Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

If everyone can take your seats, we'll continue with this morning's strong run of large-cap bank speakers. Next up, very pleased to have Chews Financial from the company, the Chief Financial Officer, Mike McGuire. Mike, welcome.

Yes. Thank you, Jason, for having me.

For those that may not have seen this morning, Tres posted a slide. And I guess, to me, the biggest takeaways were: one, they announced the sale of $5.5 billion of auto loans, representing substantially all the assets of the Regional Acceptance Corp. basically subprime auto unit. They also mentioned the quarter is tracking as expected. So Mike, is that correct? And maybe just maybe fill on some details of the kind of strategic rationale, financial considerations of the transaction and maybe any updates on the quarter.

Yes. Great. So absolutely right. We did affirm this morning with our slide that we are affirming the quarter and the year, so no outlook changed. Now that obviously doesn't take into consideration the transaction impacts related to regional acceptance. But just to talk maybe a little bit about RAC, we are under contract to sell the $5.5 billion in near prime auto loans and essentially exit that business entirely. As we thought about this business and you think about the year so far and some of the decisions that we've made around stopping originations and marine and rec vehicle lending, deemphasizing some of our national prime auto lending businesses. This was, in many respects, sort of along those same lines and consistent with that strategy. If you think about the strategic boxes, the financial boxes, we believe all are checked here. From a strategic perspective, regional acceptance is typically a loan-only, loan first national business where our opportunity to really have a meaningful relationship with these clients beyond that single loan product is extremely limited. And then from a financial perspective, and we did in our slide outlined so the concept of pairing the sale with an AFS repositioning to offset the increasing capital that the transaction would create, you see a pretty compelling financial case. So you see an improvement in EPS, albeit modest, ROTCE, tangible book value per share. So across the board, modestly accretive. The concentration in nonperforming loans and charge-offs in this business as well, creates an opportunity to really think that we believe both charge-offs and nonperforming loans as a percentage of loans will decline by 10-plus basis points, so call it 20% and then with the proceeds that are generated to the transaction, we also have an opportunity to reduce some of our borrowings to improve our funding profile just a little bit. The AFS repositioning so we outlined in sort of an illustrative way essentially takes that full, call it, $950-ish million of increased capital and offsets it with what will be a onetime loss to reposition and recoupon some of our AFS portfolio as -- as you know, Jason, in 2024, when we sold TIH, we had an opportunity to take a pretty big swing at the AFS portfolio, but we weren't able to address it all. And so we felt like this transaction was a nice opportunity to make a little bit more progress there.

I guess the slide says that this business was kind of breakeven in the first half of the year. I guess despite the fact that the credit quality is really good.

Yes.

I guess why would this business, I guess, contributing more profitability?

It's interesting. We've operated this business for a long time and for -- and through a number of cycles. Our -- there's been an evolution in our own credit risk appetite in this business, and you'll notice that we sort of headline the business is near prime. There was a moment where we operated probably a more true subprime, deeper subprime business where we would have seen asset yields and spreads wider, that has tightened over time as our credit appetite has changed. And the loss experience has remained somewhat elevated. So you think about despite the fact that this is a higher-yielding asset, maybe call it, 12% plus or minus, with a funding charge, call it, our marginal funding cost, 4% you take into consideration the loss experience in the 7% to 8% area, you just run out of economics. So for us, this was a sort of an easier one, nonregrettable. We really don't impact any of our -- what I consider our sort of true strategic client base, you see the financial benefits across the board, especially with it not being profitable.

Got it. And then, I guess, you also talked about in the past, scaling back regular auto, you discontinued, I think, marine and RV lending last quarter. Just maybe talk to are there any other areas that maybe you need to also examine for fit or whatnot or maybe just aren't profitable that we deploy better.

Yes, sure. I mean you hear how I think about it. I mean -- so first, we -- obviously, everybody knows we've got our new CEO, Mike Lines, is on the ground. I think it's technically day 15, but it feels like he's been with us for a lot longer. We had a chance to on board with Mike and get him involved in all in a meaningful way earlier this summer. And so it's been great to have the benefit of his perspective. There's a lot of urgency and intensity that's been, I think, added to this evaluation that really started earlier this year. So you saw decisions like deemphasizing originations in prime auto. Ceasing originations in marine RV and then ultimately, rackfell out of this process, too. Mike is applying a framework that I think everybody can appreciate. Number one, is -- are these businesses aligned to our strategy, right? I think look, Mike, in due time, we'll articulate his vision for our business and how we'll become a top-performing bank. But I think in the most simplest form, it's going to be focusing on fewer things that frankly leverage our strengths that are going to drive a great funding franchise and a great collection of wholesale businesses that will fit hand in glove. But as we think through these portfolios, whether they be prime auto or other loan-only products or less strategic products, that will be the first question. Does this fit, will this matter, will this drive business value in line with our strategy. And then number two, to the extent that it doesn't fit perfectly, what are its economic contributions, maybe not immediately, but even potential over time. And to the extent that these businesses are certain of these assets don't fit our eye and don't fit the economics, then we're going to stop doing them. And I think it's that simple. And so that work is happening now and -- this is, I think, a good example on the balance sheet and capital side of something that was pretty clearly and obviously doesn't fit. And there may be a few other things. But I think Mike is eager to conduct that review, make those choices and then get us, frankly, back into growth mode. He didn't come to Truist to shrink to greatness, right? I think there's going to be some recalibrating and then it's going to be really more focused on getting back to growth and improving profitability.

I guess from your seat as CFO, how do you think investors should just think about the continuity of the company's current plan? And just maybe where do you see the biggest opportunities from a fresh perspective as Mike gets up to speed?

I think from a continuity perspective, I just -- I've given you a couple of examples of -- we were at a moment where -- and hopefully, you guys have all felt this, where we've been very focused on improving profitability and getting back to offense. I think what Mike has really brought to the table has been really important is a new fresh external perspective and ability to challenge some of the choices, the inertia, whatever it might be, Rack is a good example, something we operated for a long time. There were moments in time when it was very profitable. I think in some of our mines, Rack would always sort of offer that opportunity. The realities were that, that was changing. And so Mike was a clear eye on that. Our Board has been involved in that. They're cleared as well. And so just a good example of coming in and having a fresh perspective. Mike also brings a lot of expertise to the table in areas where we believe we have a lot of opportunity to improve. Some really obvious examples of that would be payments technology and products. He ran a really successful offense in his prior life in commercial and corporate banking, delivering treasury products to clients. That's been an area where we've really under kicked our coverage, however you think about it. We don't have a card program that is, we think, suited to support our deposit franchise. That's an area where Mike brings a lot of expertise. He's got a lot of experience in that broader corporate and institutional business as we think about capital allocation and pricing discipline and relationship profitability discipline. So there's a lot of things that I think Mike just brings to the table, not to mention just a real intensity around accountability and performance. So from a continuity perspective, I think in some respects, Mike has come in and really added urgency, added really nice tone from the top. As it relates to things like what we aspire to achieve, I think it's just doubling down. I think he and the Board both and management are aligned that we will be a top-performing bank in the United States. And so we get asked a lot of questions this morning about things like what are our OTC targets, are those changing? Will we get there faster or slower? And I want to speak for my kilotchances later this year to articulated vision and we'll talk about '27 later. But I know that he's not backing off the 16% to 18% ROTCE target, I think, again, we probably say, hey, that's table stakes. There are companies that are peers of ours that are going to be operating at an even higher level of performance. And that's where his mindset is. So I feel pretty confident that we are going to stay the course on profitability improvement, but also just the plus here would be a real focus on growth.

That's helpful. We're going to double click, I think, on a lot of what we've said so far. But maybe just kind of pull back for a second and just talk about kind of the backdrop you're operating in at the moment. Just what are you hearing, seeing for your commercial clients, consumer clients. You have a good footprint in some of the better markets. Just any differences kind of across geographies and the like.

I think the overall backdrop is -- remains constructive, right? Credit is going to be a bright spot. I'm sure we'll talk a little bit about that. I'm not sure if you've heard much different today from any of the other management teams. . But we're not seeing a lot of signal from either our consumer or commercial clients and corporate clients, institutional clients that there's some emerging stress. Clearly, we have our eyes on -- it's a less certain world even today than yesterday. And so geopolitics play into that. We've got a little bit of a volatile rate environment at the moment and so I think that's a watch item. At what level and at what point might an even higher for longer rate environment begin to impact consumers and their spending habits and savings rates or even commercial and corporate clients. But by and large, pipelines in commercial banking and investment banking, again, credit performance, which is probably our best signal in savings rates and consumers are relatively stable. But -- but certainly, we have all the antenna just given all that's going on around the world.

And I guess as you're kind of pulling back in some of these consumer-related areas, maybe just talk to kind of where you see the best opportunities to grow the overall portfolio. And I think last quarter you talked about Pocket Strain, particularly on the commercial side, you've talked to, I think, 4% loan growth target for the year -- is that still the right way to think about it?

Yes. I mean we've spent some of our time in the last couple of minutes talking about some of the areas that maybe don't fit the portfolio. I think areas that we really like are that sort of core commercial, middle market industry oriented, certain pockets of CRE, what's maybe a little newer that I think Mike is bringing a lot of good challenge and ideas to the table around is if our goal is to be to own the relationships, whether they be commercial clients, corporate clients, consumer clients in our markets to truly own them. We have to think about the products that we offer that can more fully serve those clients. And so again, I mentioned already, historically, we haven't -- we haven't had a credit card offering that's been sizable and I think probably has opportunities from a feature perspective. That's an area we'd love to see grow. In addition to that kind of core commercial, corporate, middle market stuff, a home equity line -- you've heard us talk much about HELOC in the past or even retail mortgage. Those are important products to borrowers and to our -- frankly, our deposit, our DDA clients in their financial lives. So I think you're going to see us really try to focus on some of these products and the aspects of our distribution that more fully serve these clients and probably spend less of our time on things that, frankly, aren't aligned to that core client.

Got it. And maybe on the deposit side, obviously, you've got a great deal of tension of late, particularly Southeast deposits. Maybe just talk about in terms of what you're seeing in terms of balanced mix, pricing and maybe segment in the corporate side of the consumer front?

Yes. We provided a little bit of an update in July when we reported second quarter earnings around just some of the -- what we perceive to be a challenge on mix, at least relative to what we would have expected at the beginning of the year. I'm not sure that's worsened or improved. We've seen overall balance production actually be quite good, especially in the wholesale business. So I feel like our bankers are out, having great conversations. We're onboarding a lot of new clients. We're -- we're winning a lot. We want to win more, but we're winning a lot. But what we have seen is just product selection and then even some product rotation into just higher rate products. And that's -- I don't think that's necessarily a true comment. I think that's an industry-wide comment. And when you're at some of the psychology that goes into the mindset of a consumer or a commercial or corporate client around storing their liquidity environments like this just tend to have a little bit more rate awareness. And so -- that's not a new update from July. That's just sort of a continuation of what we've seen. And so we're working really hard to first and foremost, defend all the right relationships and then bring the right relationships to Truist and feel like we have the resources we need. I think one thing you'll see us do is amplify our focus on our deposit franchise even more so. We think we've got the most attractive markets in the country, and a lot of you agree with that. We hear a lot from you guys. And so we want to make sure we're growing at least as fast as our markets.

Got it. And maybe tie together in terms of net interest margin. And I guess, maybe let's segment this discussion into pieces, I guess, pre-transaction maybe post transaction. But you were $2.98 in the second quarter. There's -- we talked about loan deposit growth. There's obviously some balance sheet remixing that you've kind of already talked about. Just how do you think about the NIM trajectory from here to that until it's going to hike tomorrow, how does that impact kind of core NIM over time.

Well, the hike tomorrow, we've had in our outlook. So that's not news to us. We would expect and I think we said this back in July that we would expect our net interest margin to modestly improve throughout the second half of the year. . Some of that is just that fixed rate asset repricing in the background, albeit at a slow pace. So that's the bonds rolling up the curve. Traditionally, you would have seen some of these consumer loan portfolios, which we are deemphasizing a touch, roll up the curve, so to speak, as well. You're seeing that, but maybe to a lesser extent, given that we're running on fewer loans than we're running off in some of those portfolios. But then I think you also have some nice benefit at the end of the year around some seasonal public funds balances that we see. So we'll see net interest margin improve a touch at least, I mean, ex rack for the third and the fourth quarter. Rack is a good example of -- that will obviously be NIM dilutive, and it will reduce our overall NII, but obviously, one of the One of the most obvious benefits of that transaction is our credit losses will go down significantly. And as we've already mentioned, our earnings will actually improve. So maybe on a rack impact on NIM might be call it, 4 to 5 basis points. But I think a trade-off that's well worth it again, accretive to RTC accretive to EPS.

When you say 4 to 5 basis points of NIM on Rack, is that net of the securities portfolio repositioning or...

Sorry, yes, that would be net. So I'm thinking about it's -- you probably get a few basis points back on the securities repositioning, so 4 to 5 basis points.

Net of the repositioning?

Yes.

I guess on the repositioning, right, you took a bite of the apple after the insurance transaction.

Yes.