Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

All right. Thanks, everybody, for joining us. We are delighted to have with us today Daryl Bible, CFO of Truist. Daryl is going to kick us off with some slides, and then we'll get into Q&A. So we'll have about, what, 15 minutes of slides. All right. So Daryl, over to you.

Thank you, Betsy. I'll get some water. We are so happy to be here to be presenting at your conference. So what I would like to do is just kind of go through some slides, and then we'll open up with Betsy's Q&A. So first, I want to just start with -- we have a couple of pages on our forward-looking statements and non-GAAP information, and then we have all of our presentations really broken down into our investment thesis. We have 4 parts -- and the presentation is built into these 4 parts, and that's how we talk about Truist as we move forward. We always start with our purpose, mission and values. And if you look at our purpose, mission, and values, the purpose is to inspire and build better lives and communities, a guide of how we do business every day, provides a framework for how we make decisions. People want to work for companies that stand for something, and we want to be a purpose-driven company. At Truist, we ask all of our teammates to kind of come up with their own personal purpose statement. We do that so that their personal focus statement ties into the corporate purpose to inspire and build better lives and communities. For me, what I have in my personal purpose statement is to really build and develop the teammates that I have in my group and around the company and love doing that, love trying to challenge and then grow them. And as I leave, I know that we're going to be in great hands with the talent that we have moving forward at Truist. If you look at our ESG, on Thursday, we published our CSR ESG report this past week. At Truist, we have an unwavering commitment to ESG. Many of you are familiar with our $60 billion Community Benefit Plan. It continues to make great progress. We are ahead of schedule, and this slide also highlights what we've done through ESG so far. We view ESG as an opportunity rather than a requirement. It improves our company and puts our purpose into action. It also creates opportunities to advise clients. We've also added a team, both in our commercial bank and in our investment bank, to help our clients transition. As we help our clients transition, we think we're solving a good -- social good in the world and also generating revenue for our company and shareholders. You look at our business mix that we have, we believe we have some of the best business mixes in the industry. We have a solid mix of in-footprint businesses like our core retail and commercial businesses and national businesses like insurance, CIG and LightStream. We believe that one of our secrets that we have is our integrated relationship management. And if you look at -- on the commercial side, those businesses between commercial, investment banking, wealth and insurance, the advantage of basically working amongst all of those teams to help drive our clients to be successful is really a huge advantage. Also, the benefit of putting the company together basically diluted all the exposures that we have. So this diversification gives our businesses a lot of revenue to continue to grow as we move on into the future. If you look at the markets that we operate in, we're operating in some of the best markets in the United States, you can see, and that's a huge advantage. There's a guarantee success. We have to execute our strategies to make it successful, but we have the best markets, we believe, in the United States. If you look at the enviable position that we have in our core retail, commercial and wealth businesses, huge, huge, huge exposure there. And our deposit share that we have, we think that's one of the new huge benefits that we have at Truist. When rates were going down with COVID, we helped lower our ROTCE. I don't think anybody in the industry had lower rates than Truist. We were at 3 basis points in total deposits, and we're starting to see the benefit now as rates are rising. We'll talking about betas in a little bit as we go forward. If you look at insurance, insurance is the seventh largest broker worldwide, 12% of our consolidated revenue. And we definitely view it as a value differentiator, and it also trades at a much higher multiple than the banking business. It had little to no correlation to credit cycles. If you look at this business over the last 10 years, it's grown 10%, about half organically and half through acquisitions. We've been very acquisitive in that space. But in times of uncertainty, we're basically selling risk and trying to help people manage the risk that they have, and this is a great business to be in. It's also a very good business to be in with inflation as it's been able to pass on higher premiums to clients that need these services. We operate with healthy margins, over 30%, and it generates really strong cash flow earnings. And during the stress test that we'll get our results next week, it tends to help moderate our PPNR and have really good stress test results. And it is one of the key components for IRM. If you look at investment banking. Investment banking, we believe, has now had a step function up, and we continue to invest in investment banking. We have a larger balance sheet. We believe that balance sheet that we have has helped grow revenues approximately 10% because we're able to higher -- have higher hold position in certain transactions. It's also a big component of IRM and IRM as it kind of serves our middle-market commercial clients that we think is a huge, huge opportunity. We've invested in about 2 dozen managing directors and their teams. We're seeing a couple of hundred million lift from revenue from those investments, and we will continue to selectively invest as we move forward in these areas. However, we are not immune to the marketplace, and you saw some lower results in the first quarter. But compared to industry, we're still outperforming the industry as we move forward. Next, I want to transition to investing in the future. So Truist's digital technology strategy, we want our clients to experience distinctive, secure and be successful. When we put the company together, we pick the best of both. From a technology perspective, we believe that we have much better technology than either heritage company did, and that is a huge advantage as we move forward. As a result, we have a more modern stack, provides more flexibility and speed and also has -- and has the capabilities to make us more agile. As an example of that, we've rolled out what's called Truist Assist into the marketplace. It's a cloud-based, self-service, digital assistant, accessible to all clients 24/7, various digital channels and performs basic tasks like scheduling appointments and provides insights and recommendations. This slide might be the last time we're going to see this, but we are pretty much done with our conversions. We converted over 7 million clients, 2,000 branches, over 6,000 signs we put up. This was a huge accomplishment. This is probably the biggest deal done at least in the last 15 years. From an integration perspective, it was really complex. And I will tell you, with the conversion that we had in February, we had some issues in certain areas. We feel that we've addressed those issues, and we're moving forward and really getting into how we operate and make our clients more successful and have great client experiences moving forward, was a huge accomplishment getting through and making this happen. We actually got rid of and stopped having our merger oversight meeting, which is a huge win for us. So that's really good. And what you see and if you look at like the mortgage and wealth businesses, they converted earlier in the time period. You're seeing in the wealth areas now that it's probably sitting 9 months to 12 months post their integrations, the businesses are performing a lot better. We're having net inflows in businesses. We're adding net brokers and advisers in the businesses. So as we get further away from February, you're going to see our performance continue to perform and be stronger. And mortgage, if you look at our satisfaction scores, they're definitely on the uptick. Sharing our time, energy and focus on capital towards the future of investments. So as you move forward, our merger costs will fade away by the end of the year, and all of our cost saves will be realized. We are making investments in a lot of areas in the company. Just to highlight a few. So both heritage companies had a vendor-related treasury management product that served our clients. We decided to bring most of that in-house, and we're in the midst of developing and building out a new treasury cash management to serve our commercial and corporate clients. We think we'll have successes over the next year or 2. We're exploring in LightStream. We're adding deposits. Later this year, you'll be able to get the deposits from the LightStream system. And we're using AI in the underwriting process. We partnered with a fintech company, and that should roll out later this year to give a better, quicker client experience. We're enhancing our digital payments and definitely working on client onboarding in all of our businesses. As you look at the cost saves, we largely are intact that we're going to capture everything, as expected, by the end of the year. That's a huge accomplishment. As we move forward to our leading performance. If you look at our interest rate sensitivity, we've always taken a balanced approach to our earnings. We want to make sure we have repeatable earnings over a period of time, not really trying to guess the highs and lows of interest rates. And I think we've done a good job with that. We are asset sensitive. As rates move up 100 basis points, we're kind of right in the middle of our peers from that asset sensitivity perspective. If you look at our deposit betas, our deposit betas, while we modeled 25 basis points for the first 100 basis points, we're actually experiencing 18 basis points or 18% is what we're experiencing. So that's a positive for NII for us. That's worth probably $15 million to $20 million per month, if you will use it for a 3-rate increase period. And as far as hedging as we move forward, we are starting to put in -- because, eventually, rates will move up and then start to come down over some period of time, we are starting to put in some received fixed swaps on the books. We have about $12 billion out 1 to 2 years right now, not really trying to time what's going on, but just trying to walk in the increase that we have and the benefit that we're seeing from NII from what we're seeing. The average rate of what we have on the book so far is about 2.80%. If you look at our deposit franchise, we have a really, really strong deposit franchise. Lot of density in the markets that we serve. We averaged 18% market share in these markets. That's 50% more than what our average peers have in their markets. The combination of a deposit beta, and if you take out -- and we have some deposits on our books that are non-client oriented, some broker deposits. If you back that out, our deposit betas, that goes from 18% to 11%. So really sticky, really core deposits. If you look at it, we have about 10% that we would say would be indexed. We have about another 20% that would be moderately rate sensitive, and 70% that would be non-rate-sensitive, and you're seeing that come through. If you look at the cost saves, I definitely feel great about the trajectory of our expenses as we go through the end of this year. We've exceeded our expectations in third-party branch closures, non-branch facilities and FTEs. I would say that if you look at us versus peers, our costs have been pretty flat the last 2 years, where the peer group has averaged up 4%. So we've done a great job basically keeping our expenses in check with all these cost saves. As we finish out the cost saves, we have 6 data centers. We're going to collapse down to 3 by the end of the year and reduce about 1/3 of our application systems by the end of the year. We're on track to get $1.6 million cost savings by the end. At the end of this year, as we move into '23, you will see that we will be a much easier story to cover, less merger costs. We won't use that word, adjusted, anymore, which would be a nice thing to have, but really sets us up to have a really strong 2023. If you look at our credit quality, from a credit quality perspective, we believe we really manage the risk very well. We have a really disciplined approach to all of our risk appetite frameworks. We measure our actual risk positions across all the risk disciplines. From a conservative credit culture, we believe in diversification, prudent client selection, appropriate risk compensation and effective, early problem asset resolution. We remain very disciplined, and we aren't going to chase things that don't make sense for our company. If you look at this slide, there's 2 portfolios that have a little bit higher risk. If you look at our Regional Acceptance portfolio, it's about $5 billion in size. About half of that portfolio is subprime, and that's that 1%. The other half is more near prime. But if you look at the risk-adjusted spreads in that business, it's in the 7% to 8% range. So we like that risk/return trade-off. On the leverage loan portfolio, the definition of leverage loans has been changing the last couple of years, getting a little bit broader, but what we show here is really the leverage loans that we really manage. It's more of the below investment-grade leverage loans, which is about 3% out there. And here, again, we like the risk/return trade-off that we have in these accounts. These are long-term, tenured, very selective clients that we do business with. This slide is a new slide that Ankur's team put in. It basically assumes Truist was together since 2013 when stress tests came to life. And it shows that, from a loss perspective in CCAR, we actually have the lowest loss over that 13 year -- or since 2013. It also shows that we have very low variability. We will get our results next week, and we'll just see how we stack up there, but we feel really good about the risk that we have and the loss exposure that we have in the loan book. From a risk-adjusted capital perspective, we have very strong capital against the profitability and risk profile. If you look at our capital buffer relative to the capital erosion, we ranked fourth. This positions us to improve our merger. As our merger costs diminish, our percentage will increase. And if you -- gives us ability to optimize our capital position as well. If you look at our rating financial performance, even if you exclude reserve releases that we had this past year, you can see we had really strong profitability numbers. And we do think that is true because of our diverse business mix, strong fee income as well as our ability to basically come through our cost saves that we have. On a go-forward basis, we think that Truist will continue to have a lot of cost saves that we continue to materialize. We have much higher interest rates, at least for a while, which will help us from a revenue side. And hopefully, at some point, we'll be able to deploy more capital as a company from that. So with a mindset of trying to get things better and more efficient, the mindset is to try to drive positive operating leverage through the cycle and then making good returns and investments to shareholders. As we shift from integration to executional excellence, we believe we're there at this point, and we're starting to see that happen. We'll talk about loan growth in Betsy's Q&A, but we're definitely seeing stronger loan growth there. We have one brand, one common system, one digital platform that makes it a lot easier to run the company. We believe that we are in great markets, differentiated deposit or differentiated business mixes and the ability to capitalize on IRM. Our core organic strategy will be augmented as we will do some bolt-on acquisitions to help our businesses perform better in certain areas. And in closing, which is our investment thesis, again, we are a purpose-driven culture; unique, differentiated business mix; increased focus on investing in the future; and resulting in strong growth and profitability, underpinned with strong capital and liquidity as a risk foundation. With that, thank you for your interest with Truist. And I'll turn it back over to Betsy.

Thanks, Daryl. So while Daryl moves over, lots of really interesting points in there that we'll get into in the Q&A. Appreciate the update.

Maybe first, we could talk a little bit about the more near-term 2Q '22. So I just wanted to see if you have any guidance updates that you could share now that we're most of the way through the quarter.

Right. So if you look at -- when I talked about, obviously, deposit betas is a big benefit. We're coming in better than modeled, from 25%, what we modeled, to 18%. So that's a big benefit. If you look at loan growth, loan growth is actually exceeding our forecast that we had there. Our loan growth, and I know we'll talk a little bit about it, is exceeding H8 by a little bit, really strong growth. So that's a bit positive. Almost every of our loan categories are growing. You're seeing higher yields in some of our loan portfolios than what we expected, and you got the benefit in the investment side because of lower premium amortization. If you put that all together, we -- in the April earnings call, we had a guide for margin to be up 3 to 6 basis points and quarter to be up 7 to 10. I would say that we'd probably add 8 to 9 basis points on that -- on both of those categories. The result of that is that our guide for the quarter for PPNR is high single digit. We think we'll probably be low double digit because of that. Now for the year, I think we're going to wait until we have our earnings call in July and update everybody there and see how things go through. It's still very rate dependent with all the Fed hikes that you have in there, but the Fed could go up to potentially 3.5%, I think, is what's in there right now.

Okay. So I just want to make sure I understand. On your NIM guide, instead of 3 to 6 bps, now you're going to be 11 to 15.

That's right.

Okay, just wanted to make sure I got the math right.

So both of them up about 8 to 9 basis points, both.

Got it. Okay. Very good. Could we talk a little bit about what you're seeing on the rate sensitivity as you flex your balance sheet to benefit from higher rates?

From a rate sensitivity perspective, we are asset sensitive, and that is definitely a benefit there. But it's not just the rate sensitivity what you have on the balance sheet, it's also a function of how your businesses are growing and what's growing on the balance sheet, what you had seen growing right now from a balance sheet perspective as well, and so we are shrinking our investment portfolio. We average about $4 billion of the investment portfolio that is shrinking. We're adding loans to that, so you have a positive asset yield mix there. I think that's positive. Then on the funding side, our deposit betas are coming in really low, which is a huge positive for us. Liquidity-wise, we have tons of liquidity, if we need to raise more money, if loan growth exceeds that. We have basically paid off all of our borrowings. So the ability to overcome if the needs there, we have. But I think from a rate sensitivity, we're positioned to really, I think, produce more as rates continue to rise.

So you talked about deposit betas coming in lower, lower than what you were expecting, right? What do you attribute that to?

Well, it could be conservative modeling. But the other piece, I know, I think really seriously is the density that we have, the long-term relationships that we have. We don't have to pay the highest rate anymore to really keep because we have all of our products and services, really have a really good digital product, a lot of other services. People have -- so people want to bank with a purpose-driven company like Truist. And while we definitely are selective and protect some of our best clients. I think for overall, I don't think we have to pay the top rate to keep our clients and deposit funding is what you're seeing.

Okay. So it's partly a function of the integration. Okay.

It is. It is without a doubt.

And what about just QT, in general? We -- the Fed embarked on that in June. And I'm just wondering, from your perspective, how do you think that's going to run through your balance sheet?

So obviously, it's going to moderate how much growth you have in deposits. When we started the year planning lines, we didn't expect we'd have that much growth to begin with. We thought maybe early on, but then it would moderate. Our expectation right now is it's probably a little growth to maybe a little bit negative growth, and I think we're fine with that, to be honest with you. I know it's a function of how much the Fed shrinks the balance sheet and how much lending in their system comes in net-net overall. But we're tracking the H8 data right now if you look at our flows, so we did see a dip in the second quarter with tax payments and all that. But we have tons of liquidity in there, so we aren't really concerned about that.

So deposits are tracking roughly in line with H8, but loans are exceeding H8.

A little bit, yes, really driven on the commercial side. Strong growth in commercial. Our utilization is up almost 3% from 27% to about 30%. So that's a positive. We're definitely growing in our asset finance area group. Some consumer, technology, other areas, pretty broad-based growth there. So all that is on track. I know Bill last week talked about CRE. I would say CRE would come in a little bit flattish to down a little bit, but we are gaining more momentum and doing more lending and some more permanent financing and other areas that we think that CRE could be a potential grower for us as we get in the second half of the year. I think the things to highlight, though, on the consumer side, our 3 growth -- fast-growing businesses, which is Service Finance, LightStream and Sheffield, all those are performing really well, exceeding really good growth. The branch retail is actually starting to come back because they consume so much time and energy with the conversion and all the training that we've talked about. Now that that's behind us, we're able to dedicate and serve our clients, and you're starting to see that rebound and not shrink and start to maybe grow a little bit as the year progresses. So that's a positive. Our auto portfolio continues to grow now, and that's a positive, mainly in the prime, less in the subprime space, just because of the supply chain and less ability there. But in mortgage, and mortgage is growing modestly as well, just because prepayments are lower, and we're putting on some correspondent and jumbo stuff on the books. But net-net, overall, you're starting to see the balance sheet come to life and starting to get benefits of favorable mix changes.

And what's going on with HELOC or home equity? Is there anything there that would...

So that's the retail branch that I talked about. It's not all of that, but that's the biggest piece of the retail brand. It has run down probably for the last year, 1.5 years. It's starting to stabilize, and we hope that, that should maybe turn next -- later this year or the next year and grow a little bit there. That's a big portfolio. And if we stabilize that and grow that a little bit, that will make a huge difference in how much our consumer lending assets grow.

Okay. And is that -- does that get a bump up or a lift from having integrated all the branches into the Truist brand?

Absolutely. That's right.

Okay. Moving to fees. Just wondering on the investment banking side. I know you touched on it in your slides, but I'm wondering how pipelines are shaping up and also execution on that pipeline in 2Q.

We talked about we are really positive in our investment banking business. We've continued to make investments in that space. It was off some in the first quarter. But compared to others, we thought we were down a little bit less than others. I think as we move into this next quarter, we'll probably be flat to maybe up slightly, definitely lower than what we were last year. But if you look at the pipelines, the bulk of the pipelines are just getting pushed out. There's a little bit falling out. But for the most part, it's all getting pushed down. And if the market settles down a little bit, you could see much more activity in the second half of the year.

Okay. I wanted to touch on expenses. And given that most of the milestones of the integration are behind you and you're expecting most of these merger costs to roll off by the end of '22, how should we think about efficiencies from there? Is there -- you've been able to extract all of them during the merger process or there's more to come?

There is huge opportunity to continue to get cost saves. We've talked about this before on our earnings call, but we have a teammate lend initiative that we basically have ideas to help either cut costs, increase revenue or improve client experience. We have over 1,000 ideas, and we are starting to layer in these projects as our merger cost savings subside. And that's starting now this year and will play into '23 and beyond for the most part. So that's a big advantage. The other thing that you have to think about, when we put the company together from an integration perspective, we didn't really come up with the best perfect platform or the best production of what we came up with. So now that everything is together, we now have a huge amount of effort we can put into it to make our processes much more automated, much more streamlined. It is ripe for more digitization, RPA, definitely artificial intelligence, and that will play out over the next couple of years. The other thing on a human capital perspective, we're looking at various strategies now on what type of skill sets do you put in urban markets, what do you put in rural markets and what do you put in offshore markets and all that. So that's a huge advantage that we have. From a technology perspective, Scott and his team are starting to put more of our operating businesses up into the cloud, and we're getting used to doing more of that. That has just -- in the early stages of that, but that will have some efficiencies as that plays out. So my guess is the company will have a lot more savings. Now how much goes to the bottom line? How much goes into further investment? We've increased our investment in our company about double from what we were last year. We definitely want to increase it more as we go into '23. So my guess is it will be a blend of how much is actually brought down to the bottom line and help drive operating leverage and how much will be improved investments that we make in the company as we move forward to get that bigger piece of that investment, a bigger part of the technology side.

Okay. I'll just pause here and see if there's any questions in the room. Okay. I did want to ask on capital. We have this rate hike that had an AOCI hit obviously in 1Q. Can you help us understand, given the fact that we've had another leg up in rates in 2Q, how we should be anticipating the impact to AOCI this quarter?

Yes. So if you look in the first quarter, by the end of the first quarter, we had 40% of the portfolio and held to maturity, but we did it in 3 steps as the quarter played out. And at the end of the quarter, with rates going up about 80 basis points, we were -- tangible book dilution from AOCI was down 14%. As you look into this quarter, rates right now are up, probably up 70 basis points from where we were at the start of the quarter. But everything is already in that 40% book on the first start of the quarter, so we're probably in the 6% to 7% range, ballpark-wise, of what we would have in dilution impact on our tangible book value. We still have 40%. We have not increased that percentage.

And -- so does that impact at all how you think about buybacks?

It has not come up as an issue at all. We've talked to our regulators. We've talked to the rating agencies, and we don't view this as permanent impairment. 97% of the portfolio is government guarantee, so it's a matter of timing of when you get the cash in. So we believe that, that is not a hindrance to us, and I think we can believe that we can still manage and just target our CET1 ratio.

Okay. And on the CET1 side, you're running at, what, 9.75%?

So that was the target. We're about 9.4% at the end of the quarter. We talked about it in 3 parts. First is the risk in the company. And since we're pretty much through the risk of the integration, I think that the risk of the company has come down, which is a positive. From an economy perspective, I think it's a wild card because you have a lot of variation of what could have out into the marketplace, so it's something I think we would have to assess as we move forward. And then we get our CCAR results next week. And hopefully, we'll do really well on those CCAR results. So you could see us adjust our capital targets downward potentially later this quarter or early next quarter.

Yes. I mean, we've talked about that in the past. That 10% seemed a bit on the higher end versus peer group.

10% was set, we're just going through -- playing the merger of equals because it was such a big integration. There's a lot of risk there, but that's 99% behind us now.

Right. Okay. So that's something, if you were to address it, we could hear about that in July or...

It could be later this month or July.

Okay. And then can you talk a little bit about the tangible common equity ratio to tangible assets, new investors? I do get a lot of questions from folks on it. So how much does this ratio factor into your discussions, analysis? And is there any level that you'd say I really don't want it to go below?

So we haven't talked about any specific levels. What I would tell you is it's a ratio that matters when you really have a big recession or whatever and you have permanent impairment in that ratio, you really need to be aware of that ratio at that point in time. But right now, the economy is still relatively strong. Well, it is slowing down. People are starting to normalize from a credit perspective, to some extent, but still overall, strong. I think we're far away from having to be concerned about our tangible common equity ratio as we speak.

Okay. So it's not really a factor. You are probably the longest-serving CFO right now. I think you started in January 2009. Is that right?

Something like that.

Yes. Okay, so 13.5 years. Definitely among the top 20 largest banks, you're the longest. So you've seen a lot, and I just wanted to understand how do you rank the current challenges we face today. We have inflation. We have QT. We have the sharply rising rates. When you put it into your framework, where does this pop out?

Yes. I would start with the Great Recession. Great Recession, we basically had an issue of people were diversified enough, and people were levered more. If you look at the banking system now, there's a much more liquidity, much more capital in the system. So I start from that standpoint that we have a much better starting point from that. From where I see right now, I think the variability of what could happen is as wide as it's ever been. You could continue to have some growth in the economy, could slow down, could go into recession. You could have stagflation, which is something we haven't experienced in the last 30-plus years. So there's a lot of variability out there. You just have to be very disciplined in how you approach the market and how you manage the company. We take that risk very seriously and go through our 8 risk types and manage it, such that we know we will survive and actually succeed in stress periods. Typically for Truist, we usually gain market share when there is stress. So I'm not wishing us to have a lot of stress in the system. But experience has shown that when there is stress, people will come to us, and we're flight -- beacon of quality. People want to do business with us. And if you remember the Great Recession or whatever, we were still adding liquidity in some of the municipal hospital deals that are up, where everybody else was shut down and all that. So I think our strength and our ability to actually gain share, if that were to happen, would actually be a positive for us, although a little painful going through. But I view the risk as very manageable. And as long as we take that long-term approach to how we manage risk and earnings, I think that's what you should focus on.

Great. Well, Daryl, thank you so much for joining me this morning.

Thank you, Betsy.