Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us for our next fireside chat with Truist Financial Corporation. As many people know, Truist has about $531 billion in total assets, over 1,900 branches. They put up a return on tangible common equity in the most recent period at about just over 13%, 13.3%. And though we priced this a couple of days ago, the market cap was $61 billion. And certainly, that has changed with what's been going on. Joining me is their Chief Financial Officer, Mike Maguire. He's the CFO of Truist Financial, and we were chatting. And Mike, you said you joined there in 2001.

2001.

He's been a long-time employee of Truist Financial over the years, and thank you for coming and joining us today.

My pleasure. Thanks so much, Gerard, for having us.

Possibly, you can share with us how -- with all the uncertainty and volatility we're seeing, how is the quarter going? And what are you seeing so far in the quarter?

Yes, it’s been -- it's so far a quarter of some puts and some takes. And so I'd say from our perspective, and you framed it, I think, the right way, especially as it relates to some of the strategic transactions that drive our investment banking and our sales and trading business, we've definitely seen a slower start than we would have expected earlier this year when we talked about the quarter. So as we think about what does that mean for our quarter, again, maybe just to add some balance, we do feel actually quite good about the balances in the business, loans, deposits, while I think we have an outlook this year for low single-digit end-of-period balance growth. And whether that will be linear or some starts and some stops, we're off to an okay start there. But on the investment banking side and the trading side, we definitely are seeing some weakness. So as we thought about the quarter back in January, we talked about maybe being down 2% or so. That's probably trending closer to, call it, maybe 3.5%. On the other hand, as investment banking pipelines are a little slower and delaying, we're also seeing some better trend in expenses. So we guided expenses for the quarter to be down, I think, 3%. And I think we'll probably see that down 4% at least. So some puts and some takes. It's still very early, certainly even in the quarter, but for the year, we still do feel quite good about the outlook for the full year. And hopefully, some of this strategic transaction activity that we're seeing sort of pause or spin a touch will be really more a matter of timing.

And when you say expenses down maybe as much as 4%, that's sequential.

That's linked. Yes. And same with revenue. Yes. Our previous guide was down 2%. And again, just with investment banking, again, hopefully timing moving out, we see that pressure.

Yes. And I remember in the fourth quarter earnings call, you guys were talking about maybe 3% to 3.5% total revenue growth for calendar 2025.

That's right.

How does that break out between fees and net interest income? And what are some of the opportunities or challenges?

Yes. You'll recall, we said from a fee perspective that we thought we'd be up low single digits, but that takes into consideration a variety of components. So banking, as I just mentioned, we believe can be up low double digits, right? And I'm not willing to let go of that yet, right? I mean we're only a couple of months into the quarter here, into the year. And we do believe that there's still good organizing activity. There's -- whether it be M&A, especially, which serves as such a catalyst around some of the financing work that we do, we think that, that hopefully does still come through. On the wealth side, lower single-digit growth, but that was including the tough comp. We mentioned when we reported the fourth quarter that if you think about the fact that we sold our Sterling business, if you were to adjust for that, we'd probably be more of a sort of a mid-single-digit grower there from a wealth perspective. And then very focused on our payments business as well, so -- which I think we believe can grow in the sort of high single digits. So blended, it's low single digits. And then on the NII side, our expectation, I mentioned we believe that we can get the balance sheet to grow this year. We had some nice momentum in the fourth quarter. As I mentioned, we're seeing balances look okay so far in the quarter and have an expectation that despite some of the volatility and uncertainty that we're seeing in the market and some of our customers' minds, we do believe that we can see that balance sheet growth and also benefit from some of the margin expansion that we would expect throughout the course of the year.

It's interesting that some of the challenges are more macro related. Obviously, the investment banking that you touched on, others have done the same as well. Of the things that you can control, where is the most confidence for 2025 in that where you guys know you can have a better control over it?

I think for me, what gives me the most confidence in terms of what we can control is just the mindset, like our teammates across the board, and this has been a change over the last year, are completely on offense. I spent the last couple of days visiting with some of our teammates in Richmond and the Greater Washington area, met with investment bankers, met with wealth managers, commercial bankers, and we are clear eyed on the growth agenda that Truist has established for itself. We feel like we've got the right products. We've got the right sales focus. We've got the capital capacity to grow the business probably faster than the market will allow. And so that gives me probably more confidence than anything else. Our brand is more seasoned than it's ever been. So I really feel great about our opportunity still in '25 for Truist.

When you talk about loan growth, what areas within the portfolio do you see opportunities for that to drive the total number?

I think ex-CRE, it's across the board. I mean we're still being cautious there and working through our office portfolio. We can talk more about that if you'd like. But as I sort of think about especially our C&I business, both in our commercial and corporate and investment banking units, we have an appetite to grow, obviously, in our industry verticals. We've just recently hired Kerry Jessani to join our firm. She's now leading corporate and commercial banking. They have a growth agenda that's focused on sort of that truly kind of upper middle market corporate businesses as well as continuing to serve our clients locally in the commercial bank. So we really believe we can grow our sort of core C&I portfolio. And then on the consumer side, we've got a great collection of specialized businesses as well as our 1 to 4 business -- or pardon me, our resi business. So really across the board, we'd like to see these businesses grow. We don't want to remix the balance sheet. We sort of like that 60-40 mix, but we recognize that we'll -- the market will give and take. But over a longer period of time, we'd like to stay about how we're mixed today.

And aside from the residential business that you mentioned on the consumer side, you've also got other differentiated consumer loan products. Do you think those also could be a driver of the growth this year?

I think they can. One of the interesting things about our consumer loan portfolio is we don't have a very large credit card business. But we do have a number of really specialized and I believe, very defensible, leading sort of market share businesses in their niches. So you've heard us talk about our auto businesses, which span prime and subprime, but we have businesses that focus in the home improvement lending sort of at the kitchen table, promotional financing. We have a similar type of business that focuses on outdoor power equipment and outdoor powersports. So that's Service Finance and Sheffield. And then, of course, we have our LightStream business, which is a direct-to-consumer personal loan business. So these are businesses that are all designed to serve clients in a much more modern way. So literally, in LightStream's case, you can apply for an unsecured personal loan and be -- apply and be funded same day. That's a great experience. Service Finance, you get a quote for an HVAC replacement or a roof replacement or windows or a kitchen or whatever it is, you're at the kitchen table, you get offered a rate that in a structure that's really attractive. It's been subsidized by the dealer. And you are instantly approved and the work gets done. And same thing with Sheffield. You walk into a dealership, you pick out whatever it is, maybe it's a snowblower or maybe it's a side-by-side, whatever it is, and you get offered a really attractive rate and you drive away with the piece of equipment. So people like that sort of embedded finance as you might think about it. So great businesses. We think they've got capacity to grow. Each are growing nicely and will definitely be a part of our growth agenda.

Got it. Moving to the other side of the balance sheet. If we talk about deposits a little more, where are you seeing the growth or the mix of deposits and the pricing of the deposits?

Deposits have been, I'd say, broadly speaking, much more stable in the last -- really maybe the second half of last year and coming into this year. This is an important time for us, tax and bonus season, but much more rational in general. I think you're seeing the effects of the Fed's balance sheet velocity changing. So the system is overall more stable. I think the rate-seeking behavior that you maybe saw in sort of at the height of rates and before we started to see some decline in the policy rate has really subsided. If you look at our DDA mix, for example, relative to our total deposit portfolio, it's been stable now for 2 or 3 quarters at around 28%. So just a very rational market. And we're beginning to see balance sheet growth on the deposit side and loan growth will obviously beget deposit growth as well. So that's been a nice change.

And then coming back to just interest rates and obviously, they're very volatile at times as we've seen with the 10-year. And can you characterize the risks and the opportunities in NII when it comes to the rate environment that's going forward?

Yes. Yes, sure. No, that's one of the things we did talk about in January as we thought about the year and even thinking out into '26 and beyond is it was really nice to have a little more steepness to the curve. And I think the whole industry appreciated what seems fleeting at the moment. We've seen a little flatter curve. Look, at the end of the day, we try to position the company to be successful in a wide variety of interest rate conditions. Obviously, it looks like we probably won't get the cut we were looking for in March. And -- but even in the last couple of days, you've seen a lot of movement in people's expectations for how the short end might move around. And even the long end has been pretty volatile here lately. So look, for us, we're positioned to benefit over the short term from a deposit pricing perspective, from a lower short end. So we would welcome whether it's a cut or 2 or 3 throughout the course of the rest of the year. And look, we obviously would benefit our earnings momentum if we could get a little bit more steepness to the curve. But harder to manage that risk. And obviously, just that has an impact, not immediately, but really on our ability to reprice our fixed rate loan portfolio. And so keeping a close eye on it.

Yes. And speaking of portfolios, obviously, you restructured the bond portfolio in the second half of '24, added securities. What are the expectations for the balances going forward on how you are managing that portfolio?

Yes. We -- the size of the portfolio back in May when we did the initial repositioning, we remixed into a little higher, we added to our cash position at the time. And at the time, we weren't exactly sure what loan demand would look like throughout the course of the year. And I think in our mind, we had a view that cash and securities probably based on whether it be our liquidity sort of objectives, loan demand outlook and other factors, we sort of said, "hey, maybe it's between the two, $150 billion to $160 billion or so," we were at the low end. We added securities in July and throughout sort of the second half of '24 and took our position up to closer to the higher end, about $160 billion, if you think about the bonds and cash. I think that's about right for us. That's the high end. So I wouldn't expect us to continue to add securities. And to the extent that loan demand accelerates, you might even see us slowly reduce the size of the portfolio. We have about $2.5 billion to $3 billion of cash flow a quarter just from maturing securities. And so we could very easily sort of just redeploy some of that liquidity into the loan portfolio.

Got it. You talked a moment ago about capital markets and how things are starting off this quarter. And we all know, again, as you pointed out, it's gotten off to a slower start than we all thought maybe in December. But can you share with us how you positioned your capital markets business, and you've made some investments here. What should we expect going forward in this area?

Despite my comments on being off to a slow start, we still are quite optimistic about our investment banking franchise and have consistently been investing in it. It's been a very consistent, at least high single-digit grower for us. And as I mentioned, we expect low double-digit growth this year based on sort of a market outlook. But we've been constantly are thinking about productivity and up-tiering our talent. It's typically our approach to -- at least on the banking side, has been to pick sectors where we think there's good critical mass and business value that we can go create a franchise around, and we hire entire team. So you'll see us add bankers and research and product people to go prosecute that full-service strategy in banking. So that's -- we're going to continue to do that. I mean we've added -- not only are we focused again on the productivity element and bringing new sort of blood into the organization, but also net adds on -- at the MD level. And again, that's across coverage as well as product and the likes. We made some investments in our trading platform last year as well. We're starting to see some benefits from those investments as well. So this is a business that we like a lot and are very hopeful that it will continue to be an important part of our growth story.

And is there a targeted level, I don't want to say end game, but is there another 20% that you need to add to really get it to the level you think is optimal or...

I don't think so. I mean I think we've got plenty of headroom in terms of like how big this business could be with respect to all of Truist with fee income and our ROTC objectives. A big part of this opportunity we'll be able to -- will be based on our opportunity to take a lot of these products and services and to deploy them into this sort of corporate banking expansion and continue to be successful driving into the middle market and commercial banking businesses that we have. And so I think continuing to grow at least at the pace we've been growing suits our eye.

Yes. And sticking with the fee revenue growth for Truist. When you think about the opportunities to grow wealth and treasury and payments, you touched on payments just a moment ago. Can you give us more details or scope about the opportunities in these 3 areas?

For wealth, it's really -- we've been focusing on our -- on the platform. So the experience that our wealth clients have as they engage with us, but also the adviser platform itself and how our teammates utilize technology to provide better service to their clients. So we've made those investments. And really, I think the new frontier for us is just continuing to add great advisers and teams. And so we're on the hunt there. And so that team is very focused on bringing new talent to Truist. And that's one growth vector. Another on the wealth side is just doing a better job connecting to our -- I mentioned investment banking team that's creating wealth through exits and recaps, et cetera. But also in our Premier Banking segment, which Donta has talked a lot about, we have a sizable amount of office assets, which aren't always deposits. Oftentimes, these are investment assets as well. And so we think we've got a huge opportunity that we can mobilize against just on getting assets that our current clients have on our platform under management. And on the payment side, it's been a story of investing in the product, which has been a multiyear journey, and it continues, and we feel great about the condition of the product, talent, both product leadership and sales leadership and then ultimately, accountability and execution and sales culture. And that's you hear. I'm really delighted most recently, we shifted our payments business under Kristin Lesher, who has all of our wholesale businesses. That's the biggest opportunity in payments for Truist relative to how we're performing. Her focus on it is extreme as is Kerry, who's just joined us as I mentioned, to run corporate and commercial banking and Chris Ward and his team are doing a great job. So the engine is warming up, and that's a slower sales cycle for some of this stuff. So on the back book, it takes a little time. But on new clients to Truist, like we -- it's sort of a new day for how we're thinking about payments and what we expect of ourselves and of our bankers.

Yes. Coming back to deposits. We've seen a number of banks decide to expand into the Southeast, Southwest, which is your core footprint. Can you share with us the competitive nature? Do you find it more competitive as you're seeing new entrants come into the market? Or how is that shaping up?

Yes. Without a doubt, I mean, we've always -- one of the things that people love about the Truist story is that we're in some of the most attractive markets in the country and companies who don't operate at scale in our markets see that same opportunity. And so we've had a -- again, that's always been sort of a characteristic of our markets. And I think lately, I mean, look, the game is, it's competitive. And so some of the largest firms are aggressively expanding into the Southeast as our firms our size and smaller. And so that's -- look, that's the life we've chosen for ourselves. We feel like we can compete. We have a right to win. I think just the evolution of the mindset of our teammates, honestly, and looking forward, not backwards around many of the distractions that came with putting 2 world-class companies together and living through some of the obstacles that we all face together, everybody is looking forward now. And so look, we -- our view is our value proposition is we have all the capabilities and the prowess that the largest firms, the most complex firms in the country can offer to their clients, but we can offer it in a more local way where we're just embedded in the communities where we've served these communities for 100 years plus in certain cases. And so we think we can bring the best of both worlds together, and that's our opportunity and we're focused.

Got it. You mentioned a moment ago about with the loan growth, commercial real estate, obviously, is not an area of growth for you and for others. Maybe talking -- shifting about credit quality. And what are you guys seeing currently in not just commercial real estate, but in all the different broad categories that you service?

Man, it's funny. We have a new Chief Risk Officer, Brad Bender. He's excellent, long-time risk executive at our company, but really a lot of his life spent on credit. And he joined our last earnings call, and we prepped him and he got ready, not a single question on credit Gerard. Usually, we can depend on you, but there's really not a lot of story right now. I mean, honestly, I mean, we've talked a little bit about multifamily. And obviously, that's an area where we're focused, but just it's not even comparable to what we're seeing in terms of asset value deterioration and some of the structural changes that are impacting the office space. consumer, I mean, I think with all the change and uncertainty that's happening right now, there are questions. We're doing work, trying to understand some of the puts and takes around things like tariffs or changes in policy. But that's just good risk management. We don't see any signal right now that you've got deterioration at this point. And with short-end rates a little higher for a little longer and inflation maybe being a touch sticky, who knows? Like we have our eyes on all these things, but we're really just not seeing -- we're not seeing deterioration out there at the moment. So knock on wood.

Yes. No, we agree with you. The credit is strong across the board. Shifting over to regulatory. And when you think about with the election and the change coming with all the heads of the regulatory agencies essentially being changed, how are you guys viewing that landscape? And second, we're also seeing some potential changes with the stress test, maybe more transparency. Any color that you'd like to share on that as well?

I think on the broader kind of rule-making front, I think it just sort of pays to be patient, right? I mean we -- obviously, our firm went through a pretty significant sort of evolution, doubling in size and thinking about the expectations for a firm our size. And obviously, in early '23, there was quite a bit of momentum around Basel III end game and a long-term debt requirement, liquidity rules. So there was a pretty broad suite of changes that were being contemplated. And so we've been doing a lot of work to prepare for what we assumed would be eventual rules across the board on those areas. I think at a minimum, our take is that those rules will -- their implementation and how they're finalized, if finalized, will be delayed. For us, that's not to take your foot off the gas. I mean, like there's a lot of work that we've been doing to strengthen a lot of the areas, whether it be capital, liquidity otherwise. But -- so I think time will tell. I mean we need to see some of these appointments sort of come through. Some of these rules require inter-agency cooperation and alignment. And so still a lot of sort of green on the table, so to speak. As it relates to the stress test, look, I mean, I think transparency would be welcomed. I think everybody in our industry, I think, would say that. The annual stress testing work that we do is a really important part of our capital planning framework. It's not the only piece. In our case, and in fact, the -- I'd say like our SCB is not necessarily the binding constraint on how we think about capital management. We have our own perspectives around what a sort of post-stress capital level should be and what severe stress looks like and other factors that go into thinking about an appropriate level of capital to operate the company. So -- but I mean, I think any chance we get to have a better sense for whether it be some of the assumptions or input into the scenarios or the models, I think would only improve the overall process. And so we'll see. We'll see what happens there.

Speaking of capital, can you just remind us what you're comfortable running the company at from a CET1 ratio standpoint? And then second, what will you do with any excess capital that accumulates due to the earnings that you're achieving?

We crossed last year at about 11.5%, I think, on like today's CET1. We have this assumption that at some point, AOCI will be deducted from CET1. And so I think we were at 9.6% or so. So look, we have -- I think we're a little reluctant to sort of set a long-term target at the moment. We've talked about a 10% area as a longer-term goal. I think that's appropriate at the moment. But as it relates to Truist, right, like we're in a position now where we have, frankly, more capacity than the market is affording us the opportunity to leverage. And so to your point around excess capital, we -- it was important to us and I think to our shareholders that we put in place an elevated buyback. And so we've been buying back stock at about $500 million a quarter. I think over the medium term, that's a reasonable assumption that we'll continue to do so. I think when coupled with our dividend, that's not perfectly 100%, but almost 100% of our earnings. And so that feels like an appropriate approach to continue to return capital to shareholders, but also ensuring that we have the capacity to go grow, which we're very, very focused on.

When you look at your guide or your targeted ROTCE you gave us in the middle of the fall of '24. Can you share with us the initiatives you're using to reach that target? And just to remind people what the target is?

Yes. Our target, we said was a mid-teens ROTCE target. And a lot of the initiatives I've touched on today, whether it be deepening -- I didn't talk a lot about this, mentioned it with wealth. But on the consumer side, like finding a way to more fully serve our clients there, whether it be with wealth or bringing more deposits on us, doing financial plans, et cetera. On the wholesale side, not just growing footings, but having a fuller share of wallet, payments is obviously a really capital-efficient revenue stream and sticky, lots to love about it. So we're very focused there. Our advisory business also for $1 of capital to the extent that we could be more successful advising clients, leading capital markets deals, continuing on the journey we've been on. We've had a continuous path of improved relevance and in relationships. So left leading more deals, average economics per deal, just general prominence in the roles we're playing on the capital markets and advisory side. So really, all these initiatives, the idea is like we really need to improve our ROA, if you think about it. Because at the end of the day, we -- the company will be leveraged in a way that sort of reflects the environment. And look, today, if you look at how we're capitalized based on our RWA density, we're just below 8% on sort of a TCE ratio, that may move around a little. But for us, if we can drive more, again, capital-efficient revenue through our footings and through our franchise, that will be the way that we achieve and hopefully exceed our target. And I do expect to continuously improve our position there from an ROTCE perspective. A big focus for our Board, for Bill, for all of our leaders.

Got it. We saw this week that the FDIC has rolled back the M&A guidelines they put into place in 2024, which were somewhat onerous. How do you guys see the M&A -- I mean, the bank M&A environment? We all know for our careers, consolidation has been part of banks. How do you see it evolving and maybe impacting Truist as we go forward?

Well, certainly, the move the FDIC took this week was, all things equal, like constructive to the bank M&A environment. I think you'd have to -- they're not the only stakeholder. You'd have to see how the DOJ and OCC and other agencies think about guidelines and approaches to mergers. I mean, all things equal, it's useful, I think, for prospective deal analysts and executives to sort of have a better sense for the feasibility of deals. So having clearer expectations around what it takes and the like is all useful. All that said, I mean, just to say you didn't ask, I mean, for us, at Truist, I mean, look, the -- I know there's a lot of widespread perspective that you might see more M&A in the banking sector, and that may or may not be true. For Truist, very, very focused on just organic growth, leveraging the capital into our franchise, continuing to pay our dividend, buying back stock at scale are really our priorities versus M&A.

Yes. And we're running -- we're in the red zone, but want to just follow up quickly. When you and Bill and obviously, you're talking to regulators, do you think the regulators are supportive of creating another close to trillionaire bank. There's some talk out there that to compete against the Bank of Americans and JP, do we need 2 or 3 or 4 $800 billion kind of sized banks? Do you guys have any thoughts on that?

I don't think I have a perspective on that.

Okay. Okay. Well, with that we are in the red zone, so we've run out of time. Saved by the bell. But please join me in a round of applause thanking Mike.

Thank you.