Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

All right. Up next, we are excited to have Truist joining us once again. Truist has been proactive in managing this challenging environment, including rationalizing costs, exiting lower-return businesses and taking steps to shore up its capital base, which we look forward to hearing more about during the discussion. Here to tell us more about the strategy ahead is Chairman and CEO, Bill Rogers. Today's presentation is going to be a fireside chat. Bill, welcome back, and it's great to see you.

Great.

I think it's the first fireside chat we've done it a long while.

It is. So be careful.

I'll try my best.

So maybe to just start off, you're out in the market talking to clients a lot. Maybe just talk about what you're hearing, what is the overall sentiment in terms of the economy? And what are they most focused on?

I think as for clients, and I think obviously what the Fed's struggling with is the data are confusing and clients are generally -- and maybe I'll split into a couple of categories, but on the commercial side, generally more cautious. So no doubt about that. You can see some of that cautious reflecting in loan demand. So a little more careful about the next addition to the truck fleet or the next warehouse or data center or whatever it may be in terms of those decisions. And I am not so sure it's as much financing-driven as it's just cautionary note about where the economy is. That being said, we'll go to certain markets, and it's all gangbusters and things are going great and people are investing and we have a lot of markets that are net growers, net in migration, so different kinds of opportunities. I would say supply chain issues don't seem to be on the table now. Most companies have sort of reconciled that. There may be the one part from the one place that is challenging, but supply chain is sort of neutralized. And labor demand is, in some companies, neutralized. Probably the retail side's still a little challenging. Companies seem to be holding on probably to a little bit longer, just sort of in the fear factor of what they've experienced before. And then on the consumer side, that -- it's also bifurcated. And the higher-end consumer is still spending and still lots of discretionary activity, and you see that in hotel and air traffic and destination experiences, all those type things. But the lower-end consumer, however, we might find that, let's call it, $100,000 income and below, you're starting to see some strength. You're starting to see some of the deposit balances or the savings rates sort of pre-COVID are now sort of normalizing where they were pre-COVID, but the rate of decline is more significant. So I think that consumer is going to start feeling a little more stress. You're seeing a little more credit card utilization, a little more delinquency. We saw some of the Buy Now, Pay Later come into some of the holiday sale. So that consumer is starting to feel that stress, and I think that's going to manifest itself in some way to what degree all -- we can all speculate, but into next year.

So given that as a backdrop, I think you gave guidance for loans to decline in 4Q. As you know you have a targeted strategy to focus on deeper relationships, higher focus on returns. Given that as well as lower demand, how are you thinking about loan growth? Are you being more defensive given capital, potential regulatory changes, which we'll talk about? And where are you looking to be more aggressive?

Yes. I would say, rather than defensive, I would say, selective. So we made a couple of important decisions right out of the chute as to like sell our student loan portfolio. So we said, let's actually just reduce the areas of RWA that don't have the return characteristics that we need. Other examples would be in the correspondent side, auto side, correspondent mortgage side, indirect auto side. So we've been pretty conscious about reducing those portfolios, so think about sort of single service type clients, lower return, to ensure that we've got the capacity because we're still -- to my earlier comment, we're still in great markets, and there still are opportunities. And we want to make sure that for those that were on the offensive position. So there are opportunities to become less lead. There are opportunities to move into credit, where the opportunities for Truist now is more relevant to those clients in terms of maybe product, maybe size, maybe specialty, whatever it may be. So it's a little bit of an optimization versus defensive as sort of lower the places where we don't have as much desire to create the capacity. But even overall, because of the overall demand, it's not like loans will be -- that will trend down. But that's not to say we're not being opportunistic about certain opportunities.

So one of the big things that emerged over the course of '23 was a heavy amount of new regulations, at least that have been proposed since the banking crisis in March. Maybe just talk about how the bank is positioned for this new environment. Do these change the way you operate the bank at all over the longer term?

Yes. Remember, because we were merging, so we were doubling the size of our respective company, we were sort of already on the increased regulation track. I mean that didn't feel like an abrupt shift to us. Now the acceleration, no doubt, sort of post March sort of accelerated in terms of that capacity. But we were already creating that infrastructure and that investment to react to a different regulatory environment and to make sure that we have the systems, infrastructure, people, investment capacity to make sure that we're responding. I mean at the end of the day, there'll be more capital in the system. I mean sort of however you might want to think about how that's going to happen, but there'll be more capital in the system. And then that goes to everything we just talked about in terms of RWA. So we've got to maximize and optimize against an environment where we'll be asked to carry more capital.

So maybe let's talk a little bit about deposits. What trends are you expecting to see from deposit balances in '24? How are you positioning your offering to meet your clients' needs? And then just thinking about the movements that you've seen, do you expect to see more shift out of noninterest-bearing as we've seen over the past few quarters?

Yes. Maybe let me just -- instead of deposits, let me start with our relevance to clients. So the things that we've done with product capability, particularly with our rollout of Truist One, things we've done with our digital investments, the things we've done with our onboarding improvements. So we're net growing. So our client acquisition vehicles in the last year have been really, really strong. So when we think about deposits, we also think about net clients. So we're growing net clients and have been over the last 3 quarters. What we're seeing on the deposit side is deposit betas are, I would say, abating, maybe not abated. But we're in the high 40s. I think we'll sort of hit 50 somewhere along the way, although that rate of ascension has slowed pretty demonstrably. And then we're seeing repricing opportunities on the deposit side. So as those repricing opportunities are coming up, we're finding that we're not having to be at the same levels. We're having great conversations with our clients, new product, new capabilities. So the value that we're bringing beyond rate paid is starting to materialize. And then on the mix, we've been sort of around 30% sort of DDA. I think that'll trend down a little bit lower, somewhere in the 20s, but that's normalizing sort of where banks were and where we were in the past. So the portfolio of what the deposit mix looks like, I think it's starting to trend a more traditional combination of DDA, MMA and CDs as part of a balanced portfolio.

So if you think about that outlook for deposits and deposit beta, the outlook for rates has been -- we were talking about it last night at dinner has been widely debated given the implications for NII and capital. Given all the uncertainty out there, maybe just talk about how is Truist's balance sheet positioned for different interest rate scenarios, whether it's higher for longer or the forward curve coming to fruition? And what is your latest view on your expectations?

Yes. I mean we're slightly liability-sensitive, but our goal is to try to stay in sort of the middle of the fairway, middle of the road. We don't want to sort of position the balance sheet as being particularly leaning strongly one way or the other. Our own modeling and the work that we're doing has 2 rate cuts at the end of next year. I think the forward curve is probably 3 to 3.5. So we're probably being maybe a little conservative on that front, but I think that's appropriate. And I think that helps us in our planning effort in terms of how we're thinking about that. And for us, it's all related to sort of how we started the conversation. I think the economy is going to slow down in the first part of the year. I think we're probably a little jaded by the fact that we're in really good markets. And so we tend to think probably not as much as maybe the rest of the country. But I think we'll see some slowdown, and I think there'll be some rate response to that over time.

And then maybe just thinking about it a little bit more near term. So NII is expected to decline in the fourth quarter as the margin comes down and loans and securities come down. And I think you said at earnings, you do expect some decline in the first half. Maybe just talk about some of the drivers of NII bottoming. Are they shifting at all? And how do we just -- how do we think about growth under those scenarios?

Yes. I think NII -- based on those forecasts, I think NII starts to bottom somewhere in the first half of next year. I think it's -- we're not predictors of -- it's March 17 or June 14 at 4:00 or whatever those times. But I think you'll start seeing that at the latter part of the year. And I think also, we see the opportunity for growth in terms of that component. So some combination of sort of NIM and NII bottoming out, but then some growth in NII as you start seeing the economy recover, you start seeing a little more stimulus or rates coming in. Again, probably a little clouded by our markets, a little clouded by our opportunity to lean in, put our shoulder against the wheel against opportunities when they materialize. And we've got our sale pretty taut. And so I think when we get a little bit of tailwind, we've got the opportunity to really take advantage of that.

And just sticking with the revenue side of the equation. So obviously, the 2 big fee drivers for Truist are insurance and investment banking. Maybe just talk broadly about your expectations for fee income growth. Any other areas I think we could see an inflection? Obviously, '23 has been a slow year for the industry.

Yes. I mean for us, the -- as you said, the 2 bigger swing drivers are insurance and investment banking, but also wealth and we'll talk a little bit about that. Some are market-dependent, but we'll talk about the net-net growth. Starting with the insurance side. I mean this has been favorable insurance environments, inflation, just lots of advice, think about cyber. I mean create any categories of really desire for increased insurance, increased skill in terms of insurance side. The headwinds part of that is just capacity. So if you think about what catastrophes do with related to capacity. So those are the tailwinds and headwinds, but probably a little more tailwinds in that we've had good single-digit sort of organic growth and could expect that to continue. On the investment banking side, I don't know when the inflection point comes. I mean I clearly think next year would be, let's call it, significantly, with a small S, bigger -- better than this year. And what I see from our dialogues with our clients is our -- probably not translated into pipelines yet, but our dialogue has never been stronger. I mean the conversations we're having, the pitches we're having, the conversations we're having with our commercial clients on sort of the business life cycle advisory, the number of interactions, sort of "the at-bats" we're having are really, really significantly higher. So again, to that sale taut with a little bit of market tailwind, I don't think we've actually been better positioned ever as a company. We've been able to acquire a lot of really good talent. Our teams have been through a lot of training. So they've got a really good knowledge. We've got a lot of really good technology, a lot of really good AI, a lot of really good focus on creating opportunities for those conversations and dialogues. Our M&A business has sort of been strong throughout and the ability to scale up. So the size and relevance of Truist, our -- not only our number of fees, but our average size fee is going up substantially, both on the M&A side and the debt side just because we're more relevant. I mean we're more important. We brought the adviser. We're on the left side or all those components that help that.

May I have a follow-up on insurance in a bit?

Okay. I suspected you might.

So we spent a long time talking about the recently announced organizational realignment and simplification plan. Maybe just walk us through the strategic process behind it, specific examples of the changes you made and why you're making them now? And what you think this will do for the franchise over an intermediate time frame?

Yes. And maybe -- and Ryan, I'll talk about this. This isn't a pivot. This is an evolution of sort of where you go. I mean our merger was driven by, let's merge and do no harm. And I think that was really the right call. Let's -- because almost by definition, 50% of us didn't understand as well 50% of the businesses. So let's bring them all together, let's make sure we merge them well. Let's make sure we go through all the client J curves that we need to go through, the teammate training that we need to go through. And we're at a really good place. So we're at a really good place with our client experience, our OSAT, Net Promoter Scores. We're in a really good place with our teammate engagement, training, all the things we need to do. So now the evolution in that, again, versus a pivot is now defining what the new Truist should look like. So we brought all these things over the trends, so now what does the new Truist look like? And the new Truist is more streamlined. So rather than having a lot of different businesses, we want to orient one around the client. We want to orient backwards from the clients. So think about our consumer business rather than thinking about a mortgage business and a LightStream business and an indirect auto business. We want to think about, okay, what does the consumer want? What does the client want and work backwards from that and organize around that. And that really allows us to allocate capital in the right way. It allows our leaders to make decisions that are driven from a client-backwards basis. It allows them to make a more comprehensive decision and allows them to achieve a lot of efficiency. And we see it in the [ kid like ] let's take dozens of examples. LightStream is a good example, where LightStream is sort of a separate business, really good client experience, but a more outside-in. Now we want to take the technology and the capability of LightStream, bring it in-house, make it rebranded, doesn't need to have a separate brand. We have a great brand called Truist and have it focus on our existing client base. Our goal is to win the home game. I think if you look at our franchise and you look at our markets, you just have to conclude, we have a home court advantage, and we want to win the home game. So we want to reorient our products and capabilities. LightStream in that example, probably 80% of its business was outside, 20% was inside. If we fast forward 2 years from now, it will be 80% inside, expanding relationships, increasing our relevance to clients, improving our market penetration, improving our stickiness, helping create deposit relationships. So it will be 80% inside and 20% outside. That would just be one example. And the same thing is on wholesale is bring our investment banking business and our commercial business and our wealth business, all under one umbrella. The bulk of our wealth business growth and new acquisition comes from our commercial franchise, and that's our home court advantage. So we don't -- if we're thinking about where we want to compete, we don't want to compete sort of independently. We'll win those. We'll have products and capabilities, but home court advantage, we want to win with our clients and their assets and their turnover. And while we're helping them create wealth is actually maintain and manage that wealth. And so that's that sort of singular focus on our franchises.

So when you kind of package that together with the cost-save program, are you able to achieve these expense reductions while investing where you need? And you talk about the home court advantage and we spent a lot of last night talking about going on in the offensive, how do all these things impact the long-term growth? And do you feel that you've invested enough that you could actually go out and deliver on these things?

Yes. Remember, I mean, for the merger, we invested a lot sort of going into this. So it's not like we started with it from a place of deficiency and so in terms of product development, digital capabilities, the things that we're missing. But yes, so -- and the cost-save initiative is a net initiative. So it's really when we talk about the cost side, we talk about our expense growth for next year sort of the being the 01 more, that's a net number. So that allows us both to invest, sort of how we started our earlier question, regulatory environment. We've got to make sure we've got really good systems capability and operational foundation, risk foundation that's really strong. And then similarly, in the places that are important to us, payments might be a really good example, we need to continue to invest, increase our penetration, increase our relevance. So the answer is yes. And at the end of the day, it's a net number, which is why we try to make sure that we combined, when we talk about this, the simplification because that's the foundation, that's what drives all this, then the cost saves that sit on top of that and then the guidance on total expense side because that's the foundation of the netting of all of those 3 things.

So when you put together a lot of the things that we've talked about, obviously, there's still headwinds in the beginning of the year. How important is positive operating leverage to Truist? When do you think the company can begin to see it? And can you deliver better results than the overall peer group?

Yes. I mean long term, positive operating leverage is critical. And the expectation for us should be, again, back to this home court advantages, where we have the best home court, we ought to represent it. So our growth ought to represent that. And we ought to do it against a really, really efficient and strong, stable expense base. So operating leverage in the first half of the year will be hard. I mean those are tough comparables. But I think we come out of next year with a lot of really good momentum. If we come out of the year with, again, a little bit of revenue momentum, a little bit of economic momentum, I think we just start building that capacity and growing that significantly over the course of the next several years. And everybody has that. And that's also the real benefit of the simplification effort also as well because today, what we're trying to do is a lot. We're adding a lot of positive operating leverage as components, and some people have a different definition of that. Now we're able to sort of do that in 2 really strong towers. And so those leaders can pull the levers in order to achieve those. And they know that if I save on this side of the efficiency side, I can overcome this with this level on the revenue side and create that not only positive operating leverage, but more importantly, momentum to continue positive operating leverage.

You talked a little bit earlier about what you were seeing in deposit betas. I think at earnings, you gave a 4Q guide, revenues flat to down a little, expenses to fall 3.5 and credit losses to be in the mid- to high 50s. Any updates on how the quarter is progressing? And any observations that you've seen that you want to share with us over the last 2 months?

Yes. I think we're on track to those. I mean we've got a few weeks left, and there's always little puts and takes to all those things. But certainly, philosophically, we're on track to both of those. And that's good momentum, particularly on the expense side. I mean we had said very specifically, we needed to not only change the curve but bend the curve significantly, and that needed to start demonstrably in the fourth quarter. So not only I think we're on good track for that guidance, I think we're building the right momentum headed into next year on both those sides.

And just coming back to something that you said, we're going to have relatively stable costs next year. Given the cost -- the timing of the cost-saving program, does that momentum continue into 2025? I don't want to get too far ahead of ourselves, but do you have continued momentum on the expense side from this program and the way you're going to be running the company?

Yes, I do. And again, I don't want to give '25 expense guidance on where we are. But yes, I mean, the cost saves that we put in place are tangible, achievable and time-bound. The investments that we're making in the areas of AI, machine learning, robotics, efficiency, all those are things that will be on this defined platform. So there'll all be things that continue to improve and continue to create efficiency opportunities on an ongoing basis. But we're also going to invest. So I want to be careful by giving that guidance because we might -- we'll see opportunities. And as I said before, we're in great markets. We want to make sure that we not only protect those markets but that we dominate in those markets. And so we're going to be -- we're going to make sure we've got the right opportunities to do that as well.

Maybe let's spend a couple of minutes just talking about credit. We've obviously seen normalization happening across the industry. I think you're looking at around 50 bps of losses for the year. Talk about what's been driving it? And how are you thinking about credit performance provisions, charge-offs and criticized assets over the next few quarters?

Yes. I think if you get on the spectrum of normalizing to normalized, there are certain things that have normalized. I mean if we look at sort of near-prime and subprime auto side, I think that's normalized. I mean we're sort of where we were and we're there. We talked a little bit about the challenges that sort of the lower-income consumers starting to feel. And then if you go back to the CRE side, I mean, we -- in the last couple of quarters, I mean, we took some pretty big moves on the CRE side. We wanted to really get in front of that. Not only did we take some charge-offs, we sold some assets and looked at some of our larger exposures and said, let's try to get some of that behind us, and that's reflected in some of our numbers. So I think you'll see then on balance things start to normalize. So I don't think charge-offs go down from here necessarily over the next couple of quarters. But I don't think that sort of shoot up dramatically. I think we sort of see a continuation of that incremental normalization.

And then you talked about low-end consumers, CRE. Any other areas of the portfolio you're watching closely from a credit perspective? And where do you see the -- after the actions you've taken in CRE, where do you see the remaining big risks for the company?

Yes. I mean we're stressing everything in our portfolio. So we want to make sure -- the strength of our balance sheet is our diversity. But we want to make sure that we're stressing everything. So let's just take an example. Our leverage lending portfolio, similarly smaller portfolio, $5 billion, generally underwritten to sort of higher rates. A lot of those are fixed, a lot of that portfolio is over the next 5% to 7%. We want to continue to stress that. We're stressing multifamily. We want to look at sort of individual markets. While as a whole, that portfolio probably looks pretty strong for us, there are markets that even in our strong markets that have a lot of in-migration, I've got some areas that are overbuilt. So I want to make sure we look at that and where are we positioned and are we at the right place? And are we with the right long-term, strong, stable capital providers? We stress the subprime part of the portfolio. We'll look at Service Finance. We'll look at Sheffield. We'll look at all the places that we do a lot of the consumer and some of the unsecured businesses and make sure that we've got the right profiles, look at all the vintages that come through there. So it's hard to pick one thing that you sort of say, I mean, we've all got CRE and office in our sights, I mean I think we've done a good job of -- for us, that's well under 2% of our portfolio. As I said, we've taken a lot of early actions on that front. But it has potential contagion impacts for municipalities, markets, knock-on effects that we want to make sure we're paying attention to and looking at it. I think that's the part of credit cycles that you want to -- that we -- you learn through a variety of experiences is look at the secondary and tertiary not just -- even if you have a low concentration of the primary, what are the impacts on general markets from some of these.

Maybe switching gears to capital. So your capital is approaching 10%. You talked about targeting 10% at year-end. Obviously, the adjusted capital ratios, given the regulatory changes, are lower. Maybe just talk broadly how you're thinking about managing capital levels through this phase-in period that we're going to have here?

Yes. We'll -- as you noted, we'll get to a 10% CET1 and we'll -- and we're going to operate above 10%. So we can generate 100 basis points or so organically of CET1. I think we have a really good flight path on the phase-in period that we can, through our organic generation, the phase-in, the roll off of our securities portfolio, that we've got a strong and defensible landing spot as we get through that. But we're going to be sensitive to that and any changes that happen from that. So we want to make sure that we don't sort of rest on our laurels and just be really confident and conscious of the changes that can happen because that's a long time. That's several years for that phase-in period.

Given to your comments that you are in capital-building mode, maybe just expand on what your top capital priorities are? I'm assuming the appetite today to buy -- to do acquisitions, whether in bank or nonbank such as insurance would be pretty low right now. But maybe just talk about the capital priorities and how you're thinking about using the capital?

Yes. I mean given our current capital profile, our capital priorities are investing in our business, protecting our dividend in terms of our capital profile. So having the earnings profile that will ensure that we're able to do that. And then M&A is sort of that third in that category. If you sit here today, you'd say large-scale M&A for us is not a priority at this particular juncture. But all that factors into the capital decisions we make and what changes over the next few years, and does that become a bigger priority in the future? Or is that something that we want to make sure we create capacity for?

I know that you're excited to talk about TIH. I think I've saved some time for us to dig into that. Obviously, this is a topic that is getting a lot of attention. The sale would clearly help your adjusted capital in a meaningful way. You've highlighted in the slides. Can you maybe just go over your current thoughts and plans for the business? And then what scenarios would you consider a majority sale of the insurance business?

Yes. So I don't want to sort of venture too much into the hypothetical, but the reason we sold 20% of the business was to do a couple of things. One is just to create this strategic and financial flexibility. So we wanted to not be constrained. We wanted to have an ability to bob and weave and react to different situations. We want to be able to fund the growth in the insurance business. So that's a business that has been consolidating. We have been a consolidator, and we want to make sure that we had capacity to do that. We want to create currency for our insurance teammates. So -- and that's been -- that's really had the positive impact. So they're investors in their business, and we've been able to acquire and retain really, really good talent. That reflects in the productivity and the growth that we've had in the insurance side. But you fast forward and there are lots of other variables now. So our cost of funds went up by 500%. Regulatory capital constraints or demands or opportunities went up significantly. So we have to put all that back into the mix now and say, okay, how do we ensure that we can continue to support the insurance business? It would be hard, as you mentioned, to do a large-scale insurance deal right now. How do we make sure that we've got the capital flexibility and support that we need for Truist long term? If we were to raise capital, how would we use it? Would we -- what would be the offensive opportunities? What would be the growth opportunities in our business? So we've got all that in the mix, and there is no one variable. The 10-year hits x, and we do y. This is not how we plan. So this is ensuring that we continue to maintain the strategic and financial flexibility and how and when we use that will be determined by changes in market conditions and our opportunities to maximize shareholder value for the Truist overall shareholder.

Because I know how much you enjoyed talking about speculation on these things. And you referenced using capital in an offensive manner. One thing that has been debated in the investor community has been whether a large or small sale securities portfolio restructuring would make sense. Maybe just talk about where that fits on -- you talked about investing in the franchise, maintaining the dividend. Where would this fit in terms of offensive uses of capital?

Yes. I think that's in the mix. I mean some could argue in fairness that's defensive. Some could argue it's offensive. So you could sort of pick your poison in terms of where you come out on that. But that would be one of the other variables that we would have to consider, and it would be a separate variable by the way. I think those are distinctive. I think those are 2 separate things, and we want to make sure that we're thinking about them. But they are 2 separate things on a parallel path that we have to factor in and consider. And all of them would again be in the category of not wanting to do something that would be viewed as sort of a short-term reaction or a short-term fix, but other things that we could or should do to position Truist even better, I mean well positioned today, but even better to take advantage of a market and an opportunity that we would see long term.

And my last hypothetical on hypothetical. You talked about positioning the company even better. I know over the years we've talked about areas where you guys have invested a lot and others where you're continuing to invest such as payments. If we were to see some sort of sale to generate significant amounts of capital, how do you think about the need or desire to accelerate investments to help drive that long-term performance, that home court advantage even further that you talked about?

Yes, I think we're on a good path. So again, it's not -- I don't think we're in a deficiency category. I think we've got capacity to invest. We're creating more capacity to invest. We have invested and we got good momentum, and we actually need to materialize the return on some of the investments that we've already made. So I think we are -- not to get hypothetical again, but I think it'd just be another factor that you throw in of how do we maximize the home court advantage, the opportunity that's Truist. I mean I think inarguably, we've got the best franchise in banking, and we want to make sure that we do everything we can to optimize that franchise for the benefit of our shareholders.

And maybe just to wrap it up, when do we start to see the idiosyncratic growth or performance elements that you laid out as part of the Truist merger?

Today, we do see them. They're masked by a lot of the other things that we talked about. The securities portfolio or pick your category, interest rate environment where we are. But the things that we look for, the net new account growth [ as an app ], as so client acquisition. So we're acquiring clients in our franchise. It's an in-migration market. So we're reflecting that. The growth in our wealth business, net asset growth, not on the 10 quarters. The investment banking, we've increased our share in the last couple of quarters. So you sort of see it in the parts, but it's all against a backdrop of a tougher economy. That's sort of my comment of the -- we're getting the sail in pretty tight and a little bit of tailwind. I think you'll really start to see the impact of those investments and they materialize over a larger scale and more of a larger denominator in which our numerator increases faster.

Great. Well, unfortunately, we went over time. So with that, please join me in thanking Truist.