Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Okay. Thanks, everybody, for joining us this afternoon. I do have a disclosure to read so we'll get into it. For important disclosures, please see Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is also not allowed. If you have any questions, please feel free to reach out to your Morgan Stanley representative. So with that, thank you so much for joining us today, Mike Maguire, CFO of Truist Financial Corporation.

Yes, my pleasure. Thank you so much for having me.

I appreciate everything to get here. We've had the smoke. We've had so many things going on. So I know it's been not the easiest thing to get up to New York. I appreciate your time.

So you've been in the CFO role now for about, I think it's 9 months. Is that right?

Feels like longer, but I think that's right. Yes.

I mean it's been an interesting couple of months for any bank CFO, but you've had an even bigger plate of activity given the MOE has been shifting from integration to execution, you had the minority stake sale of Truist Insurance Holdings. Maybe you could give us a sense as to how you're thinking about, look, here's some top wins you've had in the early days. And give us a sense as to how you're thinking about the levers that drive the businesses and the EPS over the next couple of years.

Yes. I know. Well, thanks. And glad to be here, and thanks again for having us. Look, I mean, as I think about the first 9 months, and you hit a couple of the highlights, the Insurance Holdings transaction, obviously, was a labor of love, but I think a really strategic opportunity for our company to realize, and that's been so far so good. So really pleased by the outcome there. The insurance company really well positioned to continue to grow, to continue to acquire businesses. It has its own currency now, with which it can continue to recruit and retain our top producers, so thrilled by that work. You'll -- at a conference just before sort of the March madness all began, I actually spent a little bit of time talking about some work that we've been working on throughout the first several months of my CFO-ship, which included just doing an analysis of the KPIs that we think are most important and that were most highly correlated with TSR. And so we revealed those KPIs, and you should expect to see more of that in our reporting. And we're making sure that we're, again, focusing on the right metrics and then making sure that we're connecting that to things like executive compensation and the like. So that's another body of work that I've been pleased with. Obviously, just managing through the month of March and April was a feat. It was really great to see our team in action, working really well together, the speed, the readiness. I was impressed by that and very pleased by how the team came together. In terms of the drivers of the business and kind of where I'm focused, I think there's a couple of things. I mean I think one thing that Bill has been talking about recently, and I've been doing the same, is just this concept of really focusing on our core and simplifying our focus, and we believe Truist has just an outsized opportunity given the markets that we serve, the market structure, our share in those markets, the capabilities that we can deliver to clients. And so our sort of deposit gathering fortress as we think about it, coupled with a really nice, diverse and locally delivered but really kind of universally served wholesale client base. So think about the retail banking business' ability to create a really -- and the commercial banking's business ability to create a really nice, diverse funding profile and then to be able to put those -- put that liquidity back to work in small businesses, in middle market businesses, in corporate and investment banking clients to deliver those advisory services, whether it be wealth or banking or insurance, and we're really focused on that core portfolio within our business. And of course, we have a number of, what I'll think of as more complementary businesses. You've heard us talk about our indirect auto business, our correspondent mortgage business, some of our other, I'll call them, off-the-edge businesses, which, again, are still important to us, but probably a little less core in our focus in how we prioritize our investment and focus in terms of driving earnings.

And just going forward, top 3 things on your to-do list from here.

Where I'm spending my time right now is focusing on funding. We'll probably talk more about that today, making sure that we're making smart decisions around the trade-offs, around retaining client relationships, very focused on RWA optimization. You've probably heard a little bit about that today, certainly over the last several months as the capital spectrum is evolving with policy guidelines changing and the likes. And then I'd say probably the last would be more fully serving our existing clients, making sure -- you've heard us talk about Integrated Relationship Management, our IRM, which is just doing a better job of more fully covering our existing clients. We think we've got more opportunity in our existing markets with our existing clients, more fully serving them than just about anything else out there. So I spend quite a bit of time talking to our business leaders to make sure that we're very focused on execution there.

Okay. Great. So now we'll just move from high-level strategy to the near-term second quarter. Give us, if you could, an update on what you're seeing now that we're about, what, 2/3 of the way through, maybe a little bit more.

Yes. Yes, and I'm happy to. And at another industry conference in the last week or so, our CEO, Bill Rogers, made a reference to some revenue pressure in the second quarter. Just to maybe put a finer point on that, as we sit here today, our expectation is that the top line revenue is likely to decline sort of in the 3% area during the quarter, and that's largely driven by a lot of the factors you've heard us talk about so far this year. The remixing based on disintermediation of the DDA balances into higher-yielding products, betas continue to perform a little worse than our expectations. Bill mentioned a week or so ago that on a sort of spot basis, so currently, we're at around a 43% cumulative beta. Our expectation is sort of a mid- to high 40-betas in the cards. And so that's taking a toll as well in the second quarter. And as we think about that and just as we're giving guidance around Q2, I thought we'd also just check in and give you a sense for sort of the full year outlook on revenue as well. For a lot of the same factors, be it mix, be it pricing, and also, I think as we think about building a little bit of capital, being more disciplined around RWA focus and pricing, and we'll talk about some of the puts and takes there, but a little bit more pressure on the top line for the full year as well. And so we had previously discussed sort of a 5% to 7% top line guide for the year. We're probably looking around the 3% area for the full year as well, up.

Up. Okay. Meaning 8 to 10, no? You're saying you're going to -- you have 3% revenue growth.

Yes, 3% revenue growth year-over-year versus 5% to 7%.

Okay. And your 3% for the quarter is Q-on-Q, that's what you're referring to?

3% down is Q-on-Q.

Right. Full year is 3% up year-on-year.

Year-on-year.

Okay. I just want to make sure we know our 3s.

Thank you for clarifying. Yes.

Okay. Anything on the expense side to talk about at all?

Just our focus on bending that curve, right? I mean you've heard us talk quite a bit about expenses and we did some reorganizing of various businesses in the first quarter and talked about, for example, at LightStream, and we talked about discontinuing middle market sales and trading business we had in the investment bank. Good examples, I think, of us just sort of reevaluating what's truly important and part of where we're going as Truist and what's not and what's maybe marginally profitable. We're focused on the things you would expect us to be focused on, things like FTE trend, things like travel expense, just everything that we're doing, spending calories thoughtfully. And as well, just data as we think about the businesses that we're investing in. It's not just about where we're growing, it's also about where we're saying no more often. And I mean that's another thing if I was going to add a fourth item to my agenda, is just making sure that we're assessing the trade-offs in a very practical way. And we need to be able to say yes for the things that matter. And for us, that's investing in our wholesale payments capabilities, our client experiences with our core clients. And that might mean that we aren't in a position to invest in some of these businesses that perhaps have nice-to-haves but not need-to-haves to improve the business. But as it relates to expenses, very focused on bending that curve in '23 and as important as anything also, preparing ourselves for 2024.

And the integration is behind you now, right?

It is. I mean we completed our -- I'd say, the bulk of our technical and branding conversion Memorial Day weekend last year. So we celebrated our first anniversary of the technical conversion. There are still a few little nits and gnats out there. The team probably wouldn't want me describing it that way. But we still have our credit card issuer -- issuing platform conversion to do, so -- which is happening in various phases and going quite well. But we're one brand out in the market. All of our core applications and processing systems have been converted and that's been great. That's why Bill has talked a lot about that pivot and really focusing on the windshield versus the rearview mirror or being distracted. And just the amount of time the teammates were spending training or learning new systems or operating 2 systems, all that's behind us now. And so I think that was probably -- a lot of it was fueling our optimism as we exited '22 and came into '23 and obviously, like a lot of others in the industry, the funding dynamics have created some more headwinds than we would have expected when we came into the year. But we think we're managing those well, too. And to my earlier point, really being thoughtful about how we're managing pricing and margin and balances and the like, it's just -- it just requires more intensity right now.

And on that topic, on net interest margin, I mean, you've got today's environment with -- which sounds like a little more intensity on the deposit pricing side. Maybe you could just give us a little bit of color on how you're seeing that noninterest-bearing deposit shift, if at all. And then help us understand how you're thinking about protecting NIM in the event that the Fed starts to cut rates at some point.

Yes. On the DDA mix, it's interesting, and we've sort of been batting this one around now for a couple of quarters now, I feel like, as a group. We -- pre-COVID, we were in the, call it, high 20s area, again, albeit that's after a low no rate environment for quite some time. During the peak of stimulus, our DDAs represented about 35% and of our total deposits. And we started to see that remix happen in the second half of last year. I think we actually ended the year at closer to 34%, the first quarter at 32%. And at the time, we had an expectation, okay, maybe this sort of continues to remix at 1% or so a quarter. And as we were thinking about, is there a floor, maybe -- we said, hey, maybe it's sort of pre-COVID levels, high 20s. I think our thinking on that has evolved a bit. And so as we think about it now -- and if you go back to '04, '05 and you look at kind of a pro forma SunTrust, BB&T, you would have seen sort of high teens. So our latest thinking on this, and again, it's hard to be entirely precise here, but maybe it's a mid- to high 20s floor. We do a lot of work on this. We analyze the account balances and behaviors of the customers both on the retail and the wholesale side. We look at average payments per month, trended, adjusted for seasonality, and we try to get a sense for what the excess balances might be and whether or not there's a model that can be built to predict this type of composition over time. And it's not obvious because there's a pretty wide disparity in how people run their lives and run their businesses. The good news for us is the bulk of these accounts are truly operating accounts, right? These are how people are living their lives. They're using Zelle, they're on bill pay, it's their direct deposit. On the business side, more than 80% -- or you have a loan product as well or a payments product, and they just aren't seeking that efficient frontier of excess balance. So I think very, very difficult to know what that answer is. But as we sit here today, I think mid-20s to approaching high 20s is probably our best calculus.

Okay. And at this quarter, a little slightly faster speed to get there than prior quarter?

Yes. I think March and April presented a bit of a pulse out there around the betas and the remixing. I mean I think whether it was on Main Street or whether you were a CFO of a not-for-profit or a midsized company, there was just a lot more awareness around rates, what you're getting paid, where you're banking, the like, which we certainly believe would have driven a little bit of an acceleration in some of that behavior. Now whether that sort of slows down a bit throughout the second half of the year, we'll see. I mean I think we have an -- maybe we'll see a rate hike as early as this week or July. And I think there's increasing speculation that cuts are less likely this year. And so if we stay higher for longer, that mix is going to be -- continue to be a challenge and betas will continue, we think, to be higher and higher. But -- and I think you actually asked -- you asked a question I didn't answer, and so I'm writing these down. You mentioned rates, and if we do eventually get cuts, and we think we will, how we're positioned to manage that. We did really starting during the second -- I think maybe last summer, did start to prepare the company to be positioned for a lower rate environment. And so we started putting on forward-starting receivers and managed our interest rate liability position to be close to neutral, barely liability sensitive. So we do feel well prepared for those cuts when they come.

All right. Great. Maybe we could flip to growth outlook here and talk a little bit about balance sheet growth and where you're leaning in perhaps starting on the loan side. Especially C&I, it seems like that book has frankly not been growing as fast as I would have thought given how good the credit quality has been. So can you just give us a sense as to what you're thinking there?

Well, the credit quality in C&I continues to be excellent. We're not seeing softness there. We've been asked a lot of questions about that throughout the course of the day. Maybe seeing a little bit more conservatism, some less expansionary type of behavior, which is reducing demand in the C&I space. We're seeing that across the middle market businesses as well as even in some of the corporate space. But we're still very focused on our C&I customers. I will say one caveat to that, I think this is industry-wide, is we are applying much more discipline around returns, right? The cost of capital for the sector, for Truist, cost of funding is higher than it was 3 months ago, 6 months ago 12 months ago. And with the backdrop of the new capital policies and the likelihood that OCI will no longer be an opt out, I think there's just a renewed focus on making sure that we're, again, sort of investing in our calories in the right place. And so just looking at loan-only relationships a little bit differently, making sure that we've got a really good opportunity to -- on a loan-only basis, it needs to return. Otherwise, we're looking at relationship profitability. And look, that's our model, right? That's kind of where I started with, where we're focused is Truist. I mean in our -- a lot of our markets, which, again, are some of the fastest growing, most attractive demographics in the country, there's a ton of great opportunity. We've got leading market share in these markets. And so our ability to find 1,000 paths to yes in terms of extending capital and credit, that's on us, and we work very, very hard on that. And so what I mean by that is if we've got a middle market customer that's a loan-only relationship, if they renew next week, odds are that rate is going to be higher than maybe they expected or certainly higher than it's been over the last couple of years. But the good news is, is we have so many other ways that we can serve the client to make that relationship work for us and to make it work for the client. That's a real focus for us. And so look, C&I, I think all things equal, is a place where we are always leaning in. It's a big part of our franchise. But that's definitely a more balanced opportunity than it would have been, say, for example, in Q3 and Q4 last year where we saw really pretty significant growth.

Right. Okay. Part of the reason for asking is just you mentioned a little bit earlier about capital -- new capital rules coming in. And I noticed that last week, you issued some senior unsecured debt, right, that was in size around $3 billion, was that right?

$3.25 billion, yes.

$3.25 billion. So that -- just wondering what the rationale was for the debt issuance? And did it have anything to do with funding growth? Or was it more around some of the regulatory outlook that you might have.

It's probably more the latter and just managing the balance sheet. So as -- we're going to be a regular way issuer in the unsecured market. We've told our credit investors that were probably an $8 billion to $10 billion a year type of issuer. We did $3 billion in the first quarter and went out for benchmark size last week and had just a really great day in the market and ended up with many multiples oversubscribed deal. And so we're really pleased with that outcome. But that was not a signal of funding outsized loan growth, that was more liabilities management exercise. And as you know, the likelihood of an LTD requirement or TLAC, we think, is very, very likely. And so we issued that at the holdco. So that would be TLAC or LTD eligible. And again, we feel like we'll be very well positioned in short order to comply with whatever guidelines come out as it relates to that.

And then the other question I've been getting, I'm sure you've been getting as well, is what's the path for and the time frame for path to -- for Truist to get to that next level of bank category, that $700 billion. You're currently at $575 billion, right? So it seems like a ways but just wanted to get your sense as to how quickly you think you'd get there.

Yes. I mean I think hard to speculate on -- it's funny because this concept of cliffs and these different levels, that's all evolving right now because so many of the implications of even becoming, for example, a category 2 institution are being pulled forward and being pulled lower. So it certainly was on our radar, call it, pre-March. Having good readiness and thinking about how you approach that line and whether there's an efficient frontier, we are having all those conversations. And we -- as a category 3, we have a modified LCR. And again, we wouldn't have had OCI be deducted from CET1. But all that's changed. So we're probably spending less of our time now thinking about like that $700 billion line and more thinking about readiness for sort of this new regime of policy, Basel and all that comes with it, and do feel very well prepared for that.

So last question on capital that I have actually has to do with Truist Insurance Holdings because I've gotten this question around the press associated with Truist Insurance Holdings. And maybe you could give us a sense as to whether or not that's something that you would suggest to make sense or no.

Yes. Yes. No, thanks for asking. We've actually gotten a lot of questions about this privately. You'll recall that we did -- we created a preferred stock structure when we sold the minority stake, a 20% stake of the common stock to Stone Point. We actually sold roughly 13% of the basis. So we actually pushed the basis and the preferred into the common. So the short answer, without giving a long speech about taxes and accounting, is that we couldn't simply refinance or sell the preferred to create capital, right? We would -- the basis -- and the capital basis is in the common. If we were, for example, to do a transaction that resulted in us no longer owning the majority, there would be a significant acceleration of capital increase. And I'll point people -- with those of you who have more of an interest in that topic, we did provide some incremental disclosure. I think it got a little bit lost in the chaos, but at another industry conference, just before the events of the weekend of March, whatever it is, 8th, 9th, we provided some incremental disclosure around the technicals of that structure.

Okay. Great. Well, I do want to turn to fees. It's obviously an important line item for you. You've got many different businesses that are driving fee growth and composition. I think there was a recent comment that fee income remains below potential. So could you give us a sense as to what you're thinking about with regard to driving growth in the various fee lines? You've got 5, 6 really key lines there.

Yes. It is below potential. And that's a huge focus for us. That was my #3 on our list, right, IRM and sort of circling these core businesses with these advisory capabilities in many cases, whether it be wealth or insurance or banking and other. So maybe just to tick through them, and we talked a little bit about insurance already, obviously, that's a widely admired, very successful, well-run business, a global business in many respects. And John and the team are doing a great job. We had a little slower organic growth earlier this year, and some people asked us some questions about that. But we still believe that's a high single-digit organic growth business. We've got a diverse business there. We're both in the retail and the wholesale side of things. And as we think about sort of that first quarter performance and it being a little sluggish relative to sort of what I just described, some of that was related to our -- the P&C market, and we have a business called AmRisc that's in the casualty business. And so there have been some -- a little bit of noise in some of those markets. But the backdrop is actually still quite good for the insurance brokerage industry so long as we've got a hard pricing market and an increasingly complex environment where people need to manage risk. And so we feel really good about that business. And as well, by the way, I'll just note its ability to continue to grow inorganically. Now that it has an independent capital structure, the ability for the insurance company to either attract teams of producers or acquire businesses that are either entrepreneur, owned or private equity-backed companies are -- the degree of difficulty to do those deals is much lower now. So feeling good about that. Also, by the way, a big opportunity to continue to penetrate our wholesale client base with and retail client base. I mean everybody that we serve with a banking product needs insurance. And that's like what we talk about with John, and we're doing a great job and trying to do better. Investment banking has been a really important business for us. We've been a consistent investor. For us, that's a really nice mid-cap and increasingly larger mid-cap, even small, large cap advisory business. It's full service. We think we do a great job there. We've been really focused on talent. And so we acquired a ton of talent over the last couple of years. We actually -- a lot of the bones of this business were built during the great financial crisis, where we hired really much more of a focus on product and platform, debt capital markets, equity capital markets. And now we're really focused on industry captains and teams, in many cases, from other large cap or mid-cap full service platforms that want to come do it at Truist, that are a good cultural fit for us and really want to deliver the whole firm. And so we're seeing some of the benefit of that as well, feel really well positioned. We think we're taking share in that market. It's been a tough market the last several quarters. But we still have a good pipeline and feel good about the prospects for our investment banking business. Wealth has been a great business for us, too. Joe and his team are doing a great job. We did do a lot of acqui-hires last year in our wealth business. We've slowed that down a little bit this year, and we're allowing some of those teams to season and improve their productivity. And so we're seeing that. And so I feel good about that. It's a really stable business for us. And we're doing a really nice job integrating the coverage of our commercial banking, investment banking and wealth management teams. They're covering teams as packs, and we're getting great feedback from clients on that and getting great feedback as well from teammates about our ability to drive more business. So what am I leaving out? On the mortgage side, obviously, some industry dynamics have that business -- mortgage banking income is down, a bit cyclical, and we'll see where we go.

Right. Not as much refi as there used to be.

A little bit.

Okay. Just wanted to bring it full circle here with regard to operating leverage then because clearly, we've talked through drivers of top line, and we touched a little bit on expense efforts that you've got underway. But maybe you could help us understand how you're looking to deliver the positive operating leverage here over the medium term. And talk about the puts and takes on the pros there.

I think it's going to have -- I'll do it in order of importance, and they're actually -- it's 1 and 1a or however you want to think about it. But -- and we talked about it a little bit. On the revenue side, we absolutely have to deliver the full firm and do a better job more fully serving our clients in franchise. And so there's probably not a more important sort of theme, narrative push, focus by Bill, by all of our executive leaders to make sure that we harmonize and choreograph our coverage, again, whether it be on a -- from a more digital perspective on the retail side, delivering timely offers to clients that are good fits, making it easier to do business with us to moving over to commercial bank and making sure that we're delivering the full firm, being sort of timely with our advice, client-first, all those things. This seems like basic blocking and tackling, and that's the good news, right? Because we're committed to executing, and we're going to do a great job there. That's the big revenue opportunity for Truist, and that's going to be a significant component of our ability to drive positive operating leverage in the medium and long term, which by the way we're committed to doing. On the expense side, we've got to be piper vigilant. And if you remember back in, what was it, like, maybe it was in January when we were reporting fourth quarter earnings, we talked about 2023 and there were a lot of structural impediments to managing expense. Some of it was run rate acquisitions we have acquired, FDIC premium. We didn't increase our minimum wage and so on and so forth. And so we still face those same factors in '23, but we're taking action, making the tough choices, the trade-offs, focusing on FTE, focusing on the things we've talked about to bend that curve in '23 and not doing it in a way that's sort of short-term focus, making sure that we're doing that in a way that's ensuring that we're well prepared from a structural perspective in '24 and beyond. So very, very focused on it. I assure you, all of you that we are committed to delivering the positive operating leverage.

Yes. It's just it's harder, right, in this environment where the NII is not as helpful as it had been. And your fees are obviously doing great and you're investing more, but it's a little bit more of a comp-heavy line there to do that. I'll just pause and see if there's any questions in the room at all from anybody. Okay. We've had a somewhat shy audience. I think it's Monday. Yes. Maybe Tuesday, we'll have more questions coming through. One of the other things that we've been talking a bit about with everybody is the tech strategy. And in particular, is there something that AI can deliver to you for enhancing the operating leverage from here, not in a 1-year basis, but 3-, 5-year basis? Is that something that resonates with you? Or is that too science fiction?

No, I mean -- look, I mean, I think technology and automation, and I'll maybe incorporate AI into that to some extent, it's going to be an important part of our story going forward. I mean we have -- again, better onboarding is going to be done digitally, more self-service is going to be done digitally. AI can actually have a hand in self-service. Some of these beyond the chatbot type virtual assistance. Thinking about how we develop models and how we document models and back test models, AI has a hand in that. So I think AI is one of those enabling technologies like many others out there that are going to be ultimately in hindsight really, really important. I'm not sure I'm as caught up in the step functional, blow your mind science fiction contributions that AI is going to have in the short term, but it's absolutely going to be a part of our business. And we've got teams engaging against it sort of in our innovation center. And a lot of our vendors today and for years, frankly, have been leveraging AI to create efficiency. So I do think it's part of the story.

And as you think about tech and the tech budget, as a percentage of expenses, does that grow over time? Or are you at a point where you're saying, you know what, in our post MOE environment, we're able to bend the cost curve there as well.

Yes. We'll have to see. I mean the -- there are still some really big foundational initiatives that are happening in the banking industry that do consume a lot of investment, foundational and incremental data capabilities, cyber threat, I mean, you name it. There are some big projects that are out there. I would say this, as Truist. Our capacity, like the overall size of the investment pool that we have is bigger than it's ever been. And a higher proportion of it is focused on sort of innovation and growth in clients than it's ever been before. I think over time, it would be reasonable to expect that the -- its share of total expense should decline. I mean we have to get some of that efficiency. We're still working through -- I mean, again, we just did our conversion a year ago, it wasn't perfect, right? So there are still places where we're seeing manual processes or where we're seeing opportunities to improve. And so we're getting after that stuff. That's another part of the expense initiatives that we're focused on for the second half of this year and for next year is like really getting after some of the automation opportunities. And that sometimes takes a little more imagination and a little more courage, and so we're focused on facing that now.

Well, I did visit the innovation center down in Charlotte, was it in November and it's very impressive. Organization with the real-time activities that's happening and the teams that are delivering new products to your clients, really, it's impressive.

Yes. No, thank you. That was a fun visit, I remember.

All right. Great. Well, Mike, thanks so much for your time today.

Yes. My pleasure. Thank you.

Appreciate it.