Truist Financial Corporation (NYSE:TFC) Q4 2022 Earnings Call Transcript

Truist Financial Corporation (NYSE:TFC) Q4 2022 Earnings Call Transcript January 19, 2023

Operator: Greetings, ladies and gentlemen and welcome to the Truist Financial Corporation’s Fourth Quarter 2022 Earnings Conference Call. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ankur Vyas, Head of Investor Relations, Truist Financial Corporation. Please go ahead, sir.

Ankur Vyas: Thank you, Jess and good morning everyone. Welcome to Truist’s fourth quarter 2022 earnings call. With us today are our Chairman and CEO, Bill Rogers, and our CFO, Mike Maguire. During this morning’s call, they will discuss Truist’s fourth quarter results and share their perspectives on our continued activation of Truist’s purpose, current business conditions and our outlook for 2023. Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, our Chief Insurance Officer, are also in attendance and are available to participate in the Q&A portion of our call. The accompanying presentation as well as our earnings release and supplemental financial information are 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 Slides 2 and 3 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. In addition, Truist is not responsible and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast are located on our website. With that, let me now turn it over to Bill.

Bill Rogers: Thanks, Ankur. Good morning, everybody and Happy New Year. Thank you for joining our call today. Truist delivered a strong finish to a pivotal and purposeful year. We completed our final integration and decommissioning activities and incurred the final set of merger-related costs. Adjusted PPNR grew a strong 12% sequentially, ahead of our guidance and helped us deliver on our commitment for positive operating leverage for the full year. We will cover the details on the quarter’s results throughout the presentation and we will start with our purpose, the foundation of our company on Slide 4. Truist is a purpose-driven company dedicated to inspiring and building better lives and communities. Our purpose is the foundation for our success as a company that drives performance and defines how we do business everyday.

Slide 5 highlights many examples of how we activated our purpose in 2022. For our clients, our measurement is to provide distinctive, secure and successful experiences through touch and technology. We achieved a major milestone along that journey with the launch of Truist One Banking, our differentiated product suite that reimagines everyday banking and includes two new accounts that eliminate overdraft fees and provide greater access to credit. These accounts meaningfully advance financial inclusion in our communities and we are very encouraged by the positive reception they have received from new and existing clients alike. Based on August through December data, which reflects Truist One, branch checking production increased 10% from a year ago period and we achieved this result despite having around 400 fewer branches.

The Truist One suite now also includes our new cash reserve deposit base credit line up to $750, which launched in mid-December and expands our commitment to our clients and communities. Our ability to innovate at the intersection of touch and technology was greatly enhanced by the opening of our new innovation and technology center, which brings our cross-functional teams together with clients and large tech companies to reimagine banking experiences for everyone. We have already realized the benefits of the ITC as Truist One Banking and the new digital and hybrid investment capabilities launched throughout the year were all co-created client with clients and our client journey rooms. We also continued to deliver on our mission for our teammates.

In October, we took a bold step to improve the lives of our teammates by raising our minimum wage to $22 an hour. In the 3 months since this took effect, we have experienced improved teammate recruitment, retention, lower turnover expenses, better execution and an all-around better client experience. We also enhanced our total rewards program to include an employee stock purchase program to further align our teammates’ interest with those of our shareholders. As a company that champions diversity, equity and inclusion, we achieved our goal to increase ethnically diverse representation in senior leadership roles a year early with aspirations for further progress. Finally, Truist has made a significant impact on the communities we serve by meeting and in some categories, exceeding our $60 billion community benefits plan.

Our first inspirational commitment is Truist and one that has served as a framework for similar plans across the industry. The execution of this plan was a testament to our purpose of building better lives and communities by elevating low and moderate income and minority communities through material support for affordable housing, non-profit, small business and community development lending. In summary, we are delivering on our purpose and the significance of what our teammates have accomplished is just outstanding. We will continue to raise the bar and I look forward to the year ahead as we actualize our purpose, advance integrated relationship management, positively impact clients and communities through continued investment in touch and technology and make Truist an even better place to work.

Now turning to Slide 7, selected items for the quarter totaled $170 million pre-tax and included our final charges related to the MOE. Now that our integration activities are complete, MOE costs will exit our run-rate going forward. This is a positive development for shareholders that underscores our pivot to execution and will simplify our narrative, enhance earnings quality and improve capital generation. Turning to our fourth quarter performance highlights on Slide 8. Truist delivered strong fourth quarter earnings of $1.6 billion or $1.20 per share on a reported basis. Adjusted earnings totaled $1.7 billion or $1.30 per share, up 5% sequentially as strong PPNR growth was partially offset by higher provision expense. Adjusted ROTCE was 30% and even excluding AOCI, was 20%.

Both data points are very strong. Net interest income grew 7% to $4 billion, a new high for Truist, supported by strong loan growth and significant margin expansion resulted from higher short-term rates and well-controlled deposit costs. Fee income rebounded 6%, primarily due to insurance seasonality of full quarter of benefit mall results and investment banking. Adjusted expenses increased sequentially, mostly as expected as the impacts of higher minimum wage, acquisitions and targeted investments were partially offset by the final leg of some of our cost saving efforts. Together, these factors drove a 12% increase in adjusted PPNR exceeding our guidance. This performance also resulted in 370 basis points of adjusted operating leverage relative to the fourth quarter of 2021, our strongest operating leverage results for the year.

Our adjusted efficiency ratio was 54.2%, our best quarterly performance at Truist thus far. Asset quality remains strong and the sequential increase in provision expense primarily reflects moderately slower economic assumptions. We also deployed 10 basis points of capital as a result of strong organic loan growth and the BankDirect acquisition. Our capital position remains strong relative to our risk and profitability profile and we remain confident in our ability to withstand and outperform in a range of economic scenarios. Turning to our full year highlights on Slide 9. GAAP EPS was relatively stable year-over-year as significantly lower merger-related costs were offset by higher and more normal provision levels. Adjusted EPS declined 10% year-over-year, a solid 4.4% adjusted PPNR growth, was more than offset by the $1.6 billion increase in the loan loss provision expense.

Importantly, however, we delivered 60 basis points of adjusted and 680 basis points of GAAP operating leverage for the full year, which was a primary metric to which we hold ourselves accountable to in 2022. This was our first year of operating leverage as Truist and it establishes a firm foundation, from which we can accelerate as we head into 2023. Turning to Slide 10, digital engagement rose steadily through 2022 as a result of changing client preferences and our improved agility as Truist. We experienced strong growth in digital transactions and Zelle, in particular, as transaction volume increased 42% since the beginning of the year. Zelle continues to represent an increasing percentage of our overall transaction mix and highlights the importance of continuing to invest in money movement capabilities.

Our agility and responsiveness have improved tremendously since we have migrated to one digital platform built in the cloud, resulting in better client experiences. We delivered 3x as many production releases across retail, business and wealth in 2022 as we did in 2021. And as a result, our mobile app was rated at an average of 4.7 stars on Android and iOS at year end, up materially from a year ago. We introduced many new digital capabilities and solutions to clients in 2022 from Truist One Banking, Truist Assist and expanded digital investment capabilities, some of which are highlighted on the right side of the slide. In 2023, our goal is to more fully activate those capabilities with our clients to improve acquisition, retention and reduce cost.

In addition to enhance digital capabilities for our clients, our digital and technology team successfully completed the largest bank merger in 15 years, decommissioned three data centers, successfully piloted a new deposit product on a next-gen real-time cloud-based core, enhanced credit decisioning and underwriting across certain consumer lending platforms and upgraded our contact center technology stack and completed a 5G network and branch WiFi pilot program. We have a great digital and technology team and they have been battle tested and have demonstrated incredible agility in responding to client needs during the integration period while also keeping their eyes on the future. Turning to loans and leases on Slide 11, average loan balances increased a strong $11.3 billion or 3.6% sequentially, approximately 20% of which came from the BankDirect acquisition.

The improved loan growth we have experienced in recent quarters reflects our shift to execution and Truist’s greater competitiveness for clients due to our size and capabilities as well as broader industry trends. C&I grew $7.2 billion or 4.7% overall and increased 3.2%, excluding BankDirect, as balances increased across most CIB industry verticals and product groups and CCB. As in recent quarters, growth continues to be strong within our Asset Finance Group as we continue to build that business with more talent, product capabilities and larger balance sheet. Macro trends such as supply chain management, infrastructure spending, inflation and choppy capital markets are also supporting growth here. CIB delivered growth across most industry verticals due to a combination of new client acquisition, uptiering our position with existing clients, acquisition activity and business-as-usual liquidity management.

Commercial Community Bank C&I balances grew 3.7%, reflecting the strength of our markets and our team’s focus on execution. Residential mortgage balances increased $3 billion or 5% sequentially due to previous correspondent channel production and lower prepayments. Excluding mortgage, consumer and card balances decreased on an end-of-period basis, primarily reflecting continued runoff in our student loan portfolio as well as our decision to pivot away from lower return portfolios such as prime auto. At the same time, we continue to invest in higher return consumer finance businesses, such as Service Finance, LightStream and Sheffield. Service Finance continues to grow and ended the year with over $3 billion worth of loans, ahead of high expectations at the time of the acquisition.

Going forward, loan growth will moderate from the robust levels in 2022 as clients respond to the impact of higher rates, high inflation and a slowing economy. In addition, we also expect growth in residential mortgage and prime auto to continue to slow as we focus our capital on higher return opportunities. Truist remains well positioned to advise clients across a range of economic scenarios given our broad capability, talented teammates and increased capacity post-integration. Now turning to deposits on Slide 12. Average deposit balances decreased 1.6% sequentially as effects of tighter monetary policy, inflation and higher rate alternatives continue to weigh on balances. Deposit costs remained well controlled, reflecting the strength of our deposit franchise and our strategy to be attentive to client needs and relationships while maximizing value outside of rate paid.

During the fourth quarter, interest-bearing deposit costs increased 52 basis points, contributing to a cumulative interest-bearing deposit beta of 27%, thus far. As the interest rate environment evolves, we will continue to take a balanced approach to maintaining and managing deposit growth and rate paid giving our broad access to alternative forms of funding. Our continued rollout of Truist One and ongoing investments in treasury and payments will be key areas of focus going forward as we look to acquire new and deepen existing relationships and maximize high-quality deposit growth. Now with that, let me turn it over to Mike.

Mike Maguire: Great. Thank you, Bill and good morning everyone. I am going to begin on Slide 13. For the quarter, taxable equivalent net interest income rose a very strong 7% to $4 billion, primarily due to ongoing margin expansion and strong loan growth. Deposit costs were well controlled and reflect the strength of our deposit franchise. Purchase accounting accretion decreased $19 million and is expected to continue to gradually diminish. Reported net interest margin increased 13 basis points and core net interest margin improved 15 basis points as a result of higher short-term interest rates alongside well-controlled deposit costs. Overall, we maintain a balanced approach to managing interest rate risk, maintaining modest upside to higher short-term interest rates while having some downside protection when and if interest rates begin to decline.

Looking to Slide 14, fee income rebounded during the quarter, increasing $125 million or 6% sequentially. The improvement was largely attributable to seasonality and insurance and the BenefitMall acquisition as well as higher investment banking and lending-related fee income. Insurance income increased $41 million, largely due to seasonality and a full quarter of BenefitMall results. Organic revenue for the full year grew 7% driven by a firm pricing environment, new business and strong retention. Investment banking and trading income increased $35 million as higher investment banking fees and strong core trading results in the quarter were partially offset by negative impacts from CVA/DVA. For the full year, investment banking income declined 37%, which we believe compares favorably to overall industry fee performance as the partnership between CIB and other lines of business continues to grow and earn momentum builds.

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Strategic hiring within CIB over the past 2 years has also led to improved lead table standards. Fee income declined 4% compared to a year ago, primarily driven by declines in market-sensitive businesses such as investment banking, wealth and mortgage and partially offset by organic and inorganic growth in insurance. Overdraft fees also declined from approximately $150 million in 4Q €˜21 to approximately $120 million in 4Q €˜22 as a result of the actions we took last year to eliminate a host of overdraft-related fees and the continued introduction of Truist One Banking to new existing clients. We expect overdraft fees to decline another 40% as we move from year end 2022 to year end 2024. While fee income remains below its potential, we are optimistic that our investments in key areas such as insurance, investment banking and wealth will payoff as markets normalize and our IRM execution continues to progress.

Turning to Slide 15, reported non-interest expense increased $109 million or 3% sequentially. Merger and restructuring costs rose $18 million linked quarter and exceeded our October guide by $70 million due to higher-than-expected restructuring charges related to planned facility and branch reductions that will occur in 2023. These were business-as-usual decisions unrelated to the MOE and have solid financial returns. As Bill indicated, we will have no more restructuring charges or incremental operating expenses related to the MOE going forward. We would anticipate restructuring costs related to prior acquisition activity and other BAU expense normal rationalization efforts. It is difficult to forecast these with accuracy, but we would anticipate approximately $100 million to $125 million for 2023.

Adjusted non-interest expense increased $68 million or 2% primarily due to the effects of our non-qualified plan. Excluding changes associated with the non-qualified plan, adjusted expense rose 0.6% sequentially, fairly consistent with our outlook from October. Personnel expense increased $84 million, half of which was from changes in the non-qualified plan and half of which was from the recent increase in our minimum wage. These increases were partially offset by a $35 million decrease in marketing expense and a $28 million reduction in other expense. The decline in other expense was driven by lower operational losses, which have decreased for two consecutive quarters, as recent investments in talent, technology, and process have begun to mitigate our fraud-related costs.

Compared to the fourth quarter of 2021, adjusted non-interest expense grew by 8% as a result of the increase in minimum wage, investments in revenue-generating businesses, technology and acquisitions, higher call center staffing to support our clients post merger and a normalizing T&E spend. For the full year, adjusted expenses were $13.1 billion, up modestly from the $12.8 billion baseline in 2019. This performance is strong, reflecting the achievement of the $1.6 billion net cost save target. Overall, we continue to focus on generating expense reductions in certain areas to fund longer-term investments in talent and technology and to generate ongoing operating leverage. Below the line, our fourth quarter results also reflected an effective tax rate of 16.7%, down from 18.2% in the third quarter, primarily due to annual true-ups for state income tax returns.

Moving to Slide 16. Asset quality is strong, reflecting our prudent risk culture and diverse loan portfolio. Net charge-offs increased 7 basis points to 34 basis points largely due to seasonality in indirect auto and lower recoveries. The allowance increased $172 million, reflecting strong loan growth and the ALLL ratio was stable at 1.34% as the effects of a moderately slower economic outlook were offset by high quality organic loan growth and the BankDirect acquisition. Excluding the BankDirect portfolio, which has extremely low losses through cycles, the ALLL ratio would have increased approximately 2 basis points. Continuing to Slide 17. Our CET1 ratio decreased from 9.1% to 9.0% as we deployed capital to support strong organic loan growth and close the BankDirect acquisition.

We also continue to pay a strong dividend at $0.52 per share. Overall, our capital position remains strong relative to our risk and profitability profile. We expect organic capital generation to improve in 2023 due to the elimination of MOE-related costs and more focused loan growth, all of which will provide additional flexibility and opportunities for Truist. Finally, our liquidity position remains strong with an average LCR of 112% and access to multiple funding sources. Our securities portfolio remains high quality at 97% government guaranteed and continues to produce approximately $3 billion of cash flow per quarter, which has supported our loan growth. Turning to Slide 18 where I’ll provide guidance for the first quarter and full year 2023.

Looking into 1Q €˜23, we expect revenues to decline 2% to 3% relative to 4Q 2022, primarily driven by 2 fewer days impacting net interest income in addition to typical seasonal patterns in investment banking, card and payments and service charges, amongst other factors. Adjusted expenses are anticipated to increase 1% to 2% as higher pension expense and FDIC premiums, along with seasonally higher personnel expenses are partially offset by ongoing cost discipline. For the full year 2023, we expect revenues to increase 7% to 9%, driven largely by strong net interest income growth and modestly improving fees. Adjusted expenses are anticipated to increase 5% to 7% as a result of higher pension expense, higher FDIC premiums, the full annual impact of our minimum wage increase and acquisitions that closed throughout 2022.

These four factors drive about 4% of our year-over-year increase. Given these factors, we are targeting adjusted operating leverage to be 200 basis points or greater, which would be more than 3x our pace in 2022. We also expect the net charge-off ratio to be between 35 and 50 basis points in 2023, given our expectations for continued normalization across the loan portfolio. Lastly, excluding discrete items, we expect our effective tax rate will be approximately 19%, which translates to approximately 21% if you model it on a taxable equivalent basis. Now I’ll hand it back to Bill for some final remarks.

Bill Rogers: Great. Thanks Mike. Continuing on Slide 19, the fourth quarter was a strong finish to a year that was strategic and financial turning point for Truist. The pivot from integrating to operating is real, it’s palpable and it can be evidenced across a number of dimensions. Loan production in the fourth quarter was near the highest it’s been at Truist. This is despite some intentional reductions in certain consumer categories. Commercial Community Bank loan and deposit production in both the fourth quarter and full year was the strongest we’ve had at Truist. Importantly, left lead relationships within CCB were up 36% in 2022, reflecting our increased strategic relevance and advisory capabilities with clients. Branch deposit and checking unit production in the fourth quarter increased 24% and 8%, respectively, compared to the year-ago quarter as teammates became more confident with processes and systems, but also improved solutions and capabilities.

Our wealth line of business has had three consecutive quarters of adding net new advisers, and organic asset flows continue to be positive. Integrated relationship management activity across the company gained momentum throughout the year as a result of more focus, increased alignment and improved reporting as we ended the year with a 16% increase in qualified referral activity, excluding mortgage relative to 2021. Average client satisfaction scores for retail and small business banking are ascending and in the fourth quarter reached their highest levels of for the year in key areas that include our branches, call centers, retail digital experiences and small business. Our digital app ratings ended the year as one of the leaders in our peer group after starting near the bottom.

The financial benefits of this momentum can be seen with the fourth quarter operating leverage being the strongest of the year and adjusted PPNR building each quarter. So to conclude on Slide 20, our fourth quarter results reaffirm that Truist is on the right path, and I’m highly optimistic about our ability to realize our significant post-integration potential to summarize our investment thesis. Our goal financially has produced strong growth and profitability and to do so with less volatility than our peers. 2023 will be our first full year as Truist with zero integration activity, and our priorities are very clear: Core execution to actualize Truist and our purpose, harvesting IRM opportunities, continuing to digitize and automate our processes and operations and maintaining a strong profitability profile.

We will also raise the bar on ourselves, focusing on the KPIs that drive total shareholder return and ensuring executive compensation targets reflects our potential, not just our business mix. While economic uncertainty remains high, Truist is in a position of strength across a broad range of outcomes because of our diverse business mix, conservative credit culture, balanced approach to interest rate risk management, strong profitability profile and our strong risk-adjusted capital position and most notably, our significant performance momentum as we continue to shift from integration to executional excellence and purposeful growth. Ankur, let me turn it back over to you and begin the Q&A.

Ankur Vyas: Thanks, Bill. Jess, at this time, if you would explain how our listeners can participate in the Q&A session.

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Q&A Session

Operator: Thank you. Our first question comes from Mike Mayo with Wells Fargo Securities. Your line is open. Please go ahead.

Mike Mayo: Hi. Can you hear me?

Bill Rogers: Yes, we got you.

Mike Mayo: Okay. Great. So it looks like €“ I’m going to push the Corvette analogy. It looks like you’re guiding for your Corvette of a franchise to go from first to second gear or maybe second or third, but you’re guiding for twice as much revenue growth. You’re guiding for 3x more operating leverage. But I and others are going to be unsure if you’re going to be able to get that given your headcount’s up 3% quarter-over-quarter in the fourth quarter, you have NII pressures from deposits, and you have capital market headwinds. So I guess the question is, what’s your degree of confidence with this 2023 guidance given some of the pressures and the internal expenses? And along with that, your merger saves, are they all in now? Or do you still get some payout effect that you benefit in the first quarter? I know you disconnected three data centers. Thanks.

Bill Rogers: Yes. Yes, Mike, let me start with the last one first. Yes, they are all done. So we’re €“ excuse me, entering the year with positive aspect of not sort of having those adjustments every quarter to talk about. And then as it relates to the confidence in our guidance, there is a lot of market uncertainty. So we have to accept that. I mean there is €“ things could change the inflation, what are clients going to be doing, but we know a lot of our own internal momentum. We talked about €“ I mean, your analogy of first, second or third or fourth. I don’t know how any gears a Corvette has, but we continue to grind through that. So we have our own momentum that we’re creating. And you saw that in some of the production numbers.

I think you see that in some of the deposit betas. You see that in terms of our ability to, I think, outperform both in the asset and liability performance of our company as well as in the stability of some of the fee businesses. We’ve got a great insurance business. We’ve got great momentum within our investment banking business. It isn’t just market-driven. I mean these are also relationships that we’re developing with our commercial core businesses. So we’re expanding our capabilities and our prowess. So while there are headwinds and we accept those and understand those, we have enough of our own tailwinds. I sort of call it, the Truist tailwind. That’s just our increased performance, our increased capacity. And when offset those Mike, that’s what gives me the confidence in the guidance is I can feel enough tailwinds to know that we can offset some of the headwinds that we may be facing.

Mike Mayo: And then a follow-up, you mentioned good insurance, maybe this is for you, Bill and Mike. You have an insurance operation where publicly comparable peers trade at like 3x the valuation of Truist. So lot of press, no comment from you guys. All you did present involving about this business. How do you think about monetizing some of that unrealized value that tracks value so that shareholders might benefit more? Or is this just part of your firm forever and you would never consider a move like that?