into their decision-making of how they want to utilize capital. So we start there. I mean what's the right thing for the client, what's going to be the best thing for their business, how it's going to position them the best. And then we work backwards to our balance sheet. And then we think about we want the most diversity possible in our balance sheet. So if we're doing what's right for the client, we have a lot of diversity in our balance sheet, then we optimize around that diversity. We do what's right for the client, then we optimize around that diversity. So we don't think as much about what is the impact on CECL or what's the impact on SCB. We think about what's right for the client and then how do we balance that within our portfolio. How do we -- and if we have a diversified portfolio, which we're optimizing, it sort of leads us to the right decision every time. And I think that's the best way to try to guide rather than letting accounting or CCAR sort of be in the indifference of whether it's on or off-balance sheet. Does that make sense?

Yes, that makes a complete and total sense. But thinking about CECL for a moment here and weaving that into a credit update, it feels like it's so much different this cycle versus prior cycles. When you look forward at the path of loss rate realization and the impact of stimulus, what are you seeing now? What are you thinking in terms of loss realization and really the orders of magnitude of the losses that you see in this portfolio? Are there any new or different pain points that you see? Any points of incremental concern or optimism?

Yes. I don't think there are dramatic differences and pain points. But I do think, as you point out, and CECL being sort of driven off that macroeconomic look going forward, it's clearly more positive right now than it was in the third and fourth quarter. I mean it just is. I mean we have every reason to be more positive. We have a better look into the future. We see that clients who've been on deferrals that are coming off deferrals are staying in the payment cycle. So they're -- you're performing well. We're seeing the cycle of what's happening with our wholesale clients continue to perform well and probably exceeding expectations of where we might have all thought somewhere in the second quarter of last year. So I think you're right in terms of it's certainly a more positive macro environment. I don't say -- the pain points that we continue to look at are the industries that have been more acutely impacted by COVID. And in fairness, again, I think while we're paying attention to those, those are -- have more positive trends as well. If you think about airlines or cruise ship, bookings are going up. That doesn't necessarily translate into passengers today. But it's more positive, people plan to travel and spend more in the future, so you have a little better look into that. Restaurants, same kind of thing. People are coming back to eating inside and [ creating ups ]. So I don't think there's a new pain point. We're just watching things carefully. And particularly as consumers come off of deferments, will they continue to be in a positive basis? And so far, all those indications have been really good. But that will manifest itself over the next few quarters.

Okay. Fair enough. So let's shift gears and talk merger integration, which has been an elongated process that has really kind of facilitated a smooth integration for these 2 franchises. I suspect you remain as committed as ever to the $1.6 billion in targeted net synergies. I'm curious why -- if we think about the last year now, what's the most important takeaways have been from the integration process? And how really important you're thinking about technology investing and ongoing efficiency initiatives for the bank?

Yes. So the answer to your first part of your question is absolutely, still committed to the $1.6 billion. And there have been trade-offs in that in -- for certain things have been materially better than we thought they would be. Think about things like sourcing and real estate consolidation. Other things have had other trade-offs that we've wanted to take environmental opportunities. Think about digital investment, for example. We wouldn't have been able to predict the rapid rate of digital adoption during COVID because we haven't been able to predict COVID and the pandemic we're under. But we want to make sure that we take advantage of that. We don't want to be impeded or slowed down because we're in the middle of a merger. So while we see some of these advantages and some other things, we're also seeing opportunities to invest at a little higher rate than we might have thought when we entered into it. So if we think about the future and the things that we're going to invest in, every time we turn the page, I mean, we see more opportunities to invest and the higher return from those. Now we're always going to balance that against the synergies and the cost saves and the things that we want to achieve. But for every dollar we save, we're very clear about how we want to reinvest it. I mean and the returns on those investments are higher. We get the benefit from scale. Our teams have been able to implement and be more relevant with clients. As we mentioned, the digital adoption is going at a higher pace. Our clients' acceptances of the things we're doing are higher and faster than we thought they were going to be. So the trade-offs of getting the synergies, we're on track. We're ahead of it. But the opportunities to invest have also grown significantly and with higher, shorter and better returns than we might have anticipated before.

Okay. I want to circle back on the real estate strategy because you and I spoke this summer about the bank's ability to really further reduce your footprint, both branch and nonbranch, including the ability to negotiate better pricing on lease renewals. And so I want an update on where you are in that process and how much square footage reduction you actually end up expecting, considering both the merger and the digital shift. And I can't help but also wonder, and I apologize for throwing 5 questions together, but does this worry you at all vis-à-vis the prospects for commercial real estate when you see what you're doing?

Yes. It's a great question. You do have to consider both sides of it. So let me sort of go at us from that side first. And every cloud has a silver lining opportunity. I mean you really couldn't imagine a better time to be out trying to negotiate real estate than right now. So people are giving us better opportunities on short-term leases. Clearly, they want a credit tenant like Truist to be the anchor of anything that they're doing. So as we're consolidating the space and we're thinking about where we want to move to, but it just couldn't be a better time. And we're seeing it in terms of cost saves and longer-term capabilities. We're about halfway through. We've got -- we had just a little under 5 million square feet that we wanted to consolidate. We're about halfway through. We're -- as I said before, we're ahead of where we wanted to be both -- and probably in terms of square footage, but maybe more importantly, in terms of savings. We're balancing all this with a back-to-work strategy. I mean we're a work-from-office company. So we think that's really important to our culture. We'll have a lot more flexibility, no doubt about that. Teammates want and we should give them more flexibility. But we -- the physical footprint is still important to what we do. So -- and if we overshoot this, it's easy to fix. So we're being aggressive. We're being aggressive. If we need to add more real estate, easy to do, it will be easy to accommodate. So that's given us a lot of opportunity. If you translate that then to what does the other side of that look like because we've got clients that we're lending to, and they've got their Truist equivalent on the other side of that equation, most of those situations are longer term. They're in longer-term leases. Most people aren't in the extreme consolidation like we are. They're around the edges kind of doing things and they've got longer-term leases. But it is something that we keep an eye on. We want to make sure that we're in the right places, that our clients are not being overly speculative. I think we have a little bit of a geographic positive as well. I mean we really see the migration to our markets. So while globally, probably less use in real estate, maybe a little idiosyncratic to us, maybe we won't have the same type of impact. That we'll get a little bit of benefit of -- coming from other markets into our market. But we're keeping a close eye on it.