Truist Financial Corporation (TFC) — Q3 2018 Earnings Call Transcript

Thank you, Andrea, and good morning, everyone. Thanks to all of our listeners for joining us today. On today’s call, we have Kelly King, our Chairman and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the results for the third quarter and provide some thoughts for the fourth quarter. We also have Chris Henson, our President and Chief Operating Officer; and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session. We will be referencing a slide presentation during the call. A copy of the presentation as well as our earnings release and supplemental financial information are available on the BB&T website. Let me remind you that BB&T does not provide public earnings predictions or forecasts. However, there may be statements made in the course of this call that express management’s intentions, beliefs, or expectations. BB&T’s actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary statements regarding forward-looking information in our presentation and our SEC filings. Please also note that our presentation includes certain non-GAAP disclosures. Please refer to Page 2 in the appendix of the presentation for the appropriate reconciliations to GAAP. And now, I’ll turn it over to Kelly.

Thank you, Alan. Good morning, everybody, and thank you very much for joining our call. Hope you’re having a great morning so far. We had a great quarter with record earnings driven by strong revenue, broad-based loan growth, and solid expense control. For now, we continue to execute on numerous strategies, which are creating more diversified and resilient profitability. At the same time, we are investing substantially in our digital platform, which creates an outstanding client experience. Net income was a record $789 million, up 32% versus third quarter 2017. Net income, excluding merger-related restructuring charges, was a record $802 million. Very pleased that quarterly fully tax equivalent revenue was $3 billion, up 7.1% annualized compared to the second quarter of 2018, largely due to Regions Insurance, net interest income and investment banking. Our diluted EPS was a record $1.01, up 36.5% versus third quarter 2017, and adjusted EPS was also a record at $1.03, up 32% versus third quarter 2017. We had really strong returns with adjusted ROA, ROCE and ROTCE at 1.52%, 11.88% and 20.33%, respectively. More importantly, we achieved positive operating leverage on a linked- and like-quarter basis, a very strong operating performance. Loans held for investments averaged $146.2 billion, which was up a strong 5.8% annualized. Margin on a net and core basis improved, with net margin improving two basis points, core margin improving three basis points, and Daryl will give you more color on that. Adjusted efficiency ratio was slightly down, and grooved at 57.3%. Adjusted non-interest expense has totaled $1.7 billion, which was up 1.5% versus third quarter 2017. However, if you exclude Regions Insurance, our expenses would have been actually down slightly. So we’re exhibiting excellent expense discipline, even recognizing that we’re making substantial investments in building what I call the new bank or the digital bank. Credit quality was excellent, and Clarke will give you some detail on that in the Q&A. We did increase our quarterly dividend 8% to $0.405 per share. We completed our acquisition of Regions Insurance, and that was a giant add from both a cultural and market perspective point of view. The execution on that has gone extraordinarily well, and Chris can give you detail on that in Q&A. We completed $200 million in share repurchases. If you’re following along in the deck, on Page 4, you’ll see that we did have merger-related and restructuring charges of $18 million pre-tax; $13 million after tax, which impacted EPS negatively by $0.02 per share.

Thank you, Kelly, and good morning, everyone. Today, I’m excited to talk about our excellent credit quality, improving margins, record fee income, effective expense control, and our guidance for the fourth quarter. Our asset quality remains excellent, with net charge-offs totaling $127 million, up five basis points but flat compared to last year, driven by seasonal increases in the Consumer portfolio. Our NPAs continue to be historically low, with an NPA ratio of 27 basis points. This is the lowest level since the second quarter of 2006 and is primarily driven by a decline in non-performing CRE loans. Our allowance coverage ratios remain strong at 3.05x for net charge-offs and 2.68x for NPLs. The allowance to loans ratio was 1.05%, flat from last quarter. We reported a provision of $135 million compared to net charge-offs of $127 million, leading to a modest allowance build. We provided $15 million to our allowance for natural disasters, now at $35 million to reflect potential losses from recent hurricanes. The reported net interest margin was 3.47%, up two basis points. Core margin was 3.37%, up three basis points, both reflecting asset sensitivity to higher short-term risks. Noninterest income was a record $1.2 billion, and our fee income ratio was down slightly to 42.3%. Our expense management continues to be strong, with adjusted noninterest expense just over $1.7 billion, up 1.5% from a year ago. Regions Insurance added $31 million to expenses. We are doing a good job controlling expenses. Our capital and liquidity remain strong with common equity tier one at 10.2%. Our dividend payout ratio was 40%, and our total payout ratio was 65%. In addition to acquiring Regions Insurance, we repurchased $200 million worth of common shares. We plan to repurchase $375 million in the fourth quarter.

Thanks, Daryl. In summary, it’s a great quarter. As Daryl said, we had record earnings, expenses are being managed excellently, and we have excellent execution of strategies designed to create more diversified and resilient profitability. We’re investing substantially in our digital platform, creating outstanding client experiences, which is critical for the future. The economy is good, rates are rising, regulations are improving. That’s a pretty good scenario for banking. There are plenty of challenges out there, but we have huge opportunities to build our new bank while nurturing our old bank. We feel adamant that our best days are ahead. I’ll turn it over now to Alan.

Great, thank you, Kelly. Andrea, at this time, if you would come back on the line and explain how our listeners can participate in the question-and-answer session.

Hi, good morning, guys. I wanted to ask about the loan growth. You showed good loan growth this quarter, and I’m just wondering if you could break it down a bit more between the Commercial side and the Consumer side. Specifically, on Commercial, some of your peers have been running to elevated paydowns. I did notice on a period-end basis, your C&I balances were down. So I’m just wondering what you’re seeing there. And then on the mortgage side, it seemed like residential mortgage was a big driver of loan growth this quarter. What were some of the factors there?

John, this is Clarke. I’ll take that. Kelly mentioned earlier, on the C&I or the commercial side, we have pretty broad-based growth drivers; Corporate Banking was a positive. Our dealer floor plan, mortgage warehouse, Premium Finance, our Sheffield C&I component, small ticket leasing, and general leasing, showed very strong performance. I think the takeaway was our diversified set of platforms helped us overcome challenges and we’re not solely dependent on traditional middle-market C&I. As for the retail side, we had a nice improvement in residential. We chose to hold high-quality super conforming and jumbos out of our correspondent area, as correspondent margins are really tight, but these are very high-quality, high-yielding assets. We had strong results in our card growth and overall, it's a diversification story for us.

Yes, and John, I want to stress two of the points that Clarke made because they are very important. We’ve been working for years on developing this diversified strategy around lending. It’s crucial because while certain categories can look great, they can also perform poorly when the environment changes. Our multifaceted loan asset strategy allows us to maintain good performance across the board. About those paydowns, I think people noticed the 10-year rate spike and perceived it as a tipping point, leading them to bring portfolios to market. It’s a temporary phenomenon and we expect good production to lead to substantial loan growth.

Okay, great. I wanted to ask about your operating leverage. You've shown a nice acceleration this year, and I wanted to know if that level is something you think you can maintain or even expand in 2019?

I’ll give you some thoughts and Daryl can get into more detail. We believe we can continue to achieve positive operating leverage for a couple of reasons. First, we have a multifaceted approach on revenue generation, not just focused on lending. Our insurance business and wealth strategies are examples of this. Additionally, we are focused on controlling expenses. While we are making necessary investments, we are aggressively managing our expense growth. So we are confident about positive operating leverage moving forward.

Yes, I agree, John. On the expense side, we remain confident that we can keep expenses flat year-over-year as we eliminate non-essential expenses and make strategic reallocations towards investment areas like digital transformation. Our revenue is expected to grow with loan and fee income, and we're structurally positioned for continued strength.

Hi. Good morning. I wanted to dig into loan growth because you had very strong growth this quarter, but you’re guiding for a 1% to 3% range next quarter. Can you help clarify that deceleration?

Betsy, generally, it’s two things. We do have a seasonal slowdown in the fourth quarter, and we are being a little conservative given the expectation of continued paydowns. If the paydowns subside earlier than expected, that could offer a boost. But seasonality and paydowns are significant factors.

Additionally, if you consider that our strong quarter was aided by seasonality, our 5.8% growth could be adjusted to more like mid-4s without the seasonal influences. So our outlook is reflective of that context.

Got it. Changing topics, I’d like to understand your thoughts on reserving given the excellent credit quality this quarter. Could you outline your thoughts about the allowance coverage?

We’re maintaining a 1.05% allowance coverage. While we believe our credit quality will remain stable, we don’t foresee any releases due to current conditions. We’ll watch the long-term trends closely, but right now, we're conservatively positioned.

We're preparing for the CECL implementation, looking to be prepared with the models and understanding the potential impacts. Recently, there have been discussions regarding the procyclicality of CECL and its effects on lending. There's a lot of unity within the industry regarding these concerns.

This is a significant issue for the industry. If CECL proceeds as intended, it could negatively impact the economy and our clients. We need to ensure this is studied carefully to avoid unintended consequences. Communication with regulators is critical.

So in the meantime, you're moving ahead with the parallel run next year, is that right?

Yes, we'll conduct a parallel run early next year and assess the overall impact on our portfolios with the updated regulatory accounting framework.

Good morning. Thank you for highlighting the diversity of your Commercial portfolio. With nonbanks emerging in traditional middle-market lending, can you give us your sense of the competitive dynamics?

Yes, that is an insightful question. The aggressive strategies of nonbanks in commercial lending raise risks. However, our diversified strategy positions us well against that competition. We focus on robust lending categories that nonbanks typically do not pursue.

Kelly, just back to your M&A commentary. What’s changed for you regarding bank M&A activity?

The view on scale has shifted. We remain focused on organic growth. My intent was often misunderstood; I've not pursued M&A aggressively in recent years, as our focus is on internal revenue generation.

That clarifies things, thanks. What are your expectations for loan growth in 2019?

We will detail these aspects at our upcoming Investor Conference but anticipate solid growth in loans and performance overall.