Here we go.
Okay, we're on now. All right, thanks very much. I'll read my disclaimer and then we'll get on with it. For important disclosures, please see Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs, the use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay, thank you very much. We are thrilled to have with us today Mike Maguire, Chief Financial Officer of Truist Financial. Thanks so much for joining us.
Thank you so much for having us.
Yeah, pleasure. So I did want to just kick off first with a question on guidance. Is there any change as we round the corner here into the end of Q2?
No, no, no updates for us. As you know, we guided in April and then actually updated at least our NII outlook or added on in May for the completion of TIH and the bond repositioning, but all is on track.
Okay. And with that, TIH sale closed May 7th, right?
That's right.
May 7th. You repositioned your balance sheet, you changed the composition of the securities holding, generating higher yield now, right? Is that correct?
That's right.
I know the goal here is to offset the lost earnings from TIH. Well, one of the goals. There's many goals.
One of the goals, that's right.
Maybe you could walk us through the strategy and talk a little bit about the repositioning and how that repositioning will be replacing the TIH earnings?
Yeah, you got it. So literally the same day that we ended up completing the sale of TIH, we did execute a strategic balance sheet repositioning. So we ultimately sold approximately $34 billion of book value securities for around $29 billion. And at the same time, as you know, had cash proceeds from the sale of about $10 billion. So call it just short of $40 billion. Reinvested those proceeds almost equally between cash and some shorter duration investment securities. So considerable pickup, obviously, in the yield on those securities. And you mentioned, so one of our objectives certainly was to at least replace the TIH earnings contribution. So we were able to accomplish that with that size and the makeup of that repositioning. Another one of our objectives was to advance and improve our liquidity and our ALM profile, and both were accomplished as well.
Because if you think about some of the securities that we disposed of and what we replaced them with, they were less weighty from a capital perspective, higher quality from a liquidity perspective, and helped us shorten up the balance sheet as well from a duration of equity perspective. I think lastly, another objective as we thought about sizing, why 34 versus 30 versus 40, a really important objective of ours was to maintain a relative and an absolute capital advantage. So for us, the flexibility to now go focus on prosecuting a growth agenda, leveraging that capital and our core client base was critically important for us. Having the flexibility now, and Bill's been very consistent about this, our desire to resume buybacks in the second half of this year was an important guideline as we thought about sizing and otherwise.
Okay. How should we think about your plans to manage that portfolio, in particular if rates were to go down?
Yeah. Well, our philosophy around rate management, we've tried to be pretty consistent about, which is we do, at least at this moment, want to manage our NII sensitivity somewhere around that corridor of neutral. And we were able to maintain that positioning through this transaction, through a series of, I think we mentioned when we issued our press release describing the series of transactions, we provided some analysis that contemplated the impact of some of the hedges that were in place. So some pay-fixed hedges that would have terminated or come off of our balance sheet in connection with the sale of some of the investment securities, as well as some positioning we did with some receive-fixed swaps to think about some of the cash and some of what otherwise would have been an increase in asset sensitivity. So net-net, we still believe we're relatively neutrally positioned.
And then on the other side, if you think about sort of the complementary measure of longer-term rate risk and Duration of Equity, we were able to reduce our DOE pretty .
Now, let's assume the Fed will be cutting rates. I know every day it changes. But in an environment where the Fed is cutting rates, given the cash position and given the shorter duration of the securities book position, a pull down in the front-end rate curve would be offset by the swaps, or is that just something we'll?
Well, the receivables would contribute to more liability sensitivity. But again, what I would say is the totality of the balance sheet is how we're thinking about the positioning. And we are still relatively neutrally positioned. And that's relative to our outlook on rates, right? So if you look back to, and it's hard because you don't have a measure now that our last Q wouldn't have been updated to reflect sort of our post-repositioning positioning. But again, just to keep it maybe more qualitative, we're relatively neutrally positioned. We do have an expectation that short-end rates will come down. We think that will be a benefit to Truist's overall NII position. And to the extent that rates, you look at, for example, a down 50, that would actually still be a benefit for Truist.
That's driving through the deposit side, liability side?
It's the total balance sheet. What I'd say is the hedges that we have on the receive-fixed swaps would have been intended to offset any incremental asset sensitivity from the floating rate cash.
Got it. Okay, very good. So we'll look forward to the next Q, I suppose, right?
Yeah.
Okay, very good. So as we are thinking about the funding side of the equation, how are you anticipating deposits finish up this quarter? Or at least where are we in the deposit cycle Q to date? Is the remixing from non-interest bearing to interest bearing still progressing or slowing down? Any color on that? And how are you thinking about level of competition for deposits?
Yeah. It's funny, here we are a year since the last hike in rates. And I think history would have said that certainly we would have been grinding to more of a much more gradual impact. Obviously, the level of rates is obviously a factor as well. We're still seeing some modest amount of pressure on both balances, on mix, on rate paid, but it is moderating a touch, which is great. I think it will continue to, in some of its perhaps QT, some of it, to your point, is a little bit of competition for deposits. I think given the backdrop and loan growth being a touch muted, perhaps some of that competition for deposits has alleviated a touch. But certainly, we still do expect to have some balance pressures on core client deposits so long as we stay where we are from a rates perspective.
Okay. And on the loan growth side, can we talk a little bit about what's going on there? Loan growth has been muted for the industry. Muted is a nice way of saying flat. But for yourselves, there's been periods where you've had a little bit better than H.8, periods when it's more in line. Can you give us a sense as to where the drivers are for better loan growth within your book? We could start there.
Yeah. Well, look, getting back to kind of your first question too is one of the reasons that we're really optimistic about our businesses is we do have the financial resources to go and grow and leverage the capital. And so we're leaning in. We're really serious about this pivot to offense and prosecuting a growth agenda. To the extent that C&I loan demand shows itself, we think we're really well positioned to take advantage of that. But stimulating that demand is, let me know if you figure out the right recipe there. There are areas where we're focused. There are certain industries that we'll, I think, maybe place some emphasis in that are perhaps deposit-rich or where we have more industry expertise, etc.
But something that's been really important to us is we do not intend to make changes to our credit policy, for example, and take more credit risk. We don't expect to compromise profitability objectives and returns objectives as we think about relationship profitability and pricing. And so I think it will pay to be a touch patient there. That being said, we're out talking to our bankers, whether it be in wealth or commercial or corporate investment banking, making sure that they're clear-eyed that we want to be positioned to go and prosecute our right to win. On the consumer side, it's a little bit different, right?
Because there's, I think, more of a sort of broader, at least the way our businesses are positioned, there are more marketplaces of consumer assets, right, where we perhaps have a little bit more ability to turn a dial and change production and whatnot. So we've done some of that. We took some actions last year. Prior to completing the sale of TIH, we were in more of a capital preservation mindset. And so one of the things you heard us talk about was, hey, we're going to find assets that maybe are a touch less profitable. Maybe they had lower relationship value in terms of the ability to deepen a relationship with multiple products. And so a lot of asset classes, we sold a student loan portfolio. We dialed back production in our Prime Auto business, some of our other consumer specialty businesses.
We're taking actions now to recalibrate some of those. So we mentioned in our first quarter earnings call that we saw growth in our consumer balances for the first time since October of 2022. And so that's a little more easily managed. But it will be welcome news to us when we begin to see a little bit more demand. We are seeing improved pipelines for what it's worth in our commercial business. We look at the total opportunity set of the conversations that our bankers are having with their clients. And again, it's like the highly granular and high-funnel perspective, but it is, generally speaking, somewhat telling of sort of future periods if you see a bigger. And it's not at all where it was in certain periods of expansion.
But for a number of quarters, that pipeline had been declining, and we saw that actually turn, which we think is promising.
That's this past quarter or two quarters ago when we saw that?
I think we saw that begin at the end of the first quarter, and that's continued, yeah.
Okay. Those are conversations, or?
Well, I mean, if you pick your CRM database where you're logging conversations and opportunities. So it's an official opportunity to whatever. It's a little rudimentary, but a loan relationship, whatever it is. So it is a way to get a sense for the volume of the conversations that are happening out on the front.
Excellent. Well, I'll take that. Very good. Because I would think in particular in the Southeast, you still have some nice in-migration going on, right? And so is there an opportunity there in the real estate side? Now, commercial construction balances are up nicely, right, year-over-year?
I think that's for us, I would say, broadly speaking, on the C&I side of our business and CRE and construction, we can talk about all these various pieces. But in construction in particular, I think what you're seeing there is projects that were previously committed to that are funding up.
Right. Okay. Got it. Which is good.
Yeah, it's good. We've been a little more cautious, broadly speaking, in CRE, especially, obviously, in office, to a lesser extent in multifamily. But what you're seeing in the data there is exactly that. That's previous commitments that are funding up.
Okay. So while we're on loans, we'll deal with credit, and then we'll go back to fees. But on the credit side, you've been inching up your reserve ratio over the past several quarters. I think it's sitting at 1.56 right now, which is in line with your day-one CECL, seems to me. And I'm just wondering, you feel like that's at a good spot? Is there any reason to expect that it would inch up from here?
Yeah. We added to the reserve last year quite a bit. And do feel like where we are in the cycle, we don't have a perfect visibility. I think none of us do into kind of where we'll be in a year or so. But based on our work and analysis and discussion, we do feel like we're certainly adequately reserved. And I think the expectation is versus the last year where we saw a much more, I'd say, deliberate build, probably continue to build a touch, but to a much lesser extent. We don't see at this point sort of an opportunity to begin to release reserves. I think it's going to be important for us to see how some of this plays out. I mean, the data, obviously, is quite positive still.
If you look at our baseline scenario, consistent with sort of this very modest unemployment, low single digits GDP growth, reasonable housing, etc. But watching it all very, very carefully.
What about the migration into criticized and classified? Is there anything going on there that we should be aware of? Accelerating, decelerating, stabilizing?
Yeah. I'd say a lot of the criticized classified migration has been in some of the CRE portfolios. So office, for example, I think we've disclosed we're around 30% or so criticized. A lot of those deals are still paying as planned and as contracted. But we do see, for one reason or another, reason to be working more closely with those borrowers. Feel really well reserved on the office portfolio. We've been consistent about that too. I think we're at 9.30%-9.40% of balances there. And even that, of the $5 billion of office exposure we have, there are certain, obviously, cohorts within that that we're more focused in. So I think the bulk of that reserve would be focused on that subset. We've seen a little bit more migration in terms of criticized stuff on the multifamily portfolio as well.
The bulk of our exposure there is Sunbelt, like better demographics you just mentioned, markets. But you're starting to see a touch of stress around things like coverage ratios and otherwise that are leading to good conversations with borrowers. I think it's a very different situation than what we're seeing in office, where you've got a significant sort of reset in values and a very likely the likelihood of loss and beyond default. It's a very different framework than how we're thinking about multifamily, where you've got maybe some weakness in rents, still actually pretty good occupancy, but some weakness in rents, higher rates, but really strong borrowers who I think still believe in these deals. So we're seeing people add interest reserves and do all the right things that you would expect in those situations.
Okay. Yeah. I've heard that multifamily in the Southeast is being hit more by supply, incoming supply.
Yeah. A lot of building.
More competition.
Yeah. No doubt.
Okay. Is that fair?
I think that's fair.
Okay. So there'll be a tail to that, and you'll move on.
Yeah. I think all very manageable, including the office stuff, by the way, I'd say manageable. Not just a 2024 thing. I think it's a multi-year cycle. But again, based on our exposure and what we see, we think very, very manageable.
Okay. Now, just turning to net charge-offs, in first quarter, your NCOs in total clocked in at about 64 basis points, right? Which was right on with your guidance that you were expecting or guiding us to, driven by CRE, Card, and Indirect Auto. Do you feel that your loan categories have now all normalized, or are there still area pockets where we're still yet to see normalization?
I think the bulk of the consumer portfolios at this point have normalized. We've got a pretty wide spectrum of consumer lending businesses. We're a little under-indexed in card, but we have our specialty businesses, the promo financing businesses, LightStream. You mentioned auto. We also have our non-prime auto business. So I think for the most part, we feel like a lot of that has normalized. Obviously, over on the CRE side, we talked a little bit about office and stuff. Broadly speaking, in C&I, just seeing very, very good results. So which is not atypical, but that's an area where we still see a ton of strength. So I think charge-offs for us, the first quarter you mentioned, it's consistent with sort of our full-year outlook. I would expect our charge-offs quarter to quarter to be relatively stable.
The asset resolution team that's working the office portfolio has done a really nice job sort of working these deals through the system sort of based on the maturity profile. So we've got a pretty good line of sight on sort of the order of operations and the magnitude and the resourcing required. And so you've seen our NPLs be relatively flat. So again, I mean, knock on wood, but we feel pretty good about, again, how our overall reserve coverage and the hotspots, we feel like we're managing pretty sensibly.
Just to round it out on loans, you mentioned with the TIH behind you and the repositioning completed and opportunity for capital redeployment. How do you think, well, just to get back to the comment you made earlier around leaning into the commercial, is there an opportunity there in your credit box?
Well, again, the credit box is the credit box. So that's unchanged. Our expectations around profitability are unchanged. So we can prepare ourselves for demand. We can have more conversations. We can have the confidence. We can attract the bankers. We can do all of that. But at the end of the day, we will need to see some improvement in demand for us to be able to grow balances in a sort of notable way. And look, our outlook for the year, I think we were pretty clear-eyed about the trend in balances and some of the muted demand. And so I think it's playing out somewhat similarly to how we otherwise would have expected.
Is this really just a function of interest rates? Do we need a lower Fed funds rate?
Theoretically, I mean, you would assume that some lower rates could lead to additional demand and lending and that'll create deposits. So I like that storyline. I hope that's it. There's maybe some speculation that as we get closer to an election, that people maybe become a little less decisive. And so I don't know. There's probably 1,000 factors that go into it, but we would welcome some improved demand.
What about any interest in doing kind of slightly different structures for your clients, like term loans or more ABL? The part of the reason for asking the question is we've obviously got private credit circling around and looking at these types of structures. If you can do it yourself, that seems like an opportunity.
I don't think we want to be excessively creative on structure. I think we want to be flexible and meet our clients where they are. But I think one of the strengths that we've been able to rely on for a long time has been great discipline and great credit management. And so I think we'll be open-minded but disciplined, right? I mean, look, this private credit phenomenon, that's not new. There's a, and there are, I think, still plenty of we view our value proposition as being beyond capital. And for the clients in the right circumstances, which we believe there are more than enough of those circumstances, we think there's a great business opportunity. We have a good right to win.
Super. Let's turn to fees. You've got, obviously, several different businesses that are generating fees for you, one of which is investment banking. First quarter was up significantly. Clearly, the market overall did well. Can you give us a sense as to what you're anticipating from that business as we go through the remainder of the year? And also, where are you leaning in from an investment perspective?
Yeah. Our investment banking business has been really consistently successful for the last, really, at this point, decade plus, even beyond that. And so we've been really pleased by its performance. It's sort of just continuous progress, whether it be market share and finding, adding product capabilities and so on and so forth. So you're right. I mean, the market gave us some great raw material to work with in the first quarter, capitalized on that. We feel like we outkicked our coverage there. Great activity. What's great about the banking business in the first quarter, and I think that's carried over into the second quarter, is it's been broad-based. So really seeing great momentum and success in our advisory business, in our equities business, risk management, leverage finance, high grade, you name it, really doing well.
The industry coverage, where we really find subject matter experts that work really closely with our product experts, has really resonated in our various markets. Second quarter's been great, off to more than a start now at this point in the quarter. So feel great about that. Look, I think if you look at the first quarter and even the second quarter, on a linked quarter basis, we're operating at a pretty active level at this point. So my perspective would be that certainly the second half, as an example, will look great compared to last year on a linked quarter basis. But the sort of continued sequential growth would be difficult to maintain.
Got it. And any other fee categories that you want to call out here in terms of where we should be expecting growth to pull through?
Yeah. Well, you said, I mean, you started with Investment Banking. That's been historically one of our growth areas we've been investing, whether it be in electronic trading, people, you name it. So that's obviously a really important component to our fee story. We have a nice Wealth business as well. Wealth's been a little more steady in its sort of history of growth. But we're very pleased with how it's situated. Again, some of the work we even did throughout the course of last year and into this year, becoming much more clear in the segments in which we want to really win and focus on. And we've been working on our advisor platform, recruiting new advisors to Truist. We think we've got a really good value proposition right now for advisor teams. And so I could see us continue to add advisors there and grow that business.
But again, a steady business for us and one that we're fond of. And I think the area where I'm personally most excited, I've talked a lot about this, is on the sort of transaction banking or payments aspect of our wholesale business. So the good old-fashioned sort of treasury cash management, which in many instances also is accompanied by operating accounts and deposits. That's a big opportunity for us. And we've been talking about that for, frankly, I think, years at this point. And we're in a position now where we're actually investing in the products. We've invested in talent. We have new leadership around sort of the overall business itself, around product, around sales, servicing. And so our ability to more fully serve and develop even stickier relationships, especially in sort of that core commercial, but also corporate banking segments, we think is a huge opportunity for us.
When I'm thinking about Treasury, there's a couple of different ways that clients can pay, either through deposit balances, non-compensated deposit balances so that revenue stream shows up in net interest income, or hard dollar fees. In an environment where interest rates pull down, should we expect to see a migration from that NII to fee line item for you?
Maybe a touch. I mean, to think about that. I mean, we do have some clients that are in excess balances that have moved over to cash pay interest. I'm not sure that's going to be sort of the needle-moving factor in sort of our success on the fee side in treasury for us. I think it's more around we've got the right products. We've got to get the right mindset and just go prosecute our offense. And we've talked a lot about that actually today in sort of individual meetings. We have welcomed a new executive to our company a few months ago, Kristin Lesher from another large competitor. She's running our wholesale business now, which spans commercial, corporate investment banking, and also wealth, which is an outcome of our resegmentation.
That was an intentional choice, putting wealth with the wholesale businesses because so much of our focus in wealth is on that affluent family or client and business transitions and executives and so on and so forth. But Kristin, my point, is very, very focused on the importance of delivering the full firm, thinking about connecting the commercial banking, lending, deposits, relationships to treasury, to advisory, to wealth. So it's been a great add for us. We're excited about her. And she's off to a really great start.
Okay. So your payments growth, really, you're expecting is coming from new account acquisition?
Yeah. Or working with existing clients and winning the payments business.
Right. Okay. Okay. Let's turn to expenses. So post the TIH sale, with your new disclosure, gives us an opportunity to really see the expense profiling of the bank, which was not as clear before. And I think in one Q, the expense ratio for Truist ran about 56% for the bank.
We're continuing up, yeah. That's a ballpark, yeah. Ex insurance. I mean, the insurance company was, and this isn't perfect science, it's kind of quarter to quarter because there was some seasonality, with 200-300 basis points of efficiency ratio impact if you think about it that way.
Okay. And as we look at where you are today, you have the full run rate of the integration in your current expense base, right? So all the cost saves are in the run rate. So how should we think about the trajectory of the expense ratio from here?
Yeah. Well, I probably spend a little less time focused on, and these things are all connected, but on the absolute efficiency ratio. I think a lot about positive operating leverage, growing revenues faster than expenses. It was really important to us. We made the commitment last fall a little earlier than normal that we were going to maintain our expenses this year at that moment, including insurance, at flat to 1%. When we removed insurance from the equation, we wanted to be very surgical about that. And so we adjusted it very specifically just to remove insurance. And that obviously changed our outlook to flat. We are intensely focused on delivering against that commitment. That is going to be driven by a number of actions that we took and continue to take, frankly. Some of it was assessing our organizational health and spans and layers.
That resulted in a number of reductions in terms of workforce. We've rationalized our technology project spend, really making sure, especially with Kristin and Dontá being very clear-eyed around what was the most important aspects of sort of the business spend, and then also contrasting that with some of the discretionary or non-discretionary reg and tech spend. So for us, it's really been a journey of focus and trade-off. And so really feel great about our ability to manage cost going forward. And look, as we think about beyond 2024, we're not here to talk about 2025. But I'll just say we've created a lot of really good muscle around cost management. The whole company was engaged in the work that we did last year and early this year. People have been proud of the success and the results from a cost management perspective.
So I would expect that rigor to continue.
Okay. So as we look, because all of us are modeling a few more years out, you're not done at 56% expense ratio, right? That's not the end point here.
We're not done managing cost. And we're always going to manage cost as assertively and appropriately given the revenue environment, right? But again, I mean, the efficiency ratio, by definition, is comprised of expense and revenue. And so there's a lot of ingredients in the recipe.
Right. Of course. But if you're generating positive operating leverage.
You never arrive when it comes to running a more efficient company. I'll agree with that.
Okay. Very good. So putting it all together here, how do you stack rank the levers that you have to drive EPS over the next two to three years?
Well, we've talked about a number of them. I mean, I think first and foremost, we have the capital flexibility to go grow our business. So if we can grow balances, and I don't just mean loans, but grow our balance sheet and improve our NII trajectory and perhaps even at an improved margin, that's going to be a significant driver. We talked about our fee businesses. Investment banking is hitting on a lot of cylinders right now. I think we can have an opportunity to improve the growth trajectory of our wealth business. And we are all dug in around the opportunity around treasury management and payments. You think about the capital flexibility also affords us the chance to return capital to shareholders. Bill's talked about a meaningful buyback later this year.
We intend to follow through on that and make sure that beyond even just sort of this meaningful buyback, we want to make sure that it's sized and set in a way that it can be sort of a more durable part of our story as well. So those are all factors. And of course, and I guess I'd be remiss not to mention also sort of endless focus on expense management too. So if we drive balances in the spread business, follow through with the fees, I'll put expenses now third. And then the buyback, obviously, really important for us.
You mentioned that you have the excess capital. Well, you have a significant amount of capital. If loan growth isn't coming through, should we expect that there could be opportunities to upsize the securities portfolio?
Well, that's a good question. I mean, again, capital planning is a multi-year thing. We have assumptions about what we think we can do in terms of leveraging the balance sheet organically. We think about our dividend, obviously critically important to our capital planning, a buyback. I think if the loan growth doesn't come through, it does give us more capacity to think about these other options. We haven't talked much about incremental balance sheet repositionings. That's what you were referencing in your question. But yeah, that's certainly possible. I will say this. I've said it a couple of times today in a few meetings. I don't feel like the balance sheet repositioning that we undertook was sizable, right? And so we felt like it was an appropriate size.
It helped us accomplish the goals that we laid out around our replacing TIH's earnings, the stuff we talked about earlier in our discussion. That doesn't mean that we wouldn't consider incremental transactions. But I'd say that we took a pretty big swing at it this quarter. So again, I think if you think about our capital priorities, it's first and foremost client growth. Then it'd be the dividend. I'd probably put buybacks next, perhaps incremental restructurings. And then I think we've probably, and Bill's been consistent about this, M&A is not a top priority for Truist right now.
Super. Mike, thanks so much for your time today.
Yeah. Thank you very much.
All right. Pleasure to have you here.