Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Sure. The securities portfolio has been an overhang on the stock. I know you get a lot of questions about that, and there's no easy answer there. But have you thought any differently about restructuring or hedging? Or is that not really economical and you have time to wait it out and have it burn down?

I think the 2 questions are 100% correlated, right? So today, I think everything being consistent with what we know now and the time frames that these things come in. The best thing for our shareholders is to let it burn down. Not to do an immediate shock, not to one either take a loss and put us sort of behind in capital which we wouldn't want to be. Or to leverage other assets like our insurance business and whatever to accomplish that. So our strategy today is to let that burn off. I think that's the best long-term strategy. But if for some unforeseen reason, things change really quickly. We have a unique capacity in that we've got this strategic and financial flexibility with our insurance business. So that's not anticipated. So I think we've got this long trajectory. I think we have a chance for these things to meet actually sort of in a perfect combination. But we have another option and another opportunity if that -- if things change for some reason that I can't anticipate right now.

Yes. Yes. So let's talk a little bit about your insurance business, an important part of the franchise, obviously. Just fundamentally, organic growth was solid in the first quarter. It did slow a bit. Is that kind of a new pace of growth for Truist? Or do you see growth potentially accelerating later in the year in terms of revenue growth and business growth?

No, I think -- well, first of all, let me say one of the really positive for me at this merger was getting to understand and invest and learn about our insurance business. I mean I think it's extremely well run. I mean we have a great consistent leadership team that's been there a long time. 100 acquisitions over time. I think we've done about 10 acquisitions, it's Truist. So just incredible disciplines in watching the team and how they evaluate acquisitions and how they feel about capital and how they think about dilution, how they think about the positive parts of the business. And then the positive contribution it makes for our clients. So to be able to talk to our clients about overall risk management. So not only we have previously talked about interest rate risk management and their balance sheet risk management. Now we're able to sort of bring the insurance component into it. That's a really incredible conversation to have with a CFO or a business owner and be able to look at the whole opportunity. And we've got a lot of specialties in that business that line up with specialties that we have. So not only been able to say, hey, we know a lot about your industry, but we know specifically about those components. So when we think about the growth of the insurance business, I think we are starting to see accelerate. I mean, we sort of said we'd be more in the single-digit kind of range. We're sort of in the mid-single digits. So through this part of the quarter, we're starting to see some of that some of that momentum. In the second quarter, you see all the repricing that comes from the P&C business. Our business is about 70% or so of P&C. So you start to see some of that momentum. So I actually feel good about that organic opportunity growth in the insurance business and the positioning that we put in place for the inorganic growth of the business. So bringing in a partner, creating the sort of a separate currency for insurances, I mean we're 2 minutes into this. But I mean it's really had all the impact that we want to have. I mean the M&A opportunities that are coming to us be as, hey, we're really interested in this. This is really fascinating. We have a currency to join. The teammates that we're able to retain and an acquirer because we've got this currency and we've got this highlight on the insurance business. And then Stone Point has just been a fantastic partner. I mean sort of like 2 minutes into it, I mean, just a great partner in terms of helping us think strategically in efficiency and they bring a lot of knowledge of the business.

So I know you get a lot of questions about kind of the optionality that this sale of a partial stake gives you. So one of them is to kind of play offense in terms of or taking in acquisitions that are bigger than you used to do and you're using a higher currency, you talk to that a little bit about how this gives you some offensive opportunity, both organic and inorganic.

Yes. I mean, John, as you pointed out, I mean, the reason for doing this was to create strategic and financial flexibility. 20% was that -- there was no magic -- 20 -- could have been 10%, it could have been 25%. I was just actually create the -- cut the currency and the relationship and the opportunity. And as you pointed out, the premise was, just like we've seen consolidation in the banking business. You're seeing a lot of consolidation in insurance business. But some of the same reasons, scale, technology investments and all those things. Others are driven by other factors in the insurance business. High rates and -- higher rates on their own PE firms, so they may be hitting some sort of tipping point of evaluation. But the point is it's consolidating as well. And what we want to make sure, of course, we didn't know where we'd be right now. But what we want to make sure is that we always have the capital flexibility. So we can do a lot of little deals. We can continue to take the dilution. They're all on J curves. So if you take the new J curve, another J curve is coming out of its bottom, and it's funding that from a diluted standpoint, but it would have been hard to do a really large deal because that's a significant dilutive impact for overall Truist. And today, that would even be more accentuated. So the importance of having created that is even more important today in terms of that flexibility.

And you mentioned before, it does offer you if you needed it, the opportunity to raise capital for defensive reasons or just to have more capital as a bank. And I guess, how would you look at that trade-off of kind of giving away some of the insurance earnings, which are a nice diversified source earnings for you?

Yes. I mean let's take it to the first one first in terms of growing the insurance business. We're totally happy in having a large earns business in which we have a smaller share that's going to grow disproportionately faster. So totally comfortable with that as a premise. The opportunity to also raise capital at 25x to help support the bank is that's not something that we anticipate. I mean, we don't -- we're not in that we have to go raise capital. We're building capital organically. I think we've got a good flight path. I think we've got a good time line. But having an emergency sitting out there, if something happened from an unforeseen category, then that could be available to us. But that's not something that's sort of in our -- that's not front and center, that's sitting in the back in the emergency room.

Yes. And I guess the final question is, would you ever consider a sale or IPO of the entire business. And I know you are doing some preparations to scale up this kind of separation, so you can take advantage of optionality. Maybe just talk a little bit about that? And then also, would you ever consider the whole kind of IPO of sales?

Yes. I mean part of the premise of bringing a minority partner in is to also create the separation. And to create the separation primarily from a currency standpoint. So think about sort of separate audit, separate HR functions, separate technology function. Today, we have a service agreement. So the insurance company has a service agreement with the bank, what we want to migrate to is it has its own infrastructure. So it's just clean and it's clean in terms of the currency. I think that helps from M&A. I think that helps from a valuation standpoint, as we're thinking about how individuals over time can develop value from the insurance business. So we're creating that separation investment. And that's a multiyear process. That doesn't happen overnight. And then what we might do in the future is just, again, all about strategic and financial flexibility. An IPO is not in the short term spectrum of where we are. But if that were part of a much larger acquisition as that were part of developing a really, really great value for Truist shareholders, and that might be something we'd contemplate. You have to give minority shareholder the opportunity to create liquidity. So -- but that's flexible. There's an IPO opportunity, but Truist could also buy back the shares. So if you just create this financial flexibility. So it's not something that's off the table, but it's not something we're currently contemplating, but we want to create this strategic and financial flexibility, if and when that was a good opportunity and possibility for our shareholders.

Yes. And having the separate financials and everything else just helps them to what degree of...

It creates the platform such that you're not trying to do that in an emergency. And then that's always harder to do.

Yes. Can you talk a little bit about the environment for credit quality. It seems that metrics are still pretty good across the banking industry, but there's obviously lots of things to worry about. Maybe just start off with commercial real estate and office is the area, obviously, of most concern. It's not a -- office is not a big exposure for Truist, but maybe you can give us a little perspective on how you see office playing out? And what kind of loss content you might see in the industry?

Yes. I mean, as you noted, office is not a big exposure for us. That was one of the decisions and integrate, for example, as we said that we're actually not going to put our foot on the accelerator on real estate, we're just going to integrate what we have and actually sort of net reduced to what we had from a total exposure standpoint. But I do think office is going to see some stress. So I think we're going to see some stress in office. And I think it's going to be a little more idiosyncratic to markets and class of offices. So -- some -- there are some large urban markets, I think, there are going to be really tough and really tough for a long time. And tough in both A, B and C food groups within that real estate. I think in the markets in our business is about 75% of our business is in our markets. It's about $5 billion, and it runs off about $1 billion a year. So we've got some good time lines to think through that. And then in better markets, I still think you're going to see some stress in BMC properties. And I think it will be idiosyncratic. You'll have certain cities that are going to have more stress than others. Certain building properties that are going to have more stress than others. But I do think we're in for a bit of -- a little bit of a bumpy ride on overall office.

Pretty manageable for banks as a whole...

I think so because what we talked about, I mean, because most banks don't have a really large exposure in office and most of it has a longer tail to it. Again, something could dramatically happen to change that scenario. But I think -- and particularly for us, I mean, even in the most dramatic scenarios, we still have -- it's over a multiyear basis, and it's highly, highly diversified.

In terms of other areas of credit you're thinking about and how are you feeling maybe about the consumer?

Yes. It's interesting on the -- and to your earlier part of this question is, you don't see a lot of stress in the system today. CRE office is sort of other example, we're 35% or so classified, you see a little more stress there. But in the rest of the commercial system and the corporate system, we're just not experiencing a lot of that. That's not to say we're not worried, that's not say we're not talking a lot of clients, that's not to say certain businesses are doing better than others, certain markets better than others. But the overall credit quality is still relatively strong because they entered into this, they were stronger, back to my earlier comment, they entered into it with more liquidity. I think business centers are more conservative than they were precrisis. So they haven't acceptance for the lot on the leverage and they've been anticipating and they are diversifying their own businesses. And then on the consumer side, a little bit of a similar is the consumer entered into this with a lot more cash, a lot more liquidity. Some of that was supplied into the system. So the consumer overall is holding up pretty well. You're starting to see a little stress in the subprime side. You've seen that from some of the other companies that have bigger subprime portfolios. We don't have much of a subprime portfolio. And then you start to see a little more stress and lower-income clients. I think maybe $50,000 and below in income. They're starting to see a little more stress starting to feel the liquidity from stimulus, that's coming off a little bit. That's coming off faster than the rest of the portfolio, a matter of fact, disproportionately faster. So you could see out in the next couple of quarters that, that consumer is going to feel a little more stress. But even saying that, and that will manifest itself in some more delinquencies, but the loss content, today, I'm a little more optimistic about because of employment. So the loss content really comes with -- is more correlated to employment than anything else. More correlated than FICO scores or LTVs or those things, it's really highly correlated to, I have a job in the family or 2 jobs in the family and being able to sustain that.

Yes. Just want to circle back on the regulatory front. Are you expecting to have to have some TLAC debt phased in over the next couple of years. Just talk about how manageable that feels in the case of what you would have been issuing otherwise?

Yes. I mean I think in the battles, win and lost post SVB, I mean, TLAC is coming to banks of our size. And I don't know where that line will be below, but I'm 100% sure that TLAC will be part of our place. Whether it's tailored or not, I don't know. There are lots of good conversations about that. I think more a holding company and bank versus just holding companies. So I think that will be -- if that's tailoring, I think that will be a component. For us, if I look at sort of hypothetical what that might be and then look at our regular way issuing and if you assume some time line so you've seen some multiyear time line, we cover really the bulk of that sort of from regular way issuing. It will be a little more expensive. We'll carry a little more debt than we would have otherwise. But I see that as absorption challenge that's not the high bar that everybody was worried about.

Yes. And you put that all together on the regulatory side and how things change, when you think about ROEs for the industry and banks of your size. Do you expect that we'll see some degradation of ROE over time with higher capital and liquidity rules?

Yes. I mean I think you have to, right? So I mean we're -- to the point we started this conversation, I mean we're in a bit of a capital build mode. We'll operate at a higher capital level, not -- we'll have to get where that's going to be, but it will be higher than where it is today. And so you'll see some pullback in ROEs. I think the construct of our business, the diversity of our business model, the lower risk model we run, I still think we should be able to be top quartile kind of return. So it's an absolute and a relative game all the time. You've got to run your business on an absolute basis, but you're measured against a relative basis. And I think we'll be relatively well positioned on that going forward, given, again, markets we're in, the diversity of our business model. And so our ability to maximize the amount of capital that we'll be requiring to hold.

Yes. So we've covered a lot of ground. We talked about near-term trends. I just wanted to give you a chance, are there any other thoughts you wanted to share about the near-term environment or updates on your outlook for the second quarter or your goals for the year?

Yes. I think the near-term environment and we've talked a little bit about this. It has a lot of pluses and minuses. It's got a lot of give and takes. There's a lot of uncertainty. I was talking to our commercial team yesterday, and we were having this conversation where our production levels are down. So we see that and some of that is self-induced if we think about production as loans. But our near-term pipeline is high, is up. So that's a bit of a dichotomy of we see some slowing, but sort of the near-term part of processing through looks relatively positive. I'm -- if we think about sort of overall think about in the bucket of revenue, we probably thought we'd be a little flattish on revenue, probably a little bit down. Yes. And just because of all of the things we talked about, capital markets a little more uncertain than it was. NII and deposit beta has been a little bit higher. It doesn't change my -- that's a quarter issue, it doesn't change my perspective on the opportunity on the long term and sort of where we are and the ability to generate above normal PPNR growth over the long haul. But things are slower. I mean, you can clearly feel in the last 30 days, things are a little bit slower than they were at the end of the first quarter. But not stopped, if that makes sense. And again, I think our relativity is -- and I think because of all the positives and migration, all the things that are happening in our markets, I think will be relatively stronger as it relates to that slowdown.

Yes. Yes. And like you mentioned before, the operating leverage goal for the year gets tougher, but we pushed that out, but you are committed to that and you've got some efficiencies that you're going to kind of double down on?

No doubt. The trajectory just changed, it just did. So I mean, that happened from the rate increase of that substantial nature. But our ability over the long term to bring some of those expenses down, to create that top of the funnel on the revenue side. I'm probably more optimistic actually in the long term about our ability to build a sustained operating leverage but a little more challenged short term.

Yes. And just as we wrap up, remind us again, you've talked about the relative positioning of Truist. You realigned the incentive system for your leadership team really to deliver performance to all of your stakeholders. Just remind us of what the focus is on that new realignment? And how it will help deliver for shareholders and all your stakeholders?

Yes. I think totally consistent with integrate to operate. So in the integrated mode, our incentive system was really primarily related to absolute ROTCE and absolute ROA and EPS growth. And I think that was actually really smart because you had all this uncertainty and all these things, but our business model should afford us that kind of opportunity. Well, going forward, the business model still affords us that opportunity. We still ought to have absolute high ROTCE and higher ROA. We've got to grow. And we've got to grow into the expectations that we have for our franchise. So what we did is took some of those relative things down and sort of how we're going to put a more absolute growth component of that. Maybe our timing wasn't perfect, but I think long term, it's exactly where we should be. And so -- and then we added an ROCE component to say, "Hey, we've actually got to think about that from that standpoint, and that added a relative TSR. Because ultimately, that's one of the ultimate measures. So it's a pretty significant shift. Our team is sleeves rolled up, fully supportive of where we have this incredible opportunity that's true so we have to actualize it, and that should be reflected in how we're compensated.

We've got a couple of minutes. Just a couple of quick lightning around audience questions. In terms of growing capital, are there things that you could do to further optimize RWA? We've heard banks talk about securitization, selling MSRs or other things, are those in your mindset that you're thinking about now as well?

Yes. They would all be, John, in the optimized. We don't have to do because of this organic -- we don't have to just like get the RWA down and do things that would be dramatic and that would be a significant shift in our strategy and in our business. That being said, I'm a fundamental believer that the increase in the velocity of the balance sheet is really important. So things like -- I mean, if I would use an example, things like Service Finance, which had an originate-to-sell model, we purchased the company. We're really excited about it. And we did it as originate the whole. Okay. It's a new day. It's a new environment. So all the things that we're doing and creating great client experience and creating great relationships with our corporate clients using Service Finance really incredible what we're doing there. But we'll probably increase the velocity of the cell component of that. So that would be an example where we securitization...

You were going to hold on a bunch...

We're going to hold a bunch, and we'll probably hold less, but we still like the business. So strategically, we don't have to change the front end of what we're doing, but just create a little more velocity around the assets that are generated from there. And we have other examples like that, but they're all around the edges, optimizing increasing velocity versus we don't have a -- we have to get RWA down by X percent because we've got to build capital. We're building capital on a more normalized kind of basis.

Sure. And then last question, just a comment on what you're seeing in auto in terms of demand, pricing and you've got some subprime auto exposure and how you feel about that?

Yes. And it's interesting. The Regional Acceptance Corp, which is a subprime business, but actually what's happened over the over the last several years, one it hasn't grown, but secondly, it's become more of a near-prime business. And maybe because subprime sort of got squeezed out of the market. I mean strategically, that sort of happened. That business is -- it typically has 6% kind of loss rate, but it is way below that right now. The Manheim used car index has had a little more volatility, but it's still held up pretty high. So the need to still have a car -- and the alternative is not there to have another -- have a used car. So people are keeping the car and continue to make that payment. So I expect that will normalize over time, but we're just not seeing it quite yet. And again, that business has translated to more of a near prime. So it's hard for me to make a really strong sort of what's happening in the subprime market.

Sure. We feel good about your business.

We feel good about our business. And the overall auto portfolio is strong. I mean it's starting to -- that's starting to normalize. But that is a really slow migration.

Got it. Well, Bill, we've covered a lot of ground. Really appreciate it. Thanks for coming, and hope to have you back next year.

Thanks, John. Good to be here.