Truist Financial Corporation (TFC) — Q3 2024 Earnings Call Transcript

Thank you, Betsy, and good morning, everyone. Welcome to Truist's third quarter 2024 earnings call. With us today are our Chairman and CEO, Bill Rogers; our CFO, Mike Maguire; our Vice Chair and Chief Risk Officer, Clarke Starnes; as well as other members of Truist's senior management team. During this morning's call, they will discuss Truist's third quarter results, share their perspectives on current business conditions and provide an updated outlook for 2024. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist investor relations website at 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 appropriate reconciliations to GAAP. With that, I will turn it over to Bill.

Thanks, Brad, and good morning, everyone, and thanks for joining our call today. Before we discuss the third quarter's results, I'd like to begin with purpose on Slide 4. As you all know, Truist is a purpose-driven company. We're dedicated to inspiring and building better lives and communities. It's the foundation for everything we do and the belief in this mission has never been more important given the extraordinary start to the fourth quarter with two devastating hurricanes. In the days since these storms cut a path through the Southeast, Truist's humanitarian aid team and hundreds of teammate volunteers have been out in force to help our communities. I spent time in recent days with teammates in some of the hardest-hit areas. These teammates are doing incredible, heroic work, helping their neighbors, distributing critical supplies and ensuring Truist facilities were open to serve our clients even as their own lives have been upended. In addition to contributions from the foundation, we've set up several sites where we've distributed supplies. We've also deployed mobile services for basic needs like showers and laundering facilities, as well as mobile branches, ATMs, and generators to serve clients in areas without power. This recovery is going to take time, and we're going to play a significant role in helping these communities recover and rebuild in the days, weeks, months, and even years to come. They can count on Truist. Okay. Let's turn to discussing our third quarter results on Slide 5. We've made demonstrable progress on our strategic priorities during the quarter, and I'm proud of the results our teammates delivered, which included solid underlying earnings, improved momentum, and sound asset quality metrics. On a GAAP basis, we reported net income available to common shareholders of $1.3 billion or $0.99 a share. Adjusted EPS was $0.97 per share, which excluded a few small discrete items that Mike will discuss later in the call. As you can see on the slide, our solid performance was defined by several key themes. First, we grew adjusted revenue 2.4% on a linked-quarter basis due to another strong quarter of investment banking and trading income and a full quarter's impact on the balance sheet repositioning we completed during the second quarter. Second, our results show our continued expense discipline and focus on managing costs. As a result of these efforts, our efficiency ratio improved on both a linked and like-quarter basis. Adjusted expenses increased by less than 1% linked-quarter and declined for the third consecutive quarter on a year-over-year basis. Expenses are now projected to decline in 2024 compared to 2023, which is an improvement from our original commitment to keep expenses flat for the year. Non-performing loans remained relatively stable while net charge-offs were better than our expectations. We did record a $25 million loan loss provision during the quarter specifically related to Hurricane Helene, which Mike will discuss in more detail later. We also returned $1.2 billion worth of capital to our shareholders through our common dividend and the repurchase of $500 million worth of common stock as part of the $5 billion repurchase plan our Board approved in late June. We anticipate repurchasing another $500 million of our common stock in the fourth quarter. Our CET1 capital ratio remained relatively stable, leaving us well-positioned to grow our balance sheet and to continue to return significant amounts of capital to shareholders. Finally, we continue to actively pursue growth opportunities in our core consumer, small business, and wholesale banking businesses. Although average loans declined during the quarter, I'm encouraged by the underlying momentum in terms of increased loan production, greater wallet share within certain businesses, and the talent we're attracting to our company, all while continuing to maintain our expense discipline and investing in important areas like technology and our risk infrastructure. Maintaining this momentum and continuing to execute against our strategic growth priorities will be key to reaching our mid-teens medium-term ROATCE target, which we also announced during the quarter. Before I hand the call over to Mike to discuss the quarterly results, I want to spend a little time reviewing the positive momentum we're seeing within business segments and within our digital initiatives on Slides 6 and 7.

Thank you, Bill, and good morning, everyone. As a high-level summary, we reported third quarter 2024 GAAP net income available to common shareholders of $1.3 billion or $0.99 per share. Our adjusted EPS was $0.97 per share, which included a $36 million pre-tax or $0.01 per share after-tax increase to the gain on the sale of Truist Insurance Holdings and a $16 million pre-tax or another $0.01 per share after-tax reduction on the FDIC special assessment. Total revenue adjusted for the losses on the available-for-sale investment securities that were sold in the second quarter increased by 2.4% linked quarter due to a 2.2% increase in net interest income and 3.1% growth in non-interest income driven primarily by growth in investment banking and trading revenue. Adjusted expenses increased 0.9% linked-quarter but were down approximately 2.3% on a like-quarter basis, reflecting lower personnel costs. Moving on to capital, our CET1 ratio remained relatively stable linked-quarter at 11.6% as current period earnings and a smaller balance sheet were offset by the payment of our common dividend and share repurchases completed during the quarter. From a credit perspective, net charge-offs declined by 3 basis points on a linked-quarter basis and our non-performing loans remained relatively stable both on a like and linked-quarter basis. Next, getting into additional detail, I'll cover loans and leases on Slide 9. Average loans decreased $3 billion or 1% on a sequential basis, reflecting overall weaker commercial client demand and line utilization, partially offset by modest growth in consumer loans.

Thank you, Mike. So, in conclusion, I'm really pleased with the progress we've made as a company this year and I'm confident that we've got tremendous momentum within our company with our clients and with our teammates as our value proposition has never been stronger. First, we've got an incredible franchise with leading share in high-growth markets. We've got highly motivated and energized teammates. We have a fulsome set of specialized wholesale and consumer capabilities that our loyal clients value. Our relative capital advantage is a differentiating factor that gives us a unique ability to grow our core banking businesses by serving existing and new clients, invest in our infrastructure and return considerable amounts of capital to our shareholders in the form of dividends and share repurchases over the next several years. As we execute our strategic growth and capital management priorities, we see a significant opportunity to improve our profitability over the medium term. Our path to profitability improvement is multifaceted and a function of client and business growth while maintaining our cost discipline. I'm encouraged that much of the profitability improvement potential we're working towards is centered on further deepening of existing client relationships and verticals and product lines that already exist at Truist. The good news is we see multiple paths and initiatives that with proper execution will result in improved performance, while we don't have to experiment with new products or expand into new markets to achieve our goals. We plan to accomplish all of this while maintaining our expense discipline and focus on generating positive long-term operating leverage, while also continuing to invest in talent, technology, and our infrastructure. Although it's too early to provide specific earnings guidance for 2025, based on the current momentum, the confidence in our teams and our franchise, where we are in the planning cycle, we do expect to achieve positive operating leverage next year. Finally, we'll never take for granted our strong track record on asset quality as we continue to focus on maintaining strong risk discipline and controls. I'm as optimistic as ever about Truist's future, especially in light of the success I see every day inside our company. I'd like to thank all of our teammates and all of our leaders for their incredible purposeful focus and productivity in moving our company forward. Again, thank you for your interest and investment in Truist. And with that, Brad, let me turn it back over to you for Q&A.

Thank you, Bill. Betsy, at this time, will you please explain how our listeners can participate in the Q&A session? As you do that, I'd like to ask the participants to please limit yourselves to one primary question and one follow-up in order that we can accommodate as many of you on the call today as possible.

Good morning, everyone. Thank you for taking the question. Mike, I was hoping you could please maybe unpack the fourth quarter margin guidance a bit more. For overall NII, I certainly understand the ongoing pressure on loans, but was hoping you might be able to walk through thoughts on how quickly deposit betas might be able to catch up to help support or ideally enhance the margin and then just make some top-level thoughts about the company's overall rate sensitivity at this point.

Yeah. Good morning, Scott. Happy to do that. From a NIM perspective, maybe just to sort of start with the third quarter and give you the trend into the fourth and maybe even give you a sense for kind of where we go from there and I'll link that to the beta. The bulk of the improvement that we saw in the third quarter was really driven by the repositioning. So the 10 basis points from 3.02% to 3.12%. As you look into the fourth quarter, we mentioned the temporary beta lag. We do expect two cuts in the fourth. We did see some improvement in the third, you'll recall. We were better by a basis point on, call it, an average funds rate that was better by 7 basis points for the quarter. So started at, call it, a 15% beta. Our outlook for the fourth quarter is that while we'll accelerate significantly, call it, into the mid, maybe even high 30% from a beta perspective, that will still lag a touch relative to how quickly the assets are repricing. So we see some margin compression there. Maybe it's to the same tune as we guided NII, so call it a 1.5% or so of net interest margin down into the sort of low 3.05%, 3.06% area. We would expect that to catch up very, very early, probably in the first quarter of 2025, and would expect to see the margin stabilize, I'd say, in the first quarter and then begin to improve as we have further cuts as we get into 2025.

Thank you for that information. I wanted to ask about the significant balance repositioning you did earlier this year. I got the sense that this was your only plan in that regard, but given your substantial capital flexibility compared to many banks, do you foresee any further opportunities to adjust, or are you planning to maintain the current position?

Yeah. Look, I think you're right, and we feel like we took a pretty big swing at this in May and have now fully realized at least the benefit into the run rate in the third quarter. We do think that our capital position is an advantage. We're trying to be patient, very focused on growing the business. Bill's talked a lot about the various initiatives in both of our business segments where we do think we're going to have an opportunity to grow footings and leverage capital. Obviously, as that's been a little slower to develop, we're buying back shares at an elevated level. I think we would expect to continue buying back shares at an elevated level. I think the repositioning incrementally, I don't think we want to ever put the tool back in the toolbox necessarily, but I think it's a lower priority for us based on what else we see in front of us.

Yeah. Got it. All right. Thank you very much. Appreciate it.

Hi, good morning.

Betsy.

Good morning, Betsy.

Bill, you mentioned with proper execution deliver on the goals here, the targets that you have. Could you help us understand what do you mean by proper execution? Is that just hitting the goals, or is there a change in how you're operating that delivers proper execution?

There is a strong emphasis on strengthening our relationships with existing clients. I'm very pleased with the momentum we've built in our operations. After the merger, we had many distractions and devoted a lot of effort to client transitions and team onboarding, but those challenges are now behind us. The team is currently focused on executing our priorities with clarity regarding our objectives. When I reference proper execution, I actually mean the continuation of the momentum we've established, which you can see reflected in this quarter. We've seen an increase in primacy rates and a sustained level of new growth. These indicators clearly demonstrate that we are continuing to build and expand our client relationships.

Okay. And then, as we're thinking about the positive operating leverage into 2025, how much of that is being driven by deposit beta lags catching up here with Fed funds? I mean, is that the major driver of how we're thinking about operating leverage as we roll into '25?

There are several factors to consider. First, we have strong business momentum, particularly in investment banking, and we expect this momentum to carry into next year. Loan growth activity is anticipated to return, and we saw production increases this quarter, especially on the consumer side where loan production rose about 3%. We noted significant growth in areas we can focus on, such as service, finance, and Sheffield. Additionally, there was an increase in production on the wholesale side, although utilization hit a low for this quarter, the lowest in the last five quarters. We expect to see some recovery there. We have certain dependencies related to loans, execution, fees, and the deposit beta. I'm very pleased with the team's performance; Mike and his team have shown exceptional leadership, collaborating closely with Kristin and Donta to monitor our deposit betas. As Mike mentioned, we've observed some movement already and expect a slight lag, but we anticipate a transition in the first quarter of next year that will continue from there. The final aspect is managing expenses effectively. We aim to show that we are attentive to our costs and expect to be down this year compared to last year. We believe we can align our expense growth with the opportunities for revenue growth. It’s a multifaceted approach, and while this is a lengthy response to a brief question, all these elements are receiving the necessary focus, and we are committed to managing each of them closely to achieve positive operating leverage.

Thanks so much.

Hi, good morning.

Good morning.

My first question is a follow-up. Mike, you provided some guidance for the fourth quarter. Considering the future trajectory, even though we're not expecting specific insights for 2025 today, can we assume that from the 3.05% to 3.06% level, assets might start repricing faster than liabilities in the first quarter, despite a negative day count impact on net interest income, or will the asset repricing occur later? Additionally, you mentioned the swaps; could you elaborate on the notional amount and the weighted fixed rate received, so we can incorporate that into our analysis?

Good morning, Erika. Regarding the net interest margin trajectory, I believe you are correct. We expect the beta to accelerate in the fourth quarter, around the mid to high 30s, and continue to catch up in the first quarter. At that point, we anticipate that the balance sheet will become slightly liability sensitive after being asset-sensitive in the fourth quarter. As we progress deeper into 2025, considering various factors, we expect the net interest margin to start expanding slightly. You mentioned the day count, which is important. There are two fewer days in the first quarter, so while we may see a stable earning asset base and net interest margin, there might still be some pressure on net interest income dollars. To address your question about swaps, we have two programs to manage our rate position: a receive fixed program to manage our net interest income sensitivity and opportunities, and a pay fixed program to manage asset values and capital volatility risk. In the third quarter, we added approximately $15 billion of forward-starting receivers, bringing our notional to around $60 billion. We also included about $5 billion of pay fixed swaps to the investment portfolio during that quarter. Regarding the transition from active to forward-starting swaps, there was a minor headwind in the third quarter compared to the second due to about $12 billion of incremental receive fixed swaps becoming active. This was manageable, and for the fourth quarter, we do not anticipate much else coming on for the rest of the year. We expect more activity in 2025, but it will depend on market conditions. Based on current trends, this should progressively be less of a headwind moving into 2025. Our receive fixed rate is approximately 3.40% for the notional amount.

Got it. And my follow-up question, thanks for all the detail. Bill, based on what Mike just said, you should see net interest income growth next year. If the market expectations regarding capital market strength in 2025 materialize, you’ll benefit from that as you did this quarter. If the market is as volatile as it may be following an election and a change in administration, that could also be beneficial for your wealth management business. As we consider Truist’s strategy and recognize your goal for positive operating leverage, are you evaluating your expense base more in relation to potential revenue growth in 2025? Should we view Truist as being offensive rather than focusing on managing expenses due to the challenges from the merger integration? I would like your thoughts on that. Additionally, some long-term investors have inquired about why Truist aims for a mid-teens ROTCE while its two super-regional peers target high-teens or mid-to-high teens returns, which I suspect may relate to capital adjustments. I realize this is a compound question, but I’d appreciate your insights on both points. Thank you.

Yeah. Thanks for the comprehensive questions. I think you've characterized the first part of that question exactly right, in the sense that we are on offense, and you can feel it in our company; you can feel it in the results; you can see it in the things that we talked about in terms of this third quarter, and you outlined many of those in terms of momentum. We think about the expense side, and this is the concept of what I talked about in our commitment to long-term operating leverage is the expenses are correlated to that opportunity. And I think today we've got the calibration correlated. I think, as you noted, it was sort of uncorrelated as we were coming out of the merger. And today, I think we've got a really good handle on the capacity to invest and win and grow and be on offense and have those be correlated. Again, you saw good evidence of that in this quarter. So there isn't a merger hangover or other activity related to the expenses. We've been investing and we're going to continue to invest, and we see the results of that in our top-line revenue growth and opportunity. So again, higher correlated and commitment to have an efficient company. So we're operating today at a really much stronger efficiency ratio. So we didn't talk about that. So this commitment to have positive operating leverage on the platform of a really efficient company. So let's put that in one category. And then on the ROTCE side, I think you highlighted sort of the starting point is a little bit different, right, because of the sale of the insurance business and the creation of a lot of capital. So we start sort of from a different framework. I think about it as the speed and increase in terms of return. So, our speed of increase in return, I think, is unparalleled. So where we start from, our ability to deploy capital, both in growing our business and returning capital to our shareholders, I think, has the capacity to grow our ROTCE faster than anybody else. And then once we get to that mid-teens level, then our business model starts to reflect more of what we talked about in the first part of my answer, then I think we sort of catapult from there. But the key is we have the most ability to grow our return over the medium term. Hope that answers it.

Helpful. Thank you so much. Yeah, perfect.

Good morning. I have a question regarding the pace of buybacks in relation to the $0.5 billion this quarter. Is there a possibility of increasing the pace of those buybacks in the near term if loan growth remains slow, or should we consider the $500 million as fairly fixed for the upcoming quarters?

Yeah, this is Bill. So I think we ought to think about it as it's going to stay at an elevated level for some period of time. We've been very clear that we see opportunities to grow our business. So, we want to make sure that we've got ample capital to do that and invest in the growth. If we see that as being much longer than our current view, we have the opportunity to recalibrate or to stay at elevated levels longer or to increase those elevated levels. But for now, I think, and so we talked about the fourth quarter and how we would enter the first part of next year, we're doing that with a lot of confidence in the ability to grow our business.

Understood. In response to your earlier question, considering the external perspective and the fact that Truist has moved past the deal's overhang, can you remind us, Bill, about the areas where you anticipate gaining market share across your businesses? Also, do you believe the bank has reached a point where it will stop losing market share to smaller or out-of-market competitors who have been actively hiring in the Southeast? Thank you.

Let's discuss our market share across all our businesses. On the investment banking side, we have consistently increased our market share this year in nearly every area. We’ve specifically focused on net new growth, aiming to increase the number of new clients, which has been a significant milestone for us. Additionally, we have worked on enhancing our relationship with our existing clients. This quarter, we saw growth in our primary partnerships, both through increased treasury penetration on the wholesale side and product penetration on the consumer side. While new competitors are entering our markets, we are confident in our ability to maintain our primacy and continue growing our share. Although the pace initially slowed following the merger, it's now accelerating, and I expect this trend to persist.

Hi, good morning.

Hey, Mike.

Bill, could you provide more clarity on the financial expectations for 2025 and beyond? Specifically, when discussing operating leverage, what do you consider "long-term" in terms of financial figures? Are we looking at more than $1? Additionally, when you refer to medium-term returns, what years are you considering? My intention is to gain a clearer understanding of management's accountability to shareholders. I noted that in the third quarter, you revised the return targets from the low twenties to the mid-teens. Concurrently, some executive officers received a special leadership bonus award in addition to their existing awards like PSUs, RSUs, LTIPs, and annual incentives. This seems to address issues resulting from previous management decisions, particularly in asset-liability management before the current CFO. There’s also the impact on team morale for those who were not granted the bonus. Recognizing that you didn't receive an award, it's apparent that others in the operating committee likely did not as well. Beyond morale and aligning compensation with performance, I've looked at today's presentation and did not see any mention of shareholders in the context of your mission or rationale for Truist. Although you've taken steps like restructuring the Board and selling TIS to improve the company, it seems shareholders have still seen stock underperformance since the merger announcement. As a result, could you elaborate on the financial expectations following the fourth quarter and the key metrics you believe could enhance stock performance? Thank you.

Thank you, Mike, for your recognition of our ongoing efforts. I want to emphasize that every slide in the presentation focuses on our shareholders. Our commitment is centered around shareholders, and that context is important. Regarding ROTCE, we reset our expectations after the sale of TIH. It was necessary to reevaluate our returns in light of generating significant capital and altering our business structure. While this initial phase lowers returns due to the capital we created, leveraging that capital effectively will enhance returns over time. I believe we are in a prime position to increase those returns because we have the necessary capital to deploy swiftly, both within our operations and through shareholder distributions. We have raised capital efficiently and are poised to deploy it effectively. The elements contributing to our return are focused on strengthening relationships with our existing clients in markets where we already have investments. Our strategy prioritizes projects that promise higher returns and quicker paybacks. We are not looking for long-term payoffs or exploring untested markets; instead, we intend to capitalize on the opportunities within our existing framework to enhance returns rapidly. When I refer to the medium-term, I mean approximately three years, although this can vary based on economic conditions, growth prospects, and interest rates. We expect to maintain momentum, which is evident in our recent performance and will continue to demonstrate in the future. We will strategically use our capital to benefit shareholders, ensuring returns improve at a faster pace than our competitors. I have great confidence in our team's capabilities, and I believe the evidence supports this. As for operating leverage, I request a little more time as we progress through the year to better assess interest rates and asset growth. Our dedication to achieving positive operating leverage remains steadfast. I expect we will successfully navigate this transition next year and continue to see improvements in operating leverage with enhanced returns as mentioned earlier.

I have a follow-up question regarding the incentives for management. I reviewed the proxy last night, which is part of what a bank analyst does for a long time. I also noticed the release from this quarter, which shows there are 12 financial metrics and five non-financial metrics influencing compensation. With so many metrics in play, if you could highlight one or two key metrics that we outside observers should monitor to drive shareholder value, which ones would you choose?

Yeah. I mean, appreciate you diving into the proxy. I think as you dive into that proxy, you'll see compensation based on performance. So I think you'll see that actually quite clearly. So, don't assume that we don't have that mentality at this company. And I think the primary measures that we look at are ROTCE and growth in our business. So you have to have really good return, and you have to have growth. So we're looking at total book value per share plus dividends plus ROTCE. So total absolute growth and total relative return growth.

All right. Thank you.

And I think those, in fairness, are the highest correlated to share price return.

Hi. Good morning. In the prepared remarks, you guys mentioned about increasing in the fourth quarter investments related to risk infrastructure. I was just wondering if you could elaborate on what that is and the drivers of, I guess, why now?

Yes, Matt, this reflects our ongoing investments in risk infrastructure. This includes various aspects of building a more reliable and consistent framework. Consider our investments in cybersecurity and data, along with all the related elements. While these investments can fluctuate from quarter to quarter, they are on the rise and are part of our overall guidance. In the fourth quarter, we encountered some specific items that were unique to that timeframe, but they have also been taken into account in our guidance for positive operating leverage for the upcoming year. We will continue to invest in infrastructure; this is not a one-off occurrence. It is a sustained commitment for a company of our size, given our responsibilities to clients, regulators, and shareholders.

And I know when you combine the two companies, you guys made a lot of investments in, call it, the gut to the company, taking the best of both and creating some new platforms. Maybe just like give us a quick snapshot of like what is there still to do? Like, is it catching up on something? Is it just kind of business as usual staying up-to-date like all the other banks are doing?

I think regarding our risk infrastructure, we've observed heightened expectations in how we manage data, as well as in AI and our planned investments in that area. Additionally, there are increased expectations around cybersecurity. These are not issues that were overlooked during the merger; rather, they represent ongoing improvements we want to pursue in response to the opportunities and challenges we face in the financial services sector.

Hi, Bill. Hi, Mike.

Hey, Gerard.

Can you guys share with us, Bill, in your prepared remarks and you talked about market share in response to a question, but you were talking about wallet share, how in some of your businesses you're gaining wallet share. Can you share with us how can we as outsiders measure that success, growing that wallet share? And second, what are you doing to grow that wallet share that's showing up that maybe you didn't see three years or four years ago?

Yeah. I mean, the best way to see the wallet share gain is to see it in the overall returns of our business. So if you think about the return expectations and increasing ROTCE, think about that for us as increasing ROA. Think about that as the focus. So we have the assets deployed, we have resources deployed, and we increased the penetration. This time we talked about checking primacy up 1%. We talked about treasury management penetration of our commercial base up 1%. So hopefully, we're giving you that kind of information that's consistent to demonstrate that primacy, but you primarily see it in the returns. So that's the focus. I mean, that's the big way we drive returns for this business is improving our primacy with our clients. Well, you're really on it, and the answer is both. We have this concept called T3. So this concept of that touch and technology equals trust. So what we want to do and the capability that we've built, for example, our clients in Truist Assist. So, our digital clients can have a virtual assistant to sort of help them in their transactions, but what we believe is that they also have the opportunity to then transition to a human interaction with that. So you've got to sort of supply both of those opportunities. When a client is interacting with us digitally and shows up in our branch, we want to be able to follow up on that transaction and continue that process. So I think they're actually both really important as part of the overall process. And it never becomes clearer in something like we've experienced in the last few weeks in the storms. So those economies go to cash during that particular time. So our branches and our ATMs are the most important thing that those communities need at that time. They don't have access to digital; the internet is down, power is down. So being able to toggle between both of those and making sure that we serve our clients in the way that they can best be served. And that's why I led with that in this particular commentary is just to show how important both of those things are because the goal is to create an enduring relationship with the community and with the client. And we do that by investing in the channels that are most important to them when they're most important to them.

Okay. Thank you, Betsy. That completes our earnings 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. Betsy, you may now disconnect the call.