Truist Financial Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2022

There are 12 speakers on the call.

Operator

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's Third Quarter 2021 Earnings Conference Call. Currently, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Ankur Vaez, Head of Investor Relations with Truist Financial Corporation. Please go ahead.

Speaker 1

Thank you, Jake, and good morning, everyone. Welcome to Truist's Q3 2022 earnings call. With us Today are our Chairman and CEO, Bill Rogers and our CFO, Mike McGuire. During this morning's call, they will discuss Truist's 3rd quarter results and share their perspectives on our efforts to transition from an integration focus to an operating focus, current business and our continued activation of Truist's purpose. Clark 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 and A portion of the call.

Speaker 1

The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website, ir. Truest.com. Our presentation today will include forward looking statements and certain non GAAP financial measures. Please review the disclosures on Slide 23 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 for and does not edit nor guarantee the accuracy of our earnings With that, I'll now turn the call over to Bill.

Speaker 2

Thanks, Ankur, and good morning, everyone, and thank you for joining our call today. Our Q3 reflected strong progress Many areas overall. However, financial performance was mixed, reflecting continued challenging market conditions. Strong spread income resulted from significant margin expansion that exceeded our guidance and strong broad based loan growth. Credit quality remains excellent.

Speaker 2

At the same time, capital markets revenue did not rebound as anticipated and in fact declined linked quarter. Strategically, we We continue to realize the benefits of shifting from integrating to operating, which I'll share more on later. I acknowledge that operating losses continue to be too high. However, other expense growth reflects targeted investments in talent and technology in key areas of long term sustainable growth. Merger calls diminished again and our remaining decommissioning activities are mostly complete and will be finalized by year end.

Speaker 2

We'll Share details on each of these themes throughout the call. And turning to our purpose on Slide 4. Truist is a purpose driven company that's dedicated to inspire and build better lives and communities. This commitment to purpose and our value of care Could not have been more apparent in how our teammates responded to each other and their clients in the aftermath of Hurricane Ian. I experienced this firsthand when I visited with our teams in Southwest Florida soon after the storm subsided.

Speaker 2

Clients expressed their and other critical items that we sent to the region made a real difference. And the $1,250,000 donation from the Truist Foundation We'll continue to provide support to affected areas in Florida and South Carolina. The rebuilding process has only begun and Truist is committed to In order to inspire, it's often necessary to be bold and to be first, and that's exactly what we did on October 1, we made a significant investment in our teammates by raising our minimum wage to $22 per hour. The new minimum wage benefits approximately 14,000 teammates, about 80% of whom are in client facing roles. We strongly believe this action will drive purposeful growth and offset the estimated $200,000,000 increase in annual personnel expense Through improved teammate recruitment and retention, lower turnover expense, better execution and an all around better client experience.

Speaker 2

In fact, we're already starting to see the benefits of the higher minimum wage. Teller turnover in August September was down about 25% compared to the 1st 7 months of the year. And our branch vacancy rates have been cut in half since July. We also advanced our commitment to Inspire with the launch Truist One Banking in July. Truist One is our differentiated suite of checking solutions that reimagine everyday banking, including 2 new accounts that eliminate overdraft fees and provide greater access to credit.

Speaker 2

The flagship TruistOne checking account has 0 overdraft fees and the capability to provide qualifying clients the liquidity they need through a simple $100 negative balance buffer. We also introduced the Truist Confidence account, which provides consumers access to mainstream banking services and no overdraft fees. These accounts meaningfully advance financial inclusion in our communities and have been embraced by new and existing clients. Since their launch, overall branch deposit production has increased 13% in August September compared to the prior year Despite having 16% fewer branches. We're also in the process of rolling out our cash reserve deposit based credit line up to $7.50 We began a pilot earlier this month and expect the cash reserve feature to be available across our footprint later this quarter.

Speaker 2

Turning to Slide 7. Merger costs totaled $152,000,000 down 36% is a monumental move forward that will reflect a seamless client experience, simplify our narrative, Enhance our earnings quality, improve capital and help us realize industry leading returns. Turning to our Q3 performance highlights on Slide 8. We earned $1,500,000,000 or $1.15 per share on a reported basis. Adjusted earnings totaled $1,700,000,000 or 1 point 2 4 Up 3% sequentially as 5% adjusted PPNR growth was partially offset by higher provision as a result of our higher Net interest income grew 10% to a post merger high benefiting from higher short term rates and well controlled deposit cost, all of which drove significant margin expansion as well as strong broad based loan growth.

Speaker 2

Despite solid forward Progress, the pace of PPNR growth was weaker than we had anticipated, primarily due to ongoing pressure in Investment Banking as well as unfavorable valuation marks taken at Adjusted expenses increased 2.6% linked quarter, mostly as expected. However, operational losses remain elevated. While we made a purposeful decision to proactively refund our clients for fraud losses, our overall goal is to reduce them This is an industry wide phenomenon and part of our technology spend is directly related to this effort. These investments include efforts to enhance identity, authentication and fraud detection among others. Adjusted operating leverage was a Strong two sixty basis points compared to the Q3 of last year, reflecting strong net interest income growth combined with modest expense growth.

Speaker 2

This momentum has helped us close the gap towards our goal of positive operating leverage for the full year 2022. Asset quality remains excellent notwithstanding normalizing trends and a seasonal uptick in net charge offs within our consumer portfolios. We deployed 10 basis points of capital to support strong loan growth and complete the Benefit Mall acquisition, which expands our capabilities We're confident in our ability to withstand and outperform in a range of economic scenarios. Now turning to Slide 9. Digital activity continues to increase from the 1st quarter levels, reflecting strong momentum post integration.

Speaker 2

This progress reflects our We have delivered 3 times more production releases across Business, Retail and Wealth than in all of 2021. Client satisfaction with their digital experience has also improved rapidly each quarter. Consistent with our pivot from integrating to operating, our technology and digital teams are allocating more of their time, energy and resources to transformation and innovation. To that end, we recently launched Truist Assist to our retail and wealth clients through our mobile and online banking platforms. Truist Assist is our AI enhanced virtual assistant that leverages natural language processing and natural language understanding to interact and respond to client questions.

Speaker 2

Through September 30, Truist Assist had been deployed to our personal banking clients and had been utilized by 114,000 unique clients handle 147,000 interactions that otherwise might have occurred in a branch or contact center. We're also expanding Light both by enhancing the sophistication of its underwriting models through artificial intelligence and by piloting a new savings product to broaden its capability set. In addition, the recent acquisition of the Arena platform from software startup Zaloni will help accelerate our data journey through the development of a stronger data infrastructure solution deployed in a hybrid cloud environment. As a result, our data quality, analytics and speed to market will all significantly improve. Overall, I'm highly optimistic about the potential of our increased investments and capabilities to enhance performance and client experience.

Speaker 2

Turning to loans and leases on Slide 10. Loan growth was strong and broad based for the 2nd consecutive quarter. Average balances grew $13,000,000,000 or 4.3 percent sequentially, in part due to our shift from integrated to operating. C and I remained strong as average balances grew $7,000,000,000 or 4.5%. C and I loans grew across most CIB verticals and product groups reflecting higher revolver utilization, the current shift to banks from the bond market and our increased competitiveness for new and existing Revolver utilization increased just over 100 basis points to approximately 31%, the highest level since the Q2 of 2020.

Speaker 2

In our Commercial Community Bank, C and I balances excluding PPP and dealer floor plan increased 1.3%, the 7th consecutive quarter of growth. We achieved growth across almost all of our CCB regions. Residential mortgage balances increased $4,000,000,000 or 8.2 percent, reflecting Previous correspondent mortgage production and slower repayment speeds. Excluding mortgage, consumer and card balances increased 3.1%, Strong growth in prime auto, service finance, LightStream, recreational lending and Sheffield more than offset runoff in our partnership and student portfolios. Production in our consumer finance business is up 20% year over year, reflecting good business development momentum with service finance, abating inventory shortages within Sheffield and RAC and improved automated decisioning capabilities across the board, which ultimately improves consistency, efficiency And creates better client experiences.

Speaker 2

Near term, our loan growth outlook remains healthy as our pipelines are relatively strong and also expect growth in residential mortgage and prime auto to slow going forward as we shift our capital towards higher return opportunities. Truist continues to remain well positioned to advise clients across a broad range of economic scenarios given our capabilities, talented teammates And increased capacity post integration. Now turning to deposits on Slide 11. Average deposits decreased saving in response to higher inflation and seasonal patterns. Deposit costs were very well controlled reflecting Treasury teams continue to deliver excellent execution against a thoughtful strategy to be attentive to client needs and client relationships, while maximizing value outside of rate paid.

Speaker 2

As a result, interest bearing cumulative deposit betas have been 21% thus far, well below our modeled As the interest rate environment evolves, we'll continue to take a balanced approach to managing deposit growth and rate paid, particularly given our broad access Before I turn it over to Mike, I'd like to acknowledge and thank Daryl Beibold. He has built a best in class finance function. He played a key essential role in the success of our merger and he's really been incredibly supportive in helping Mike transition into the CFO role. Many of you in the investment community know Darryl well and appreciate his knowledge and transparency, which will continue to be hallmarks of Truist going forward. I'm also excited to introduce Mike McGuire as our new CFO.

Speaker 2

Most recently, Mike led Truist Consumer Finance and Payments Businesses, including LightStream, Service Finance, Sheffield and Auto Finance. He was also responsible for our Enterprise Mike is a strategic thinker, a purpose driven leader with an exceptional depth of experience across our enterprise and a deep understanding of how technology Shaping our operating environment. It's truly an industry thought leader in the FinTech space. We'll certainly draw on this Mike assumes his new role during this time of exciting transformation. So Mike, with that, I'm going to turn it over to you.

Speaker 3

Thank you, Bill, and good morning, everyone. Before I begin, I would also like to thank Daryl for his guidance and his support throughout my transition into the CFO role. I'm excited about the opportunity and I'm confident that the transition will be seamless for all of our stakeholders. I also want to thank my teammates in the finance organization for welcoming me and for their support. We have a really talented team and I look forward to working with all of them.

Speaker 3

For our analysts Investors, I'll be on the road soon and hope to meet as many of you as possible. This is really a great opportunity and I'm excited about helping take Truist to new heights. So moving to Slide 12. For the first of the quarter, net interest income increased 10% sequentially to $3,800,000,000 As higher short term interest rates and strong loan growth more than offset lower purchase accounting accretion. Core net interest income was up a strong 14%.

Speaker 3

Deposit costs remain well controlled, reflecting the strength of our deposit franchise. Lower purchase accounting accretion was the result of elevated accretion in previous periods due to conversion activity and slowing prepays in the current period. Reported net interest margin increased 23 basis points, while core net interest margin increased 30 basis Fee income decreased $146,000,000 or 6.5 percent sequentially. Insurance income decreased $100,000,000 primarily due to seasonally lower property and casualty commissions. Investment banking and trading income decreased $33,000,000 As lower fees from structured real estate, investment grade and high yield bonds and syndicated and leveraged finance were partially offset by increased M and A fees.

Speaker 3

Wider credit spreads, tightening liquidity and general macroeconomic and geopolitical uncertainty are all contributing to slower activity levels. Despite these current headwinds, we continue to make strong strategic progress within Corporate and Investment Banking. Capital Markets revenue from non Continue to learn how to successfully partner with CIB to deliver strategic advice to our clients. Our lead table position has improved across most products, including Equity Capital Markets, High Yield, Investment Grade and syndicated and leveraged finance. Given the strategic progress, We intend to continue to take advantage of the challenging environment to invest in Truist Securities by selectively adding talent to drive long term share gains as we successfully done during previous market disruptions.

Speaker 3

Other income excluding impacts from our non qualified plan decreased $17,000,000 linked quarter primarily due to valuation related marks. Compared to a year ago, other income decreased $81,000,000 as a result of lower investment income and valuation marks on SBIC related and other strategic investments. Turning to Slide 14. Adjusted non interest expense increased $83,000,000 or 2.6 percent sequentially, reflecting forward focused investments in talent and technology as well as elevated operational losses. Professional fees And outside processing expense increased $34,000,000 on an adjusted basis as we advanced critical projects including investments in cybersecurity, Contact center modernization, fraud detection and the build out of our in house payments capabilities.

Speaker 3

Other expense increased $28,000,000 primarily due to higher operational losses. Personnel expense increased $23,000,000 on an adjusted basis, reflecting strategic and purposeful additions in technology, commercial community banking, CIB, consumer finance and wealth as well as the Benefit Mall acquisition. Compared to the Q3 of last year, adjusted non interest expense only increased 2%. This modest increase was driven by higher operational losses and investment spend, which were partially offset by merger related cost savings and software and 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. As an example, we believe recent technology investments to enhance identity authentication, fraud detection among other factors will mitigate operational losses.

Speaker 3

Also with the conversion behind us, we have additional flexibility to rationalize certain businesses Such as mortgage, where capacity exceeds demand. Lastly, we have our final leg of data center related technology savings that is expected to Throughout the Q4. Below the line, our 3rd quarter results also reflected an effective tax rate of 18.2%, down from 19.5% in the 2nd quarter, primarily due to discrete tax benefits arising from final true ups to our 2021 tax return. We continue to expect a normal effective tax rate to be 20%, which translates to 21% on a fully taxable equivalent basis. Moving to Slide 15.

Speaker 3

Asset quality continues to be excellent, reflecting our prudent risk culture and diverse portfolio. Leading credit indicators remain strong. Non performing loans decreased 1 basis point and loans 30 to 89 days past due decreased 7 basis Net charge offs remained benign at 27 basis points, up 5 basis points from the prior quarter, primarily due to normalizing trends and seasonality in certain consumer portfolios. Our total allowance increased $18,000,000 to support our loan growth and the ALLL ratio decreased 4 basis points due to strong portfolio performance and growth in higher quality loans, partially offset by a moderately slower economic outlook. Moving on to Slide 16, our CET1 ratio decreased from 9.2% to 9.1% as we deployed capital to support strong loan growth and to complete the Benefit Mall acquisition.

Speaker 3

We also increased the dividend 8% to $0.52 per share beginning in the 3rd quarter, reflecting our confidence in our improving earnings trajectory. Overall, our capital position remains strong In light of our risk and profitability profile and we maintain a strong liquidity position with access to multiple sources of funding for incremental loan growth. Turning now to Slide 17, I'll next outline the strategic rationale and financial impact of 2 recently announced insurance acquisitions. First, Benefit Mall closed on September 1, providing a scaled entry into wholesale employee benefits and filling one of the remaining strategic gaps Benefit Mall is expected to add $160,000,000 of annual revenue at an initial EBITDA margin in the mid-twenty percent that will build to the mid-thirty percent over time as synergies are realized. The transaction also has potential earned benefits within Truist Insurance by supporting our brokers at McGriff, our retail insurance business and also outside tourist insurance with our corporate and commercial clients.

Speaker 3

We also recently announced the acquisition of BankDirect Capital Finance. Strategically, BankDirect effectively doubles our premium finance business, broadens our capabilities to include life insurance and expands our West Coast presence. Pro form a, we estimate Truist Insurance Holdings will be the number 2 While both acquisitions are expected to be dilutive initially, we believe they are strategic and financially attractive over the long run. I'll now provide new guidance for the Q4. Looking into the Q4, we expect a mid double digit basis point increase in both our core and reported net interest margin due to benefits from the recent rate hikes and a projected 75 basis point hike in November.

Speaker 3

Fees will rebound sequentially driven by insurance income improving due to seasonality, solid organic growth and the full impact The Benefit Mall acquisition, the extent to which investment banking fees improve will be dictated by levels of capital markets activity. Adjusted expenses are anticipated to increase approximately 1% as the increase to minimum wage, Investments in revenue producing businesses and technology and acquisitions are partially offset by the impacts of cost savings. Putting these pieces all together, we expect adjusted PPNR to grow approximately 10% with some upside based on the realization of Investment Banking Pipelines. Based on our year to date results and 4th quarter expectations, we are on track to achieve positive operating leverage for the full year. We remain consistent with our expectations that the net charge off ratio will be between 2535 basis points for the full year due to our performance year to date and normalizing trends across our loan portfolio.

Speaker 3

With that, I will turn it back to Bill to conclude.

Speaker 2

Great. Thank you, Mike. Continuing to our strategic shift on Slide 18. Earlier this year, I expressed my view that the Q1 was a strategic and financial turning point for Truist. Our Q3 results Build upon the Q2 progress, even as market conditions diminished overall PPNR trajectory, progress is real and it's palpable.

Speaker 2

We've made significant progress in our digital and technology areas as evidenced by improving mobile app ratings and enhanced client experience within treasury and payments and many other new features and capabilities that strengthen the financial confidence of our clients. Speed to answer in our care centers is now well below our initial service level agreements and more investment will improve the efficiency as well. Loan production in the 3rd quarter was the highest it's been at Truist, Up 8% compared to the 2nd quarter. Branch loan and deposit production are up a solid 14% 20% like quarter respectively as 17% sequentially and the amount of income generated from referrals by our commercial community bank was the 2nd highest ever, Both highlighting the power of our advice driven and client centric model. Our brand awareness was up almost 400 basis points in the 3rd quarter, While our peers were flat to down and our brand consideration, which measures whether consumers are giving truest or serious thought, Rose 2 10 basis points and ranks us 5th highest in our markets having only been alive for that brand for 3 years.

Speaker 2

Almost all of our client satisfaction scores are ascending and in many cases at their highest level since we become Truist. The financial benefits of this momentum are being realized and will be increasingly visible as market conditions normalize and merger related expense noise abates. To conclude, Truist is on the right path and I'm highly optimistic about our ability to realize our significant post integration potential, which is 2, execution, transformation and growth. We're investing in digital and technology as we reduce costs, including operational losses. We're simplifying our processes and operations and we're acting on our purpose each and every day with a singular goal of improving our client experience.

Speaker 2

We're also intensely focused on capturing the significant integrated relationship management and revenue synergy potential we have as it's Squarely in the center of building better lives for our clients. These shifts and activities do not require incremental risk appetite or capital, Just execution and focus, both of which lie within our sphere of control. Externally, while we believe the economy is generally healthy, Persistent high inflation and a rapid tightening of monetary policy combined with geopolitical tensions have reduced visibility and increased model for clients, conservative credit culture, diverse business mix and our strong capital position relative to our risk profile And our significant performance momentum as we continue the shift from integration to execution and growth.

Speaker 1

So that we can accommodate as many of you as possible today.

Operator

And we will begin with Jared Cassidy with RBC.

Speaker 4

Thank you. Good morning, guys.

Speaker 2

Good morning, George.

Speaker 4

You mentioned that you guys Had positive operating leverage on an adjusted basis of 260 basis points. Can you give us some color what you're thinking about When you look at adjusted positive operating leverage for the next 12 months, what do you think that could come in at?

Speaker 2

Yes. I think we'll obviously for the balance of the year, we talked about this as well that I think we'll have positive operating leverage for the year. As we look into 2023, obviously, there are a lot of puts and takes. There's a lot of uncertainty headed into that. But positive operating leverage is going to be a core tenant of what we do.

Speaker 2

So if we look at the revenue potential in terms of The loan growth and deposit production we've had, being able to capitalize on those opportunities with those clients as we move forward. So even if the economy slows down a bit, we still have a lot of momentum in that area. We've got great strength in our insurance business. We've got great strength in our Overall Capital Markets business, wealth has been building its capability. So we've got a lot of engines and tailwind from that side.

Speaker 2

And then we've got a lot of tailwind on the cost saves. So we'll complete the bulk of the merger cost saves At the end of this year, but heading into next year is really where we get to leverage all those. If you think about the concept of you put 2 things together, Now you make those two things more efficient. So those opportunities for digitization and automation, we're consolidating our card platform, all the things that will continue on in terms of cost All the things that will continue on in terms of cost saves. So I'm just I don't not giving specific guidance on operating leverage for the year other than That will be a core tenant and component of how we plan for the future.

Speaker 4

Very good. And then as a follow-up question, You pointed out that the deposit beta was 21% on a cumulative basis and then 14% without the Brokered CDs and that was below your models. Two things, can you tell us what your model would have suggested And then second, using the Fogo curve, where do you think you end up with the final cumulative deposit beta? Thank you.

Speaker 3

Hey, good morning Gerard, it's Mike. I'm happy to take that one. So you're right, we've been very pleased by the performance of the deposit portfolio So far at 21%. I think we said earlier this year, we expected betas to be closer to 30% as we get to the second half of the year. We still Expect that to be the case by year end.

Speaker 3

In terms of a terminal beta, very, very hard to tell. We've seen Probably some lag given the rate at which rates have increased. And so we do expect there to be some catch up, But whether or not it will be to the tune of the previous cycle in the mid-30s or beyond, we'll be We'll observe that together.

Speaker 4

Very good. Thank you, Mick.

Operator

We'll move to Ken Usdin with Jefferies.

Speaker 5

Hi, good morning everyone. Thank you. Just want to ask a question on funding and deposits. You guys are showing fairly good resiliency as is the industry. Just A little more context of what you're expecting to see in terms of mix shift and also your thoughts, it looked like you did add a bunch of wholesale borrowings relative to your incremental So just think help us think about how you're thinking about liability structure and deposit growth?

Speaker 5

Thanks.

Speaker 3

Ken, good morning. It's Mike. I'll start here as well. So again, we have been very pleased from the deposit With only a sequential decrease of 1%, and so very pleased by how the balances are hanging in there. We are expecting I think over the near term to continue to have some pressure on deposits as well as some pressure on mix.

Speaker 3

We did see Some shift from DDA into interest bearing. That's been a moderate shift so far and we're still well above levels Now that we experienced pre COVID, but we are beginning to see that shift to take place. In terms of short term borrowings, you're right. We are Accessing brokered markets, we are accessing short term markets and do expect that to Continue over the intermediate term, but don't expect that to shift significantly. As we think about funding, Loan growth for 1 has been very, very high so far year to date.

Speaker 3

We do expect loan growth to moderate somewhat, which should alleviate some of that gap. But between the deposit balance levels, between leveraging some of the securities portfolio running off to the tune of $10,000,000,000 to $15,000,000,000 per year, accessing some of the wholesale markets, which is a pretty wide array Of tools and even thinking about the capital markets, we feel really good about our funding capability.

Speaker 5

Yes, Kevin.

Speaker 2

Yes, Ken, maybe just to add to that in terms of the first part of the question too is just the strength of our deposit franchise. It's pretty granular, 42% under 250,000. We've got really good market share. But What we're seeing and I talked about this in my prepared comments, our production is really strong. Truist one It has been really successful.

Speaker 2

Our teammates have really responded clients and both new clients and existing Clients have really responded. Investments in treasury payments and so we're leaning into this in terms of our own capabilities From the deposit production side. And then for the Q4, remember the Q3 has got some seasonality and things Public funds, for example, where that's a strong area for us. So I think we'll be sort of stable in the Q4. And then Mike talk, I think,

Speaker 5

And just one quick follow-up, just can you just give us a sense of where you're reinvesting the cash flows that are going back into the

Speaker 3

The cash flow that's coming off Is being invested in the loan portfolio. There's de minimis investing to support our CRA efforts, but The bulk of the cash flow is being invested in loans. Okay. The great news is

Speaker 2

we have something to deploy towards, which is perfect, right?

Speaker 5

Yes, understood. Thank you.

Operator

Moving on to Ryan Nash with Goldman Sachs.

Speaker 6

Hey, good morning, Bill. Good morning, Mike.

Speaker 2

Good morning, Rob.

Speaker 6

So Bill, you saw And I saw a nice sequential growth and it's likely to continue to grow into 4Q given your outlook plus the asset balance asset sense of balance sheet. So I guess based on your comments on to Gerard, beta is in the mid-30s or maybe a little bit higher. Do you think you can continue to grow NII On a sequential basis, as we look ahead over the next few quarters adjusted for seasonal impacts and maybe just talk about some of the puts and takes involved in that?

Speaker 2

Yes, Mike, I'll let you start and I'll talk about that as well.

Speaker 3

Yes, Ryan. Good morning. Thanks for the question. You're right. I mean, look, we've got really good Going into Q4 with NIM, as we mentioned in our guide, expected to increase 15 or so basis points.

Speaker 3

Look, as long as rates Continue to increase. We expect to continue to see some NIM expansion at some point. I think we all Expect to achieve this terminal policy rate and whether it's higher longer or begins to decline, we'll see. From an NII perspective, we'll obviously benefit from that NIM expansion over that period. And then I think as NIMs begin to feel some pressure, We feel good again today.

Speaker 3

We've got really nice earning asset growth. We expect that to moderate, but should offset any impact Over the intermediate term of the decline in NIMs, we see 23 from a rates perspective as a relatively stable period.

Speaker 2

To Mike's point, a lot of it also depends on loan growth and what we see going into next year, Really positive momentum through this quarter, which I think will continue into the Q4. It all for it gets a little murkier as we Head into next year, but I like the momentum and the production and the pipelines and the relevance and the competitiveness of our franchise right now from that standpoint.

Speaker 6

Got it. Bill, maybe a bigger picture question for me. So I think at a recent conference, you highlighted that you expected expenses to grow in 'twenty three, which It makes sense given you've done a handful of deals as pressure from inflation. However, when we think back on the drivers of the merger, we were talking Best in class growth, improving returns. And I know we've now made this shift to offense, but when I speak to investors, I get the sense they feel we're not Quite there yet.

Speaker 6

So, well, I know you're not giving 2023 guidance. What do we need to see for this to begin to come Drew, whether it's operating leverage or better than peer expense growth and just how are you measuring the success of all these efforts?

Speaker 2

Yes. I think overall, I mean, we've talked about this. It's the measurement of can we grow revenue long term over time And PP and O are faster and relative to our market opportunities. And I think that opportunity sits squarely in front of us. I think if I look at the things that contribute to that in the areas of production like loan production, AUM production, deposit production, I'd argue actually we're sort of getting to sort of a peak kind of performance in those areas.

Speaker 2

As it relates To the expense side and this stuff just doesn't go quarter to quarter. You just they're going to have different levels of investment. We've made a conscious decision. And while I'm well, I'll look, I'll acknowledge I'm cranky on the operating losses side. So, operational losses, I think We've got some opportunity there.

Speaker 2

I see some improvements coming, but that has been longer and taken longer than I anticipated. We're consciously investing in some areas. So we're consciously investing in Investment Banking and Wealth and Insurance. And You know us well. I mean, we've got a good track record here.

Speaker 2

When times are a little bumpy and the opportunity is there, we've taken advantage of it and that's Proven to be really, really smart investments on our standpoint. So we're sort of unabashed about that and that has a quarter to quarter implication And I just have to absorb it and take it because I'm confident that we're doing the things that will create Better opportunity for us and allow us to gain share over time. So long answer to a short direct question, I think we can grow disproportionately over time. It just won't look like that quarter to quarter. And I think look at the production, look at the capabilities that we're creating today, And I'm confident in manifesting those towards the future.

Speaker 6

Thanks for all the color, Bill.

Speaker 2

Yes. Thanks, Ryan.

Operator

And Betsy Graseck with Morgan Stanley has the next question.

Speaker 7

Hi, it's Betsy. How are you doing?

Speaker 2

Good.

Speaker 7

Good. Thank you. I wanted to just dig into a couple of things. One is on loan growth. It's been really strong.

Speaker 7

And I heard the comments around how you're funding it and how you're thinking about driving that from here. I wanted to get a little bit of an understanding on How you're thinking about the quality of the book relative to its ability to absorb this interest rate hike. So obviously, we've had about 300 basis points so far. We're going to get at least another 150 plus over the next quarter or so. And how are you assessing your borrower's ability to pay back?

Speaker 7

Are we all too worried about credit risk? I know you gave the guide for the full year NCOs, which I'm wondering why not having have brought that down given the performance you've had to date.

Speaker 2

Please, itching to get in and talk about credit quality and the quality of the portfolio and what we've put on the books. And We've not diminished our commitment to credit quality. We're taking our clients through the I mean, we're underwriting at new rates and new environments. So I think our production just reflects our just competitiveness. I mean our ability to win more size And the relevance with our clients and then you see that reflected right now in our reserve, particularly on the wholesale side, the quality actually Might argue is might improving.

Speaker 2

So Clark, why don't you embellish that if you would?

Speaker 8

Yes. Thanks, Bill. And I agree with you. Vince, we are Very careful in our underwriting right now. So we're looking obviously at rate shock and the ability to absorb that.

Speaker 8

We're looking at other things Decisions how they're deploying capital, their liquidity, their balance sheet and just overall strength. So we feel really good about the Core underwriting fact, I would tell you for the quarter, about 95% of our C and I production was investment grade or near investment grade credit. So Really high quality there. And as far as our NCO guidance for the full year, we feel really good about where we are. But Do remember, we normalize as we go into the Q4 from a consumer standpoint and we have the seasonal impact.

Speaker 8

So that's really Truly the consumer side that may increase losses some.

Speaker 7

Okay, got it. And then just digging in a little bit on the commercial side on this Seem, can you remind us how you are thinking about your Shared National Credit exposure, what that is, Leveraged lending, I know legacy SunTrust had a bigger skew in their business model to that, but with the combined organization, it's It's been reduced a bit as a percentage of total. So just give us a sense as to how big those books are Today, how they're trending and how much capacity you have to lean in with the bigger balance sheet you've got now? Thanks.

Speaker 2

Yes. Clark, you want to take it?

Speaker 8

Yes. Yes. Maybe I'll start it, Bill. First from a S and C standpoint, we're in really good shape. We just went through the exam and had great results.

Speaker 8

I feel very good about that. We have about $59,000,000,000 in outstandings in our SNC book. So it's about 19% of our balances and that's It had been fairly steady or so. So it's a very diversified book. We feel really good about that.

Speaker 8

As far as our leverage finance book, just remember that's about 7% of our total book. However, over half of that is 55% is investment grade clients. So really 3% would be more in the sponsored or non investment grade side. That book is performing extremely well today, so minimal NPLs. We've had about 9 points of losses and our criticized are in good shape.

Speaker 8

So while there's been disruption and challenges in the market, our overall performance has been very, very good.

Speaker 2

I think you characterized it right Betsy, as part of the benefits of the merger is the diversification That portfolio by definition of the denominator. So we haven't grown it in proportion to the increase in the size of our business. And it's well diversified, leverage portfolios are well diversified. Exposures are Not significant to any one person and it's about 50% sponsors and about 50% on us. So this is a business that Supports our client base and it's categorized as leverage, but it's really supporting the growth in our client base and On us component.

Speaker 7

Thank you.

Operator

Mike Mayo with Wells Fargo will have our next question.

Speaker 9

Hi, can you hear me?

Speaker 2

Yes, Mike.

Speaker 9

I'll continue my analogy with your franchise as a Corvette. I mean, You're clearly in the country's sweet spot for population growth. I mean, I keep meeting more of investing clients that have moved to New York to Florida permanently, entire firms. And so you're certainly in the Entire firms. And so you're certainly in the sweet spot.

Speaker 9

You did mention momentum in certainly NII and loan growth And how you're going from defense to offense. So I get it, but then I hear, Bill, your target for positive operating leverage of over 0%. And it just seems like with a target like that, you're aiming The Charlotte Motor Speedway instead of Indianapolis 500, right? It seems like and this is at a time when Your peers are showing much greater positive operating leverage and they don't have this unique end market merger with these incredible synergies that are Possible. So I know you're not giving too much guidance for next year right now, but could you just talk about whatever headwinds Maybe going away, you talk about the operational losses.

Speaker 9

It seems like you're doing a lot for your customers. You're making them whole More than others perhaps, you're doing a lot for your employees, you're raising what they get paid, but I'm just thinking about the shareholders here. And so what are some of the headwinds that may or may not go away? And what are some of the tailwinds that you think we'll see more of?

Speaker 2

Yes. Thanks, Mike. And we'll continue to keep the Corvette metaphor going, I guess. But If we define speed as related to how are you doing against your markets, I look at the loan deposit, AUM, the production side, and I'd say we're actually at a really good high rate of speed. And I'd say we're at a speed that reflects the opportunity that sits So if we define it that way, if we define the opportunity, which I 100% agree with is to have Better improved positive operating leverage over time and increased revenue and In our growth, we also have to invest to make that happen.

Speaker 2

So we like you to see the same things that you're seeing in our markets and we've got to make sure that we invest in those. And Again, I wish it sort of balanced out quarter to quarter, it just doesn't. So the opportunities for us to invest right now And I think gainshare long term in areas that I mentioned before like Investment Banking, like Insurance and like Wealth, We're just going to do that. And I think that's going to have a good long term impact for us. You've seen this before.

Speaker 2

You've seen this movie and you know how well it ends For us, so we know how to do this. So I'm very confident on that side. And then the part about the operational losses and the commitments that we made to Our clients, those are also good long term decisions. I mean, we look, we were in the middle of a merger. We gave the benefit of the doubt to a client Whenever there was a benefit of a doubt, I think long term that's going to create sustainable long term relationships and the same thing with teammates.

Speaker 2

Increasing minimum wage is fantastic for shareholders. I cited some of the stats that we're seeing already And improved turnover and improved vacancy rates. I didn't mention the care center, we're seeing that as well. So long term, that's going to have a tremendous benefit for our shareholders as well as our teammates. So I'm confident.

Speaker 2

I think we're materializing the things that we want to have. It's just not coming in quarter to quarter as I'd like. It's not as matched as I'd like. There are some pesky things that I think are all come down and I'm already seeing that at the end of the quarter and the first of this quarter In terms of operational losses, so we can have a cleaner, more focused, easier to understand and easier Have the production and those things result in the kind of PPNR growth that I think we're able to do long term.

Speaker 9

So a follow-up, even if I concede the speed part, I guess the cost of gas is quite high. And maybe Mike from your perspective coming into the CFO spot, things that you might be able to do control of the expenses as Bill was alluding to?

Speaker 3

Yes. Mike, good morning and Happy to react to that. I mean, I think 1st and foremost, still at this point absorbing and coming in and meeting the team, getting a sense Where we are, look, Bill made some great points. I don't come to the table with some predefined view Or silver bullet as it relates to these things. The headwinds that Bill talked about minimum wage, inflation, Some of the investments that we're prioritizing, they're important.

Speaker 3

But then again, we have Some great tailwinds as well, whether it be realizing the benefits of the savings. I think there's some benefit from an automation perspective, some work we're doing that's in more nascent And then just overall productivity. I mean, look, if we I think we've got a great track record in terms of being able to Manage expense, if and when that becomes a more important priority based on market conditions. But no, I think Bill said it well, Mike.

Speaker 9

All right. Thank you.

Operator

Now we'll move to our next question from Ebrahim Poonawala with Bank of America.

Speaker 10

Good morning. I guess one follow-up first for Clark on the reserves. And Clark, apologies if I missed it, but Can you remind us what's the base case or the weighted unemployment rate that's baked into your Reserving at the end of the quarter. And I guess as we think about sort of what the next 12 months could look like, what are the other 1 or 2 big inputs that could change the reserving outlook other than unemployment? Thank you.

Speaker 8

That's a great question. In our base case, which We wait at 40%. We have unemployment going up to 4% and then Going higher into the mid-4s as we go into 'twenty three and beyond. So clearly, a little more pessimistic As we ran the reserves this quarter, I would say for us, other big drivers would be housing HPI PI would be another input there in our models and you've already mentioned GDP. So from our standpoint, The big driver for us would be the scenario waiting and the scenario outlook would have the biggest impact on our reserves, Obviously, versus other things like our mix of production and our overall portfolio performance.

Speaker 8

Right now, I think the scenario outlook would be the biggest driver.

Speaker 10

Got it. And I guess just one follow-up, Bill, for you. As we look at the next stage, I mean, obviously BB and T, SunTrust history of acquisitions. A lot of your peers might be struggling in terms of deposit, deposit pricing given what Talk to us in terms of as we look forward the next year or 2 appetite for bank M and A extending the franchise and how you think about that?

Speaker 2

Yes. I mean, right now, we have the best franchise to invest in and it's called Truist. And That's where our focus is and that's where our opportunity is and ability to expand and create more capacity within our

Operator

We'll move on to Matt O'Connor with Deutsche Bank.

Speaker 5

Good morning. Can you guys talk about the openness to maybe some restructuring of the securities portfolio? I mean, obviously, rates Gone up a lot and the yields on your current book are a lot lower. So it would cost a lot to restructure a big part of it, but there might be some opportunities here and there As you think about the strong capital generation and what to use the capital for?

Speaker 3

Hey, Matt, it's Mike. Good morning and happy to react to that. As of this moment, there are no plans to restructure the securities portfolio. I think I mentioned that we do view the portfolio as a tool for funding loan growth as that continues. It's Creating cash flow of approximately $10,000,000 to $15,000,000 per year.

Speaker 2

Yes. And Matt, I mean, today we're Redeploying it into the growth in our business and you acknowledge that would be very expensive. And what we try to do is look at that securities portfolio over time. And so we're going to take that cash flow and right now we've got great opportunities to reinvest it and not Take a capital hit for the securities portfolio, I'd rather use that capital to invest in our business.

Speaker 5

Okay. And then just separately, you had mentioned earlier some mix shift out of auto and mortgage. Can you frame how much you That could be over time and then maybe you mentioned it, but just where is the mix shift going if it's out of mortgage and auto? What are you leaning into? Thank you.

Speaker 2

Yes, Matt, just basically sort of an overall return focus and make sure that we're maximizing Our capital as we see some of the returns and the mortgage business and the auto business being a little more stretched, we want to make sure we're serving our clients. We're doing a great job in doing that. But by the same token, we're seeing the other opportunities in our commercial portfolio and our So we just want to get the right balance and a return focus versus we've never been sort of the growth for growth sake. We want to be return oriented. We want to maximize the return on the capital that we're investing in the portfolio.

Speaker 3

Got it.

Speaker 9

And Jake, I think

Speaker 1

we've got time. Thanks, Matt. Jake, we've got time for one more question.

Operator

And that final question will come from Erika Najarian with UBS.

Speaker 11

Hi, good morning.

Speaker 2

Hey, Erica.

Speaker 11

I just have I had one follow-up question, Bill. You got asked this several times, but I just wanted to make sure Your shareholders understood what you're saying. You've been asked a lot about delivering operating leverage. At the same time, Dislocation creates opportunity and this is also a sort of once in a cycle Help from rates, right, in terms of operating leverage getting help helping the denominator. So is the message here really that you are going to always try to deliver positive operating leverage as a way of Truist Life, but you're seeing opportunities to invest today.

Speaker 11

And as we think about the tougher part of the cycle, Whether we fall into recession next year and we don't have rate hikes helping, your investments today are going to help Truist deliver above average PPNR over a longer period of time other than just now when you're getting a lot of help from rates.

Speaker 2

I think that's really well stated and I wish I had stated it as well as your question. So, no, I think that's exactly right. And as I mentioned, I mean, Positive operating leverage will be a hallmark of what we do. So that is, that's the core and focus of what we do. We just Can't be wed to that quarter to quarter when we see an opportunity.

Speaker 2

So we're going to have positive operating leverage this year. It will be a little less than we'd hoped for 6 months But we're investing that I think is going to create not only better operating leverage, but more importantly, strong PPNR growth for the future. And we just Have to make sure that we're for the benefit of our shareholders thinking long term and thinking about this incredible That sits in front of us and maximizing our ability to capitalize on it. So I think you stated actually quite well.

Speaker 11

Got it. And my last question is for Clark. Thank you so much for sharing that data on your ACL. And just how in terms of how CECL works, if we do hit a 4% unemployment rate, which is your base case, Does that mean that you have to then wait worse scenarios in that 4%? In other words, Do you say, okay, we hit 4%, that's our base case, we don't have to build reserves further?

Speaker 11

Or does the model say, oh, we're at 4%, it could So we now need to build for something worse than 4%.

Speaker 8

Great question, Eric. I would say, Keep in mind that we run multiple scenarios. So we have our base case, which I described, but we also run a much more severe set of Downside scenarios and as we look forward those scenarios get worse as well as even if the baseline Deteriorate some additionally. So we weigh all of that and we look at it each quarter. And so Even if the baseline is at one place, the downside scenarios may be more and would be more severe.

Speaker 8

So we're going to look at all of that and How we weigh all those factors and determine the allowance. And so yes, I mean, the downside scenario could push it even further even if the baseline

Speaker 5

Going up.

Speaker 11

Thank you.

Speaker 1

All right. Thank you, Erica. 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.

Speaker 1

We hope you have a great day. Jake, you may now disconnect the call.

Operator

Very well. Once again, everyone, this does conclude your conference for today. Thank you for your participation and you may now

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Earnings Conference Call
Truist Financial Q3 2022
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