Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation and Truist Insurance Holdings Strategic Update Call. [Operator Instructions] As a reminder, today's event is being recorded. It is now my pleasure to introduce your host, Mr. Brad Milsaps.

Thank you, Jamie, and good morning, everyone. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During today's call, they will discuss this morning's announced sale of our remaining stake in Truist Insurance Holdings. In addition, Chairman and CEO of Truist Insurance Holdings, John Howard will be available to answer questions during the Q&A portion of the call. The presentation that accompanies our call this morning is available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. We intend to limit the duration of today's call to 30 minutes. With that, I'll turn it over to Bill.

Good morning, everyone. Thanks for joining our call. Today, we are announcing an important step in the evolution of Truist that significantly strengthens our financial profile, enhances the competitiveness of our banking franchise and paves the way for future growth. We've entered into a definitive agreement to sell our remaining stake in Truist Insurance Holdings to Stone Point Capital, Clayton, Dubilier & Rice and other investors at an implied enterprise valuation of $15.5 billion. The transaction is all cash, and we expect the deal to close sometime in the second quarter of this year, subject to customary closing conditions and regulatory approvals. Mike is going to provide some more details on the terms of the agreement in a few moments. But I first want to spend a moment talking about our rationale for selling TIH. I am extremely proud of the insurance business that's been built at Truist under numerous leaders and teammates, including its CEO, John Howard, who continue to lead TIH going forward. John and the team have delivered a strong track record of growth and success, and I believe that this new partnership can enable that to continue. Stone Point and CD&R are seasoned investors with significant expertise in the insurance sector. I've got great confidence that their expertise and relationships will help TIH grow and realize its full potential. I'm excited to see where John and the nearly 10,000 Insurance teammates and their new partners can take the business. Truist intends to continue offering Insurance Services to our clients as a strong referral partner with TIH well into the future. From a Truist perspective, sale of TIH significantly improves our relative capital profile and creates substantial capacity for growth at a time when our industry is constraining growth due to future capital considerations. As shown on the right-hand side of the slide, the sale of TIH will generate 230 basis points of CET1 capital for Truist under current rules, 255 basis points under proposed fully phased-in Basel III endgame rules and a 33% increase in our tangible book value per share. Increased level of capital affords us the opportunity to evaluate various capital deployment options after the deal closes, including a potential repositioning of our balance sheet. These actions would be designed to replace TIH earnings and have substantial capital remaining to play offense in our core banking business. At this point, although we're better positioned, incremental M&A is not a high priority as we're focused on execution at Truist. Finally, the sale of TIH accelerates our ability to resume share repurchases. The timing and size of repurchase activity will depend on future capital planning, market conditions, clarity around final capital rules and other factors. While we recognize that there are trade-offs with any decision, we think it's timely to increase Truist's financial strength. Truist's stronger relative capital position creates capacity for growth, allows us to maintain our earnings, gives us an opportunity to also improve our interest rate risk profile by reducing the duration of our balance sheet and, of course, capitalizes on historically high insurance broker valuations. So with that as a quick introduction, let me turn it over to Mike to discuss the key terms and financial details.

Thanks, Bill. I'll begin with the key terms of the agreement on Slide 4. As Bill mentioned, we are announcing this morning that our evaluation of strategic alternatives for TIH, which included engaging with a range of both potential strategic and financial partners, has concluded with the decision to sell TIH to Stone Point, CD&R and other investors. The implied enterprise valuation of $15.5 billion represents approximately 18x TIH's 2023 core EBITDA of $854 million. The transaction is all cash, has no financing contingencies and is anticipated to close during the second quarter of this year, subject to customary closing conditions and regulatory approvals. We expect to receive after-tax proceeds of approximately $10.1 billion, which includes the $5 billion intercompany preferred that was issued as part of the initial minority stake sale that was completed with Stone Point in April 2023. As Bill noted, the sale will generate approximately 230 basis points of CET1 capital under current rules, 255 basis points of CET1 capital under proposed Basel III endgame rules, and it will increase our tangible book value per share by 33% through a combination of a $4.8 billion after-tax gain and the deconsolidation of $4.7 billion of goodwill and intangibles from our balance sheet. Divestiture of TIH has a 255 basis point positive impact under fully proposed -- sorry, proposed fully phased-in Basel III endgame rules, which is 25 basis points higher than under current rules. The larger impact on our CET1 ratio under proposed rules is due to a reduction in certain threshold deductions due to the overall higher level of capital from selling TIH. Assuming this transaction had closed at the beginning of 2024, and we estimate that the impact to 2024 earnings would be approximately $0.20 per share of dilution. This reflects approximately $0.45 per share from the loss of TIH's earnings contribution which is partially offset by approximately $0.25 per share of earnings from reinvesting the $10.1 billion of after-tax proceeds in cash at a yield of 4.5%. As Bill mentioned, after the deal closes, we plan to evaluate various capital deployment strategies, including a potential securities portfolio repositioning aimed at offsetting the $0.20 per share of dilution, which I will discuss in more detail on Slide 5. On Slide 5, we highlight the impact of the sale of TIH as well as the impact of the sale of TIH coupled with a potential $23 billion balance sheet repositioning on our CET1 capital ratios under both current and proposed rules and on our earnings per share and our tangible book value per share. As previously discussed, we plan to evaluate a potential balance sheet repositioning after the sale of TIH is complete, which could include the sale of certain available-for-sale investment securities dependent upon market conditions. Among our goals with any potential balance sheet repositioning would be to replace TIH's earnings, which we believe we can achieve with certain balance sheet actions detailed on this slide. For purposes of these analyses, our pro forma scenario assumes that the $10.1 billion of after-tax proceeds received at closing are invested in cash, yielding 4.5%, which is based approximately on the forward curve. In the pro forma and illustrative $23 billion balance sheet repositioning scenario, we assumed that we sold approximately $23 billion in market value of investment securities or $29 billion of book value investment securities and reinvested approximately evenly in cash and new securities. We've also assumed that we would utilize hedges to maintain our target of remaining relatively neutral from an NII sensitivity standpoint, again, depending on market conditions. As shown on the first graph on the slide, our CET1 ratio at year-end was 10.1% under current rules. This would increase to 12.4% on a pro forma basis for the sale of TIH. CET1 would decline to 11.5%, assuming the illustrative balance sheet repositioning scenario since AOCI is not included in our CET1 calculation under current Basel III rules. In the second graph, we show the impact on our CET1 ratio under proposed fully phased-in Basel III capital rules from the divestiture and the illustrative repositioning. At year-end, our pro forma CET1 ratio was approximately 6.1%. This would improve to 8.7% on a pro forma basis and would further improve to 9.1% under an illustrative balance sheet repositioning. The 47 basis point increase in CET1 in the illustrative balance sheet repositioning scenario from 8.7% to 9.1% is due to the impact of lower threshold deductions and the assumption that the cash and investment securities purchased in this example would carry a lower risk weighting than the securities that we would sell. These actions, if taken, would also result in a reduction in our duration of equity measure. Moving to the third graph on the slide, we detail the impact that these actions could have on our 2024 earnings assuming the deal had closed at the beginning of this year. Specifically, we estimate the TIH will contribute about $0.45 per share to our overall earnings in 2024. The reinvestment of the $10.1 billion of cash proceeds from the sale of TIH will add approximately $0.25 per share, assuming the proceeds are invested in cash, yielding 4.5%, which, again, is based on the forward curve. We estimate that a $23 billion repositioning, if done today, would add $0.20 of earnings per share, net of the loss of the contribution from the lower-yielding investment securities that would be sold. As I previously mentioned, we assume the proceeds from the sale of the $23 billion of market value investment securities are reinvested in a mix of cash, shorter duration securities and off-balance sheet hedges based on the current forward curve. In this example, the combination of the reinvestment of the cash proceeds and the potential $23 billion balance sheet repositioning should offset the loss of TIH's earnings in '24 had the transaction closed at the beginning of the year, which aligns with our framework and goal of replacing TIH's earnings. Market, regulatory and economic conditions will be evaluated at close and can result in changes to any potential repositioning that we might consider, but this is the framework that would guide our actions. As a reminder, recognizing securities losses under Basel III rules has no impact on our CET1 ratio since new rules include AOCI in the calculation. Moreover, any decision to sell market value securities has no impact on our tangible book value per share, which we expect to increase by 33% on a pro forma basis, as shown on the fourth graph on the page. Turning now to Slide 6 for a moment just to highlight the improvement in our relative capital position. As shown on both the graphs on the slide, our relative capital position under current rules and proposed Basel III rules improves significantly. The sale of TIH accelerates our ability to meet increasing standards for capital and liquidity in the industry and importantly, creates capacity for Truist to evaluate a wide variety of capital deployment alternatives, including repositioning our balance sheet, growing our core banking franchise during a time when much of our industry is conserving capital and positions us to resume share repurchases depending on market conditions and capital planning. So now I'll turn it back over to Bill to conclude.

Thanks, Mike. You've heard me talk a lot recently about the work being done at Truist to simplify our organization and to better control our expenses in our core businesses to drive improved performance in the future. Most recently, we announced the signing of a definitive agreement to sell Sterling Capital Management, which had minimal impact on our earnings and was not a long-term fit with our core wealth management business. The decision to sell Sterling is just another example of several changes we've been making to simplify and make our company more efficient and productive. These changes have also included reductions to our headcount, further rationalization of our branch network, the appointment of key new leaders across our organization to simplify reporting lines and to drive accountability and the consolidation or exit of other businesses. This organizational work was largely completed in the second half of last year, leaving us with a strong framework and a clear line of sight on how best to deploy and allocate capital into our core banking businesses as growth opportunities arise. Like many of our peers, our growth has been impacted by our desire to conserve and build capital in response to the changing economic and regulatory environments. Throughout this time, our balance sheet has remained open to new and existing core clients, but we've been managing growth in other areas to conserve and grow capital. By selling TIH we'll have capital capacity to play more offense, which could include seeking ways to accelerate loan growth in our core franchise, lessening certain RWA management tactics that were intended to preserve capital, such as in our consumer lending units and considering other areas for growth. In addition, our significantly stronger balance sheet will be positioned to weather an even wider range of economic environments. We believe that the improvement in our capital position relative to peers will be a meaningful competitive advantage in the future. We'll move with pace, but will not be in a rush to deploy capital to meet short-term expectations that do not have long-term positive impact on our company, our clients and most importantly, our shareholders. As said, we operate with strong market share in some of the fastest-growing markets in the country with a diverse set of consumer and wholesale financial products, including wealth, payments and investment banking that give us the tools necessary to expand our strong share in our home markets. As shown on the slide, these markets are projected to grow much faster than the rest of the country, which should offer relatively more opportunities for us to organically deploy our capital in ways that help our clients achieve their financial goals and lead to better returns for our shareholders over time. In closing, our decision to sell TIH seizes a relative capital advantage for Truist without sacrificing earnings and positions our company to capitalize on our core franchise. I'm optimistic about our future and look forward to operating our company from this increased position of financial strength in some of the best markets. Finally, I'd like to thank our Insurance teammates and leaders for their incredible purposeful focus and productivity, particularly over the last few months during this important time for both TIH and Truist. So thanks for your interest in Truist, and Brad, let me turn it back over to you for the Q&A.

Thank you, Bill. Jamie, at this time, will you please explain how our listeners can participate in the Q&A session. [Operator Instructions]

[Operator Instructions] Our first question today comes from Betsy Graseck from Morgan Stanley.

Can you hear me?

Yes. Got you.

Slide 5 is really helpful. I did just want to ask about how you're thinking about not only replacing the earnings but increasing the earnings over time as interest rates come down, as you know, the forward curves looking for rates to decline, and I understand in 2024, expectation is that you can replace the TIH earnings. But I just want to understand how you're thinking about using that capital over time as rates decline to offset and maybe even more than offset the sale of TIH.

Betsy, it's Mike. The $23 billion of illustrative balance sheet repositioning was really intended to size just the replacement of the earnings. So you're right about that. I did mention in our remarks that as we -- as we reposition the balance sheet, one thing we're also going to be mindful of is just managing our interest rate risk going forward. And so we would intend to take some hedging action to think about different rate paths going forward. I think also, just importantly, you've been in -- so maybe touches on the repositioning piece of this, but I think it's really important to also appreciate the capacity that we'll have to think about just growing our earning asset base over time. And Bill gave some good examples of that, whether that just be in our core banking franchise, thinking about some of the tactics that we've been leveraging over the last year or so to manage RWA growth, we believe that we can find sensible ways to improve our growth trajectory over time as well. So I think, a, replacing the earnings, thinking about protecting that interest rate risk, maintaining a relatively neutral posture as we've talked about historically. And then, frankly, leveraging the capital ideally in our core franchise.

And if there were an opportunity to inorganically, right, to make an acquisition, either within your footprint or in some of these higher-growth markets that you're not in today, when would the timing be right for that? Is that something that you would be comfortable doing post close? Or is that something that you feel you have to wait a few years post close? Just wondering how you're thinking about that as well.

Yes. Betsy, our primary focus, Mike highlighted, it's going to be really on the execution at Truist. And so we see really good runway in front of us in terms of our opportunity in the markets that we're in. And I think the best investment is in our franchise. Now having said that, I think we create the capacity to be better positioned if there's future industry consolidation. But our focus, short and medium term, and we think we've got great ways to deploy this capital is organic.

Our next question comes from Ken Usdin from Jefferies.

Just -- if I could, a couple of cleanups just on the math. So on the $0.45 TIH contribution, is the right way to think about that, just that there's a $507 million impact in '23 we show on the bottom of Page 9, and that $0.45 more reflects what you would estimate that $507 million to have been in '24, like something more closer to $600 million?

Exactly right, Ken.

Got it. Okay. And that's -- and it's adding back? The preferred is now gone?

The intercompany preferred -- yes, right.

Okay. And the second question is on the potential securities repurchase of $23 billion. If I'm doing the math right there, it seems like you're only expecting about a -- what seems like a 150 basis point pickup on what you would potentially sell versus what you'd pick up. Is that the right way to think about that? Or I would think there'd be a little bit more juice that you'd get on a potential restructuring unless I'm missing something about other math that's included in that net $0.20 number.

I think it's possible. So Ken, if you think about the actual book yield on what we're selling versus what we'd be buying, it'd probably be closer to a 200-plus basis points of spread pickup. The delta might be we're selling $29 billion of book value securities and then buying $23 billion. So on the $6 billion, obviously, the unrealized loss that we're realizing, that wouldn't earn going forward. So think of it as like, call it, 250, 260 runoff rate on the $29 billion. And then on the $23 billion, we told you sort of half cash, half securities call it, a little north of 4.5%. And that's impacted by the receivers we'd add, too.

Our next question comes from Mike Mayo from Wells Fargo.

I'm just wondering why you're not like announcing a buyback today or at closing. Correct my numbers, but your market cap is $50 billion, you have $10 billion after-tax cash, you'll trade at 1.2x tangible book value pro forma. So why not just like a really big buyback here?

Yes, Mike, I mean, I think what hopefully was pretty clear is that we have lots of ways to deploy this to [ fully use ] capital. We want to think about this in a multiyear long-range review for our shareholders. So if you think about it, I mean, what the balance sheet repositioning allows us to do is to prepare for capital usage without the same constraints. So if we sit here today and we look on a multiyear basis, I mean, that's something that's sort of off the table. We don't have share repurchases. And now, it will become part of our normal capital planning. I mean what we'd like to do is we'll look at market conditions, we'll look at regulatory clarity, stress testing, et cetera. By the way, there's a lot of stuff coming at us right now. And then let's develop -- we'll develop a more comprehensive plan with a more durable level of buybacks. I mean I think that will be a more consistent part of what we do going forward rather than a onetime.

Okay. And my follow up -- with my insurance colleague, Elyse Greenspan.

So I guess my question, hoping you can go through the slides. Is right now a good time to be monetizing this asset? I mean you guys, on your earnings call, right, said high single-digit revenue growth for the business in '24, so it looks like a really good time for the business. So hopefully, you can expand on why you're taking this action today.

Yes. Let me talk a little bit about it and John, maybe I'll turn it to you as well because there are a lot of different forces here. I mean this isn't a market timing issue. I didn't sort of have -- we've thought about this as you know, it's at the peak of multiples or not at the peak. We really thought about it in terms of what's best for the insurance business going forward. So as we've talked about a lot, this is a consolidating business. We've been able to support it in the past, but it's consolidating at an accelerating pace that would require additional capital, and that just isn't the place where we're in a position to support that long term. So that was really more of the decision framework that came into it. And this is -- this month, this day is the exact peak or not peak. That being said though, I think we're at a good time in terms of the differential in terms of valuations. John, maybe I'll turn it over to you to maybe...

Thank you, Bill. And Elyse, when I think about it, if you think about it from the bank standpoint, clearly, it provides strategic flexibility. And when I think about it from Insurance's standpoint, this is a business that we think has attractive growth opportunities going forward, both organically and inorganically. Through this transaction, it better positions the Insurance business for continued growth.

Our next question comes from John McDonald from Autonomous Research.

Bill, just wanted to follow up on some more thoughts on investing options for organic growth. I guess as some of the things you've been holding back on been holding back loan growth? Or has that been more of a demand issue? And would you be looking to invest in areas that you're already in or maybe expanding the franchise to new products or new geographies? I know you mentioned you already like the geography, but just kind of thinking about investing in current capabilities versus new ones, that would be helpful.

Yes, John, I think to the first part of your question, I think supply and demand are for the industry, probably in pretty good alignment right now. I think what we want to prepare for is when it's not an alignment. So when demand increases, environment improves, and we think that will disproportionately happen in our markets, that we're ready and positioned to take advantage of that. Now that being said, I mean, I do think we see some more opportunistic things for RWA growth. We're going to keep our discipline on returns and not change our risk profile. But they're places to lean in, they're places to support areas that are developing fee business. Think about public finance, for example. We've built a really good public finance business. We can lean in a little more on the RWA side to support that fee business, take a little bit of a longer-term view on capital usage. So -- and then look at opportunities to places where we can become a lead, if we have opportunities in our markets to become leads or opportunities in our business specialists to become leads. So it's not put the foot on the accelerator tomorrow, but it is take advantage of opportunities opportunistically and prepare and be in the best capital position as demand starts to return.

And how about in terms of geographic expansion? Some big competitors are building branches, going into new markets? Obviously, you've got great markets already. But how do you think about geographic expansion over time?

Yes. I mean I said this on the earnings call. I mean, we'll start looking at our branch expansion after this year. I mean we wanted to sort of get down to sort of what was an optimal level, and then we'll start looking at from that branch expansion. I would say, in fairness, probably the first part of that will be in our markets, in places where we have lots of density. So think about a lot of our markets, we've got really good density. In other markets, we have chances to improve our density. And I think density is a really important component of market share. So rather than sort of being thinly spread over a lot of places, our focus will be on increasing density in places that we view as strong markets.

Our next question comes from Scott Siefers from Piper Sandler.

I was curious if you have any updated thoughts on just sort of the kinds of capital targets you might have going forward? I know recently, you've simply talked about keeping the common equity Tier 1 above 10%, but curious if that's still the context in which to size your amount of excess capital or if there are different ways we should be thinking about it.

Scott, Mike here. I'll take that one. I don't think we're at a point where we have an updated sort of target. As we think about there's still a lot of moving parts out there, are going to have finalized rules, reproposed rules, time line for rules? So I think it would be good to get a firmer sense for exactly where the sort of the next capital regime will land. Clearly, this is a transformative moment for us from a capital perspective and really accelerates our ability to comply with where these rules do go and still stay on offense. For the time being, we're obviously going to be operating at a higher level than we've been operating in the past. And I think that's sort of the takeaway here, but we'll have the flexibility to interpret those rules, comply with those rules and still support our clients and grow.

And then just in terms of flexibility on something like share repurchase, would you have to wait until the transaction has closed? Or would we still need to sort of go through this year's CCAR? In other words, are there any sort of externalities that you think about when you think about flexibility on possible repurchase specifically?

I mean clearly, we'd want to wait until the deal closes. So we're sort of in the midyear. We're obviously in a capital planning season with what's going on with CCAR. So I think it will be later in the year when we'll give some more clarity around how we're thinking about share repurchases. And back to my other comment, it's just make it more durable, make this a part of our planning process on a long-term basis rather than being episodic.

And our last question today comes from Matt O'Connor from Deutsche Bank.

I mean obviously, the insurance business over time has provided high return, kind of less cyclical business to help balance out all the net interest income and -- do you think about trying over time to replace some of that? You had mentioned leaning into some areas that can generate fees. Capital markets is an area of strength that maybe one would think you could lean in further. But how do you think about just -- this is more 3 to 5 years plus, maybe balancing out the interest rate sensitivity, the credit risk associated with the traditional bank and after giving up this part of the business?

Yes, Matt, I think we'll clearly see emphasis in our wealth business, our payments business and our investment banking business. So I think we've got a good number of pillars in the fee-based side and really good opportunity. I mean I think I highlighted at the end of the year, the penetration of payments is increasing. We've got a lot of momentum. I think the redesign, we've done with wealth and aligning it with our wholesale business allows -- it affords us opportunity for more stable returns. And then the momentum we've had around capital markets. I mean I think the increased market share in almost all the disciplines we've had in investment banking, I think, will continue. So it's not one thing. I mean it's the pillars that we have and the opportunities that we have within our existing franchise, I think, have a lot of running room to replace a lot of that fee income going forward.

And just across those 3 businesses, I mean, is this just continuing to execute what you have? Is it a combination of that plus maybe making some hires, fill in deals? Like obviously, you're quite scaled in capital markets. But how do you think to get in to the next level to offset some of the fees like you just mentioned?

It's everything you just said. It's strategic hires in parts of the business, it's better execution, it's investments in products and capabilities. I mean it's a combination of all those things. And in fairness, they'll all receive an increased level of intensity. And I think our simplification and alignment will be fueled to help all of those businesses grow.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Okay. Thank you. That completes our call. If you have any additional questions, please feel free to reach out to the Investor Relations team. Thank you for your interest in Truist, and we hope you have a great day. Jamie, you may now disconnect the call.

Ladies and gentlemen, that will conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.