Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good morning, everyone. This is Gerard Cassidy from RBC Capital Markets. I want to welcome you to our Financial Institutions Conference. And with us at this fireside chat is Truist Financial, their Chief Financial Officer is Daryl Bible. As many of you know, Truist was created from the merger of SunTrust and BB&T, with the transaction closing at the end of 2019, and it created the seventh largest bank in the United States with about $545 billion in assets. The company is primarily located in the Southeast and mid-Atlantic states. It has over 2,500 branches. And currently, the company's market cap is approximately $75 billion, trades at about 1.2x book value. It has a dividend yield of just over 3%. Daryl Bible really needs no introduction. Many of you folks know Daryl. He's the Chief Financial Officer with Truist. He came to Truist from the BB&T side, and he joined the predecessor bank in 2009 after spending a number of years at U.S. Bancorp. And with that, I'll hand it over to Daryl, who has some opening remarks. And then following that, we'll continue with a fireside chat. With that, Daryl, welcome and thank you for joining us.

Thanks, Gerard, and good morning, everybody. Before we start, please note our forward-looking statements and non-GAAP information on Slides 2 and 3. Truist has a 4-part investment thesis that starts with our purpose-driven culture, which is the foundation of who we are as a company. Our purpose is to inspire and build better lives and communities. It has guided how we do business each and every day. A recent example of this was our decision to keep our call centers and branches open during the final core bank conversion to assist clients. At Truist, we have an unwavering commitment to ESG, which you can see from our strong progress on our Community Benefits Plan, our outstanding CRA rating, our commitment to advance diversity, equity and inclusion, and our pledge to achieve net zero greenhouse gas emissions by 2050. Our MSCI and Sustainalytics ratings are strong relative to peers. And we are most proud of the positive impact we are having on our teammates, clients and communities. Our new Truist One checking account also demonstrates our purpose. Truist One will be available by mid-year, and it will provide a more cost-effective solution to our low-to-moderate income clients. Several features that differentiate Truist One are: zero overdraft fees; a simple $100 negative account buffer; and a deposit-based credit line up to $750. In addition, we are eliminating a host of overdraft-related fees on other accounts beginning in the second quarter. Long term, these changes are a win-win for our stakeholders despite the near-term costs, which include an approximate 60% or a $300 million reduction in overdraft-related fees by 2024. Service fees will start to be impacted in the second quarter. And we anticipate a $120 million impact this year that will build over time. Next, I will talk about why I believe Truist is an exceptional company. We believe Truist has one of the best business mixes in the industry, including a solid mix of end footprint and national businesses. We have extremely broad capabilities that drive our integrated relationship management process, significant diversification from the merger that creates capacity to grow balance sheet and revenues. We operate in many of the fastest-growing markets in the U.S. and our core retail, commercial and wealth businesses have enviable market position. Our strong deposit share is also an advantage as we were able to proactively reduce control over deposit costs when rates were dropping in 2020. We believe Truist Insurance is a key differentiator for us. Our Insurance business has a low correlation to credit and rate cycles, which means it performs extremely well in stress tests, and helps us manage capital more efficiently. Insurance also has a significant premium valuation relative to the banking industry. Truist Insurance has been strong and a profitable grower with a 10% annual growth rate over the past decade and a 30% EBITDA margin. The recent acquisition of Kensington Vanguard significantly expands our presence in title insurance, and it will add $115 million in annual revenue with an approximate 30% EBITDA margin. In the next few slides, I will discuss how we are investing in the future. Our digital and technology strategy has 3 main concepts: integrate and modernize; think like a client; and move faster. We recently achieved a major integration milestone by completing our best-of-both systems integration. We will now continue to modernize and advance the other elements of the strategy. The good news is we've been building our digital and tech muscles since the merger closed. A great example of this is using our digital straddle during the migration of our digital clients before the core bank conversion. Culturally, we've been one Truist since the early days of the merger. And now I'm excited to share that we are now one Truist across other dimensions, including one brand, digital and technology. We recently completed our final core bank conversion in mid-February. This was a significant milestone that included migrating 7 million SunTrust clients to the Truist ecosystem, rebranding 2,000 branches to Truist and installing 6,000-plus new signs across our footprint. And for those of you who follow us on social media, you've probably been seeing a lot of purple lately. We are now decommissioning redundant applications and data centers, which will drive technology savings in the second half of '22. A lot of hard work and preparation has gone into the integration, and I want to say a big thank you to all of our teammates. With the integration largely behind us, we are shifting our time, energy, focus and capital towards more future-focused investments and priorities. We've highlighted some of these transformative activities on this slide, such as expanding LightStream, enhancing our digital payments offerings and capabilities and advancing frictionless banking. The great news is that these investments are already included in our 2022 expense guidance of up 1% to 2%. We are also continuing to invest in convenient commerce, which is really about enabling clients to achieve their goals with less friction. Our goal is to be there to provide financing when a client makes the decision to buy. We have a solid, convenient commerce portfolio that includes LightStream, Sheffield and Service Finance. Because we own the full experience end-to-end, the economics of these businesses are strong, as you can see from the strong loan yields and return on assets. We will -- this will also help boost our net interest margin as these businesses grow faster and Truist as a whole. In the next few slides, I will talk about our potential to deliver leading financial performance. We have intentionally taken a balanced approach to managing interest rate risk. We have enhanced current earnings by investing deposit inflows into securities. We are also positioned to take advantage of higher rates at both ends of the curve. We continue to be asset grade sensitive. A 100 basis point ramp increase would increase NII by 5%, and approximately 75% of the reported asset sensitivity is at the short end of the curve. As we've said on the earnings call, if you assume a 25% deposit beta, a 25 basis point rate hike would increase NII by $25 million per month and increase net interest margin by 6 basis points. We have also transferred 40% or $60 billion of our securities portfolio into account to maturity in the first quarter to mitigate AOCI risk and volatility. As a reminder, as a Category 3 institution, AOCI does not impact regulatory capital and simply protects tangible common equity. One of the primary ways banks benefit from rising rates despite having a strong deposit franchise, and Truist is well positioned here. Truist has considerable market density as a result of the merger. We averaged 18.3% deposit market share across our markets. We also have a granular deposit base that is oriented towards retail and small and middle market commercial clients. Approximately 43% of our deposits are under $250,000. We think the combination of strong market share and granularity will promote good deposit beta performance compared to peers. As we have said, onetime merger costs have decreased in half in 2022 compared to 2021, and will cease in 2023. We are also on track to achieve the $1.6 billion of annual net cost saves by the fourth quarter of this year. As we get closer to 2023, Truist will be a much easier company to understand. Last year, we generated leading adjusted returns even when you exclude the reserve releases and efficiency. Going forward, we expect our profitability to continue to improve. As cost saves materialize, we realize the benefit of higher rates, and we deploy additional capital. We have a very strong capital position when you consider our extensive diversification, low risk profile and the ability to generate significant capital through earnings. Given the benign credit outlook, we expect to optimize our capital position in 2022 as integration risks subside and as we complete our capital planning processes. With the core bank conversion behind us, we can now focus on execution, transformation and growth, which is what really excites me and our teammates. And with this, we will be able to deliver on our investment thesis, which you see on Slide 26. Thank you for your interest in Truist. With that, Gerard, I will be happy to answer any questions you have.

Thank you, Daryl. Thank you for the insights of what's going on at Truist, very helpful to everyone listening in on the call. Maybe we could start off with some -- just a broader macro question. Obviously, the pandemic is moving behind us. But we're still, as a country, feeling the pains of the supply chain issue as well as labor issues. We certainly have inflation to deal with now with the price of oil rising to levels that we've not really seen in our lifetimes. Can you give us some color on what you're hearing from your customers about the current state of affairs? And the way things are going today?

Yes. Thank you for the question, Gerard. I would say, for the most part, our clients are still very positive as we approach 2022. I think that if you look at what's going on, we're still having good loan growth coming out in the first quarter in our commercial areas. I think that's positive. I think the activity of the economy has been very positive. The word has been going on for just a short period of time. It's too early to say what impact that might really have on the U.S. But right now, I think, overall, I think we're positive and feel good about the economy and definitely feel good with rates rising, and that's going to really help drive our revenues and increase our profitability.

Very good. In your presentation, you were obviously very clear on the merger and where it is. And by the end of the year, where you see it going, which is great. Maybe you can give us an update on any guidance that you have for the first quarter on how the quarter is trending as we speak.

Yes. So I'll start with the annual guidance. The annual guidance that we gave for the year, we thought revenues would be up 2% to 4%. We still think that's very doable. Our base forecast now for interest rates, we think, the Fed will probably raise rates 5x. So we think NII will contribute and potentially maybe we get to the higher end of that revenue side of the equation. Expense guidance that we gave back in January, post-earnings, was up 1% to 2%. We're still very comfortable with that. And we said credit net charge-offs in the 30 to 40 basis point range, we're still comfortable with that. Starting out very low, still very benign right now, and maybe building throughout the year. As far as the first quarter goes, I would tell you, we're getting good growth on the balance sheet in commercial. We're starting to see mortgage continue to grow just because our balance sheet and correspondent production, prepayments are slowing. On the consumer portfolio, seasonality is a little bit against us, but we're still seeing positive trends from our LightStream business, our Sheffield business as well as the new Service Finance business that closed in December. On the fee side, I would say it's a little bit softer coming out of the blocks for the first month or 2. We're seeing a little bit of softness in investment banking, mainly in the equity and M&A advisory fees areas a little bit. So they're off from a slower start. I think the industry is seeing that overall. On the wealth side, I think wealth is growing really well, but market valuations coming down a little bit hurts a little bit on the fee income there. And then on the mortgage side, a little bit more softness just because of lower volumes that we're seeing and tighter spreads. On the good news side, though, as we're seeing for the quarter, our expenses come in lower than expected than what we thought. We thought they'd be up 1% to 2%. I think we're at the low end of that, and that's a positive that's helped offsetting some of these lower fee income -- extremely really strong.

Yes. That's good to hear. And on that expense number that you just mentioned, Daryl, now 1% to 2% at the lower end, is that a sequential change? Or is that year-over-year when you referenced that number?

That's versus linked quarter annualized.

Okay. Got it. Okay. Very good. I'm curious, in your comments, you talked about the commercial loan growth and what's interesting is the H8 data at the end of 2021 ended quite strong. And then it started to slow down in the first couple of months of 2022. And maybe can you dive in more on your loan growth, particularly in commercial. Is it more on the C&I side? Or commercial real estate side? And is there -- geographically, is there more going on in Florida versus Texas or other parts of the franchise?

Yes. We finished the year really strong in '21 with our commercial loan growth and pipelines got cleared out. So I would say January was a little bit softer coming out of the blocks, but February has been a really good month for us. We've seen good growth in the commercial area. Geography-wise, I think we were seeing growth. If you look at our 18-state footprint, I'd say Florida, strong, Georgia, Carolina is pretty strong; Texas are probably the areas we're seeing a lot of strength. When you look at our footprint, and we have about 20 markets there, I would say the vast majority of them are growing positive on the commercial side. So that's all positive there.

Very much so. Obviously, the Fed has committed to changing its policy from a monetary easing policy to tightening, and we're likely -- very likely to see that first Fed funds rate increase next week. You talked about possibly 5 this year. Can you share with us as they move into a monetary tightening policy, and maybe even go quantitative tightening, where they actually reduce that balance sheet, what are some of the risks that you guys are watching out for in this shift in policy by the Fed as you look out over the next year or 2?

Yes. So what I would say, from a rate increase perspective, from an earnings perspective for us, that's a positive event. So we're going to have higher net interest income. Our margins will start to grow from a core and probably even GAAP basis from that perspective, so that's good. On the consumer side, they're raising rates because of there is inflation in the industry. Inflation impacts the consumer side, probably your low, moderate income borrowers that we've seen. And we've seen some normalization in some of our low-income businesses like regional acceptance, which is our auto business. We've seen some normalization there. On the commercial side, I would say that the businesses, as rates go up, that you want to be careful on are the ones that are very rate-sensitive. And I don't think the first couple of moves are going to put a lot of strain on people. But if the Fed were to get really aggressive, you could see some stress in some of the businesses that are impacted by higher rates and valuation adjustments from that standpoint. As far as the Fed balance sheet goes, we do expect the Fed to probably start to shrink their balance sheet by mid-year. We only have one time in history looking at what happened when the Fed shrunk coming out of The Great Recession. And at that point, deposits still grew some and that was really offset by the growth banks had on their balance sheets. So we're hopeful here that our loan growth, and we're planning, I think that our loan growth will help offset some of the balance sheet shrink. So we're planning for modest growth in deposits this year, not like what we've seen in '20 and '21, but still modest growth as both loans and bank balance sheets offset the shrinkage of the Fed balance sheet.

Got it. Yes. We haven't seen 2017 to '19 was the last time, as you pointed out. And you're right, the industry's deposits, those basically went flatlined. They didn't decline much, and that will be interesting to see how that plays out, as you pointed out, for Truist this year. Coming back to credit. You guys have done a great job underwriting credit, you manage it very effectively. And -- but it's -- as you pointed out, it's incredibly good today for everyone and normalization process will materialize. And you already touched on the low income, you're seeing a little bit there. Are there any sectors within the credit bucket that you watch more carefully even though I know you said the interest-sensitive borrowers that would be affected with rising rates. But is it lending to the energy industry? Or commercial real estate? Where do you guys really -- when you get -- you start looking at credit, where do you spend most of your time initially?

Right now, we haven't really seen a whole lot of impact from that because rates haven't started to go up yet. We are starting to see some of our clients that are impacted by inflation. You still have inflation, definitely seeing it in the petroleum area, we're seeing it in some fruit product areas. So some businesses are -- have higher cost of goods sold, depending on their structure and their revenues and how they're tied from that perspective, you could see some stress on some companies as the contracts they have in place with some other partners that they're dealing with. So we're really looking at that very closely. As far as just pure interest rates going up, I think if the Fed goes up 150 basis points-or-so, I think you look at some of your higher levered type positions potentially could see some valuation adjustments there, and that could have some impact from that perspective. But overall, right now, I would say credit is still really strong and very positive, both from a delinquency and nonperforming asset basis, I think we're in a really strong position right now.

Very good. I wanted to come back to a comment you made about your expenses, possibly coming in at the lower end of your guidance, expense growth that is. What was -- what were some of the contributing...

For the first quarter.

Yes. That's what I meant, for the first quarter, correct. What are some of the contributing factors that you've seen that have helped you in this area?

I think we definitely have a seasonal uptick, obviously, in FICA and 401(k) match and all that stuff. I think the offset that we've seen is we still had some pull-through from our voluntary retirement and severance programs. Remember, we announced that in the summer of last year. And we really had 2 quarters of that. We have 2 more quarters of that, so you're still seeing a reduction of teammates as we go into this quarter and next quarter probably, so that's positive. I think as we start to see the integration activities peak, we're starting to see some of those costs start to subside, so that's a positive piece from that perspective. And just, quite frankly, having lower revenue in some of the businesses I talked about, where you have investment banking that's tied to the cost structure that also lowers expenses. Insurance is going pretty strong, so you still have the commissions attached to our insurance brokerage business. But from an expense basis, some of the ones I mentioned had some of the commission expenses tied to that.

Very good. You mentioned and gave us a very clear guideline on the integration coming to an end by the end of this year. When you kind of look at senior management's time in managing the day-to-day business and managing the integration, how much time did you guys have to spend if you had to estimate on the integration? And now as you pointed out also in your slides, more of your time and effort will be in growing the business because obviously, the integration is behind us. But could you approximate how much time do you think management had to use to successfully integrate the 2 companies?

Yes. I would tell you, Gerard, having put these 2 companies together, this is probably the hardest thing that I've ever been part of in my career. I went through other some merger of equals in my prior life, but just the size of this coming together, the complexity because we are in the digital era, it was really, really complex. We chose -- we believe the best path for us by picking the best of both, by integrating best from each heritage company. But the complexity and the time and energy put into it was a huge effort. We get much better for it as we move forward, but it was a significant amount of time, I would say, on our leadership team and for the people that work in our teams, a huge amount of effort and time. Percentage-wise, it would be hard to say. However, Depending on businesses 20% to 40% to some people, 60% of their time we're focused on integrations. So that's why when I said in my prepared remarks, people are really excited. I'm actually very excited personally to actually get out there and try to improve our businesses. Bill and I are committed to making sure that our businesses start to perform at even higher levels now as we move forward, and really get our businesses humming and growing and serving our clients and doing what we do really well. So we are, I think, aligned and moving forward with that. Very happy that the integrations we've gone through have gone very well. And now we're just excited to run a company and be very successful and compete.

Very good. Now that, obviously, things will be completely behind you by the end of the year, when you look at managing capital, can you share with us your thoughts on how you want to deploy that capital every year for organic growth? Dividends? Buybacks? Maybe some bolt-on acquisitions like you've done recently in the insurance space or in the asset generation space. What are you thinking on capital?

Yes. So our capital priorities haven't changed. Obviously, we want to use our capital, first and foremost, to serve our clients from an organic perspective. Definitely, we want to make sure we have enough capital to do that. Second, we believe we pay a strong dividend. We want to make sure our dividend reflects our growth and earnings potential. And I want to make sure that's sustainable over the long term, so we put a lot of emphasis around that. I think you will continue to see us do bolt-on acquisitions. You mentioned insurance. We did our point-of-sale one with Service Finance. You could see us do some other bolt-on acquisitions and some other businesses potentially as well over the next year. So I think all that is in play. We're all about trying to get our businesses to perform better to serve our clients better, whether it's better client experience, whether it's better technology, we can drive better efficiency, get share in certain markets. That's really what we're focused on and really trying to improve our overall performance. And finally buy back at our capital target.

Got it. Can you share with us your guys' thoughts when you look out maybe over the next 5 years, how the banking landscape may change in terms of what types of banks we'll be seeing? Will there be more $500 billion to $750 billion in asset banks to compete with the big trillion-dollar players? What's your view on how you see the industry kind of developing and changing over maybe the next 5 years?

Yes. Great question. I think you and I, Gerard, have seen the shrinkage. I think what I saw in banking, there were 18,000 banks, we're down to about 4,000 now, a number, well I think, will continue to shrink. Definitely, we'll see more consolidation as we move forward. Depending on who takes the seats and the openings that you have in DC and the various regulatory bodies, definitely, we expect over time, in the next 5 years to still see consolidation. Scale is really important. We believe that is a driver. So I think you will see other entities come together to form larger asset bases to get some scale from that perspective. I think you'll see from a fintech perspective, some fintechs may grow, be national. I think that will be in the landscape. Some fintechs will probably be purchased by financial institutions and be part of their franchise. I think all that will evolve. And one thing for sure is that I think the pace of change will continue to go much faster each and every day, and we're seeing that. Definitely seeing digitization being really important, not just in the front office, but in the back office. And all that is very critical. So you have to be able to move and change, be faster. I'll give you one highlight, one of our highlight points that we've had this past year. So in the midst of all these conversions, we did this digital straddle. And this digital straddle was basically rolling out a brand-new mobile platform for all of our clients and Truist in the midst of these conversions. During last year, we did over 30 releases into this new digital system last year. If you look at either heritage company, it was probably single digit together combined as what we did in prior years individually because they have a new foundation of architecture and we're using APIs and software differently now. We're able to change more rapidly and meet the needs of clients when we see feedback, we can go in and change it quicker. So that's just one example. We want to get more of our businesses attached like that to be able to be changed and move faster and meet the needs of our clients. And that's really what we're focused on. Remember, when Bill and Kelly put this company together, T3, touch and technology equals trust, we're advancing really well in our technology area to meet the needs of our clients.

Well, that's great, Daryl. And I'm looking at the clock, and we have run out of time and I really want to thank you once again for joining us. A very insightful conversation with you, and thank you again. And hopefully, you can come back again next year in-person, and we'll do this here in New York. But thank you again, Daryl.

Thank you, Gerard. Thank you, everybody for listening. Bye-bye.

You're very welcome. Bye-bye.