Okay. Thanks, everyone. I think we're ready to go. We're live here. Very happy to continue with Truist Financial. We've got Chairman and CEO, Bill Rogers. Bill, thanks for coming back and joining us again this year.
Great, John, great to be back. Great to be back in person.
Happy to have you. Talk about the journey that you've been on since the merger. Entering 2023, your focus, you know, really emphasized pivoting from integration to operating. You also, you know, cited goals of better PPNR growth, better operating leverage. Talk about how that continues to be the focus and how that's marrying with what's probably turning into a tougher operating environment.
Yeah. It is against a backdrop of a tougher operating environment, but we also have this tailwind of our own. I call it sort of the Truist tailwind, of the shift that you note of going from integrating to operating. We spent, you know, three years merging our two companies. I would say, you know, very successfully. We were very conscious during that merger process to be focused on integrating and making sure that, you know, we had great client experience, we had really great teammate loyalty. We're building a foundation of purpose. All the, you know, cultural components we're building as that foundation. We're very conscious to say, "Let's not make a big strategic shift decision in the middle of merging the two companies." Well, now we're through that phase.
You know, so we're through the integrate phase. We felt really good about that. We felt good about the progress that we made. We did it under a, you know, incredible environment of, you know, a pandemic, you know, PPP loans, all the things that were associated with that. Now we're in this operate mode. You can just feel the pivot from our team. You know, universal focus on client, universal focus on great experience, universal focus on hiring, retaining really great teammates, and that top of the funnel part is really starting to come together. I mean, we see it in, you know, a whole bunch of different things. We look at our branch productivity is probably one of our really good examples. Branch productivity, you know, is up just under 20%.
Again, so the same, you know, teammates, whatever, but being able to take that focus, you know, almost a half a million hours of training, and shift all that focus to operating, doing great work for our clients. And that generates, you know, net new accounts, and that sort of continued through that process. Our wealth business, you know, net new asset flows continuing. Our commercial teams, you know, the top of the funnel of what they're putting in terms of their, you know, dialogue and relationships with clients are 2x and 3x what they were before, you know. All that activity from operating is really starting to happen. To your point, it's against now a tougher backdrop.
Mm-hmm.
I'm really, really confident in the long-term component of that, but it's just harder to see now because you got a little more headwind.
Sure. Again, with the smoke cleared, you also have the time to look at some other things-
Yeah
that you didn't while you're integrating. You talked about, taking a look at some of the businesses, exiting, consolidating, simplifying some areas, including parts of sales and trading, LightStream mortgage.
Right.
Where are you in that process? Is there more to look at? Do you like the business mix? Is it pruning?
I mean, I think to the point of, you know, everything's on the table. You know, we've integrated two great companies, and now we wanna operate a really great company and optimize around the current environment, optimize around our capital level, optimize around our opportunity. You know, you cited a couple examples. Sales and trading was a really, really good example. You know, we had a, we had a smaller business that was focused on sort of SBA trading. It was focused on helping smaller banks. At first, that just didn't fit into our overall strategy of where we were going. It was a, you know, it was a good business, but it didn't fit in that strategy.
We said, "Well, that's the business that we don't wanna be in." From an efficiency standpoint, that really improves our efficiency ratio. Really high efficiency ratio of business, and not one that's part of our core strategy. LightStream, I think you mentioned also, is a really good example. LightStream, you know, came together, you know, from a heritage perspective because we wanted to have more consumer loan activity and created this, you know, completely digital model, mainly outside of the franchise model, really successful, really high Net Promoter Scores, really good credit experience. Now in this operate framework, while we already, because of the merger, have a really good consumer business, we said: Wait a minute, why are we not doing that for our own clients?
We said, "Let's take LightStream and sort of reshift it. Let's turn it around. Let's carry a Truist brand. We don't need to support another brand. There's expense associated with that. Let's turn it around. Let's make the Truist business. We'll bring that platform, really great consumer loan platform, make that the platform for consumer lending for Truist now, and offer it primarily to our client base." Today it's probably, you know, low twenties, sort of our client base. Go in the future, it'll be high seventies and eighties, and the other part of the business will be reserved for, you know, helping our corporate clients and helping partnerships and those type of things. Those are just, like, 2 examples, and there are others that fit in there.
LightStream and sales and trading are both an effectiveness play, but also a big time efficiency play.
Mm-hmm.
We'll look at other businesses in that regard of what fits in the new model. Given the current environment, we're gonna need to be more efficient. I mean, we're gonna need to look for more opportunities that create that. The good news is, they're sitting in front of us and, you know, while they may have been on a longer time period, you know, we're gonna shorten that time, better to get those efficiencies sooner.
Yep. What's your mindset when we think about some of the pressures in the top line? What's your mindset around loan growth right now? Are you being more defensive, given capital, recessionary concerns, or are you trying to gain share still?
Yeah, I might say rather than defensive, I'd say judicious. We're being really smart about loan growth. We're not gonna use loan growth as a measure of health, you know, sort of as an absolute.
Exactly.
Exactly. No, that's we're gonna really look at where, what you talked about in the introduction. We're looking at keeping our growth that has low volatility and represents our markets. loans will be one of the ways that we achieve that, and loans that have higher returns, loans that have, you know, multiple parts of a relationship, loans that fit that strategic balance that we're talking about. we're being more judicious. We're being more careful with RWA. Things that are, you know, core to our business, things that are core clients, things that are primacy related, we're being appropriately, you know, responsive to the market and to our opportunity.
Things like, you know, correspondent and, you know, some of the auto, you know, non-client related businesses, we're letting those come down, actually, maybe in some cases, pretty significantly. Overall, loan growth, I think will be, you know, today is sort of flattish, but the shift is actually happening in terms of where we want to emphasize.
Yeah. I think you've mentioned you've seen this industry-wide, that banks are in a little bit more conservation mode, building capital, and there's a supply pullback going on, as well as maybe a little bit of a demand pullback on loan demands as well.
I think both things are happening, and they're both related. We are seeing a little bit of a demand pullback. I think, you know, given the markets we serve, I think we're probably seeing less. Clearly, things feel a little bit differently today than they even did 90 days ago.
Yeah.
You know, starting to see a little more cautious from our clients. That capital project might get delayed, you know, until a little uncertainty clears on what they're doing. Maybe not off the shelf, but may get delayed. Then we're starting to see some wider spreads. I wouldn't have said that 60 days ago.
Mm-hmm.
just within the last, you know, sort of after the first quarter, we're starting to see related to, actually, just what we said, it's simple supply and demand. We're actually starting to see some spread widening, which I think, which will be good for the industry.
Sure. I mean, there's not a lot of new loan growth. It helps on renewals.
100%. 100% helps on renewals. you know, we're, I think others are being, you know, more conscious with our clients, and they we're not excited about being on the, you know, the right side tail end of a deal if we have the capabilities and the strength and the prowess and the products to be on the left side, and the profitability and the relationships that go along with that. we're gonna be more, you know, demanding about where we position ourselves and how we get paid.
How about on the deposit side? How are deposits trending so far in the second quarter, and what's your outlook for the remainder of the year with QT and everything else going on?
Yeah, let's do that sort of an overlay, because I think it's really important, is deposits are coming down because of QT. You know what I mean? I think that's sort of a natural you know, evolution. I think people have sort of gotten caught up in, you know, having such a really high beta attached to deposit flows without understanding just the nature of deposits in the system are gonna come down gradually because of, because of QT. Our deposits right now are down probably a little under 2%, really related almost exclusively to tax. You know, we have a lot of, a lot of commercial individual clients who have the tax payment, so you just always see that blip this time of year.
Then I think from then on, you know, ours will reflect sort of where QT is.
Mm-hmm.
We're not looking to, you know, buck the trend necessarily, because you've got to pay a lot of price to do that. I don't think we'll be below the trend because I think our franchise doesn't warrant that.
Mm-hmm.
I think the strength of our franchise and diversity, so it'll probably reflect more where QT is.
Yeah. I think your point is that this is normal or expected cyclical behavior-
It is.
QT is going on.
100%.
Pandemic deposits are coming out.
Yeah.
Yeah. On that topic, how about betas and what we're seeing in terms of DDA mix? What are you seeing there, and what are you expecting?
Deposit betas are a little higher than we had anticipated at this time. Our, you know, our spot beta, you know, is somewhere in the, you know, 43% or so. It's a little bit higher than we probably thought we'd be at this particular juncture. That's probably pretty common. Betas will normalize somewhere in that mid to high 40s kind of range. The, the commercial, corporate, and wealth side are sort of playing themselves out. You know, we're sort of now in the, you know, in the, in the consumer side, our business is really diverse. You know, our consumer balances are low. Clients will keep more liquidity, so there's a little bit of a buffer in that.
Then you ask a little bit about DDA balances. You know, we're in sort of that low 30s, and I think it'll level out in sort of the mid-to-high 20s, somewhere in that range. I fundamentally believe in talking to a lot of clients, both individual clients, small businesses in particular, and commercial and corporates, is people are gonna keep more liquidity.
Mm-hmm.
I just fundamentally believe that. I mean, I think people came through the financial crisis, or sort of seeing the volatility today. I don't think, and I could be wrong, but I don't think we're gonna get back into sort of that teens level. I think there's gonna be some additional level of liquidity that clients want to retain and flexibility, and I think that shows up in DDA.
Yeah, yeah, because there is a concern that for the last time rates were this high...
Right.
I saw a DDA more like 15%.
Right.
Today, we're 25-30, maybe people keep more cash around.
Well, yeah, I think people keep more cash around, and then the other factor that, John, you know, the amount of services now that commercial and small business clients have that they support with DDA, you know, and for us, 100%. The whole ECR component is a much higher penetration today than it was before, particularly for our portfolio. That's another buffer, so to speak, against the deposit level.
Well, we might not need to go back.
Right.
the mid-twos.
Right.
Yeah. How about on the investment bank front? What, obviously, things are slow in terms of the industry. What are you seeing so far in the second quarter? As you look through the rest of the year, what kind of year are you planning for in investment banking?
Yeah. Well, yeah, I mean, if we look at two different variables. If we look at the second quarter, just sort of on an absolute basis, relative to the first quarter, I would suspect we'll be down slightly. The reason I sort of hesitate a little bit is it's really episodic to almost week to week. When this week ends, let's assume this week, you know, knock on wood, if we've got it somewhere around here, you know, with a positive outcome on the debt ceiling, I think markets are going to open for a period of time, you know? I think this is the kind of crazy market we're in, that they're open for days and weeks, and then slower for others.
I think overall, probably will be a little bit lower in the second quarter versus the first quarter. That's against a backdrop. I don't think our business has ever been stronger, you know, in terms of the talent that we've acquired in our business, the capabilities that we have. What I see not only coming out of the pipelines for the investment banking business as a whole, but more importantly, that supply that comes from our commercial business. I mean, just, I'll just take one example. The dialogues that we're having with our commercial clients about business transitions, so that they're gonna do something with their businesses. Today, that number of things, the things on the top of the funnel is 3x what it was a year ago.
You know, our back to our operate, you know, we're really in front of clients, and we're really in front of clients talking not about, "Hey, our system's converging, and let us help you, and let us get you on the new platform." It's about what are you thinking about with your business? What are you thinking about long term? How can we help you? Let's introduce our specialists in these areas. That long-term funnel, and it may not be a quarter funnel, but that long-term funnel and the operate is really, really filling up and filling up great. The dialogue and the culture that we've created with our investment bank and our, you know, core community banking business is just really, really, really strong.
Mm-hmm. Shift gear, let's go back to expenses.
Yeah.
You mentioned there's opportunity to do more on expense and efficiency. You know, on the one hand, top of the house, you've got a strong relative efficiency ratio of 56%, ex insurance, you're at 53%.
Right.
On the other hand, there's been some shareholder frustration through the integration.
Yeah
with elevated merger costs, op losses, and restructuring charges. What's your mindset now about cleaning up the expense base and what you can do kind of post-integration?
Yeah, I think as you mentioned, and the most important thing, I mean, we're committed. I think our model really allows us is to be a, you know, whatever I call it, top quartile, sort of efficient company, and I think that should be the expectation. That being said, I think, you know, relative to all the things you just talked about, sort of the merger itself was more expensive than we anticipated, so we carried some more cost of that in it more. As we shift into operate, it's not only about more efficiency on the things that we talked about on the revenue side and the opportunity there, it's also about streamlining our businesses. We use LightStream as an example. Think about the cost of branding, you know, another brand.
Think about the cost of keeping two consumer platforms versus one consumer platform. Think about the marketing cost of being external versus the marketing cost being internal. We have those examples in lots of our other businesses. In fairness, in the, you know, given where the, you know, the market is today, we've probably had more of those on a, you know, multi-quarter year kind of platform. I'm accelerating that a bit.
Mm-hmm.
You know, we're gonna probably take a little more, you know, strategic risk, but 'cause I think we need to achieve some of those efficiencies faster.
Yep.
You know, maybe, you know, hand on the wheel turns into shoulder on the wheel.
Yeah
... you know, in terms of just putting a little more intensity around those opportunities. We, you know, you saw those in sales and trading and LightStream and, you know, mortgage and some other examples.
Stepping up the timing and-.
Stepping up the timing. The environment's different.
Yeah.
I mean, so our revenue trajectory, you know, will be. I'm really confident in the long-term revenue trajectory, but it's gonna have a little more of an upward trend.
Yeah.
Slower upward trend than we anticipated, you know, just, you know, six months ago.
Yeah. Yeah, yeah. I know, you know, you were shooting for a positive operating leverage. This year was a line of scrimmage call, and it sounds like that gets tougher, so you'll hit the
Yeah.
next level.
Yeah, the short-term bar of that gets tougher. There's just no doubt about it. I mean, the slope has increased pretty significantly. The commitment long term to positive operating leverage, there's no backing down on that. I mean, I think our business model really affords that. That's gonna come at a different pace.
Mm-hmm.
To the point you made is if, you know, if the revenue slides, you know, a little bit, you know, NII and all the pressure that we're receiving there from interest rates, we're gonna have to pull some of the expense opportunities forward a bit too, to try to get that more in balance. That won't happen on a quarter-to-quarter basis, but will allow us to be at that, you know, really sort of top quartile efficiency as a company long term.
Yep. Are you kind of thinking of save $1 and reinvest half of it?
Well, there, yeah, well, there is a reinvestment opportunity that exists. Yeah, there is always, you know, a concept of, you know, save $1, reinvest a quarter, reinvest $0.50 or whatever it may be, it'll be dependent on, you know, different opportunities. Yeah, we still see those investment opportunities, and they also perpetuate, you know, more efficiency and more opportunities.
Mm-hmm.
You know, if we've just invested in very sophisticated data and analytics on pricing, both on the commercial and the individual side, and we're just seeing the impact of that sort of immediately. Instead of, you know, what you traditionally do in a bank when rising rates is you tend to reprice the whole back book, and that's a really tough, you know, thing to overcome. Today, we can be really, really selective and work with individual clients, both new clients and existing clients, and really identify exactly what we should do with each of them. The teammates have really adopted this kind of new technology, that was an investment opportunity that I think will achieve a lot of efficiency.
shifting gears and talking about capital, that's been a big investor focus.
Sure.
-capital ratios for all banks. How are you thinking about your capital trajectory here in preparation for what's likely to be some new capital rules and, you know, a tougher environment?
Yeah, I mean, John, we're in a build capital mode, you know? I mean, I think that's, you know, we're on a flight path in building capital. Where that flight path stops, I'm not exactly sure, but we're gonna be in a build mode until we have more information, more certainty, you know, about where that goes. We have some natural components of our build capacity, you know, because of, as you mentioned, I mean, because of the merger costs that sort of come off the back end. You know, we build about, you know, 25 basis points of sort of organic capital a quarter. You know, take the dividend off, which we're gonna be focused on the dividends, and then you're sort of at somewhere around, you know, 15-20 basis points.
If you put so we have this organic component, we're just gonna continue to do that. We're gonna continue to sort of build capital in that component. We have this unique capacity to build at a little faster pace until we sort of figure out where the, you know, where things level out.
You feel like you do have time on your side, that the regulators are gonna phase things in, so there's not an urgency to it. You can build organically and do this naturally.
I do think that. I mean, you know, both public and private conversations, with what regulators have stated and in private conversations that we've had, there's no desire to shock a system, that doesn't need a shock. Now, that being said, I think things that will, you know, translate into capital, I think banks our size will have a AOCI component of some type. I don't know how that'll be tailored. I don't know when that'll come into play. You know, sort of the, you know, on the record is multiyear. It's got to go through an ANPR process. You've got to go through, you know, grind through the crank. I think that, you know, I think we're looking at a, you know, multiyear sort of adoption rate.
At the same time, we're, you know, ours is coming down, you know, 7.5 basis points a quarter. You sort of see a meeting spot there that I think levels out without some, you know, dramatic, you know, shift in capital. I'm actually, you know, more confident that the runway exists for the industry and particularly for Truist.
In terms of the dividend, how are you thinking about kind of marrying this growth of capital with maintaining the dividend? I guess there's also an interest in having some annual growth each year. How do you balance all those?
Yeah, I mean, the, you know, the dividend's been, is, I would say, maybe not uniquely, but really important to Truist. I mean, we have a, you know, not only an institutional share base, we've got a good retail share base. Dividend's always been really, really important. You know, we have a very strong dividend yield right now, not, you know, in the way that.
Sure.
that you achieve that, but a really strong dividend yield now. We've really talked about our capital utilization, I think, very consistently. You know, that the first place we're gonna, we're gonna invest capital is in the growth of our business and our markets and our opportunities, everything that's within sort of the Truist umbrella. The second, and closely tied, is dividend. Behind that is M&A, and, you know, then share repurchase today is sort of, you know, way below that because we're gonna be in this pre-sale. Dividend's really important, in terms of maintaining, you know, a strong dividend and a really good dividend yield and good return for our stakeholders.
Sure. The securities portfolio has been an overhang on the stock.
Right.
I know you get a lot of questions about that.
Sure.
There's no easy answers there. You know, have you thought any differently about restructuring or hedging, or is that not really economical, and do you have time to wait it out and have it burn down?
You know, I think the two questions are 100% correlated, right? You know, today, I think, you know, everything, you know, being consistent with what we know now and the time frames that these things come in, the best thing for our shareholders is to let it burn down-
Mm-hmm.
not to do an immediate shock, not to, you know, one, either take a loss and put us sort of behind in capital, you know, which we wouldn't wanna be, or to leverage other assets, like our insurance business or whatever, to accomplish that. Our strategy today is to let that burn off. I think that's the best long-term strategy. If for some unforeseen reason, things change really quickly, we have a unique capacity in that we've got this, you know, strategic and financial flexibility with our insurance business. That's not anticipated, so I think we've got this long trajectory. I think we have a chance for these things to meet actually sort of in a perfect combination.
We have a another option and another opportunity if things change for some reason that I can't anticipate right now.
Yeah. Let's talk a little bit about your insurance business, important part of the franchise, obviously. Just fundamentally, organic growth was solid in first quarter.
Yeah.
It did slow a bit. Is that kind of a new pace of growth for Truist, or do you see growth potentially accelerating later in the year in terms of revenue growth and business growth?
No, Well, first of all, let me just say, the one of the really positives for me of this merger was getting to understand and invest and learn about our insurance business. I mean, I think it's extremely well run. I mean, a really great, consistent leadership team that's been there a long time. You know, 100 acquisitions over time. I think we've done about 10 acquisitions since Truist. Just incredible discipline sort of watching the team and how they evaluate acquisitions and how they think about capital and how they think about dilution, and how they think about the positive parts of the business. The positive contribution it makes for our clients.
To be able to talk to our clients about overall risk management, so not only, you know, we have been previously talked about interest rate risk management and their balance sheet risk management. Now, we're able to sort of bring the insurance component into it. That's a really incredible conversation to have with a, you know, a CFO or a business owner, be able to sort of look at the whole, you know, opportunity. And we've got a lot of specialties in that business that line up with specialties that we have. Not only being able to say, "Hey, we know a lot about your industry, but we know specifically about those components." Excuse me. When we think about the growth of the insurance business, I think we are starting to see accelerate.
I mean, we sort of said we'd be, you know, more in the high single digit kind of range. We're sort of in the mid-single digits.
Mm-hmm.
You know, through this part of the quarter, we're starting to see some of that momentum. In the second quarter, you see all the repricing that comes from the P&C business. Our business is about 70% or so of P&C, so you start to see, you know, some of that momentum. I actually feel good about the organic opportunity growths in the insurance business, and the positioning that we put in place for the inorganic growth of the business. Bringing in a partner, creating this sort of a separate currency for insurance is, I mean, we're two minutes into this.
Yeah.
I mean, it's really had all the impact that we want to have. I mean, the M&A opportunities that are coming to us because, hey, we're really interested in this. This is really fascinating. We have a currency to join. The teammates that we're able to retain and, you know, and acquire because we've got this currency, and we've got this, you know, highlight on the insurance business. You know, Stone Point's just been a fantastic partner. I mean, so, like, two minutes into it, I mean, just great partner in terms of helping us think strategically and efficiency, and, you know, they bring a lot of knowledge to the business.
Mm-hmm. I know you get a lot of questions about kind of the optionality-.
Right
... that this, sale of a partial stake, you know, gives you.
Correct.
One of them is to kind of play offense in terms of partaking in acquisitions that are bigger than you used to do, and you're using a higher currency and more.
Right.
Can you talk to that a little bit about how this gives you some offensive opportunity, both organically and inorganically?
Yeah. I mean, Jonathan, as you pointed out, I mean, the reason for doing this was to create strategic and financial flexibility. You know, 20% was that. There was no magic 20. It could have been 10%, could have been 25%. It was just to actually create the currency and the relationship and the opportunity. As you pointed out, you know, the premise was, you know, just like we've seen consolidation in the banking business, you know, you're seeing a lot of consolidation in the insurance business. Some of them, the same reasons, you know, scale, technology investments and all those things.
Others are driven by other factors in the insurance business, high rates and, you know, higher rates and they're owned by PE firms, so they may be hitting some sort of tipping point evaluation. The point is, it's consolidating as well. What we wanted to make sure, of course, we didn't know where we'd be right now, but what we wanted to make sure is that we always had the capital flexibility. We can do a lot of little deals. We can continue to take the dilution. They're all on J-curves, you know, so as you take the new J-curve, another J-curve is coming out of its, you know, of its bottom, and it's funding that from a dilutive standpoint, but it would've been hard to do a really large deal.
Mm-hmm.
Because that's a significant dilutive impact for overall Truist, and today, that would even be more accentuated.
Right.
The importance of having created that is even, you know, more important today in terms of that flexibility.
You mentioned before, it does offer you, if you needed it, the opportunity to raise capital for defensive reasons or just to have more capital as a bank. I guess, how would you look at that trade-off of kind of giving away some of the insurance earnings, which are a nice diversified source of earnings for you?
Yeah, I mean, you know, well, let's take it to the first one first in terms of growing the insurance business. We're totally happy in having a larger insurance business in which we have a smaller share that's gonna grow disproportionately faster. Totally comfortable with that as that as a premise. The opportunity to also raise capital at 25x to help support the banks is, that's not something that we anticipate. I mean, we don't, we're not in a, we have to go raise capital. You know, we're building capital organically. I think we've got a good flight path. I think we've got a good timeline. Having an emergency, you know, sitting out there, if something happened from an unforeseen category, then that could be available to us.
That's not front and center. That's sitting in the, you know, in the back, in the emergency room.
Yep. I guess the final question is, would you ever consider a sale or IPO of the entire business? I know you are doing some preparations to scale up.
Yeah
kind of separation so you can take advantage of optionality. Can you just talk a little bit about that, and then also, would you ever consider the whole kind of IPO sale?
Yeah. I mean, part of the premise of, you know, bringing a minority partner in is to also create the separation, and to create the separation primarily from a currency standpoint. Think about sort of a, you know, separate audit, separate HR function, separate technology function. Today, we have a service agreement, so the insurance company has a service agreement with the bank. What we want to migrate to is that it has its own infrastructure, so it's just clean, and it's clean in terms of the currency. I think that helps from an M&A. I think that helps from a, you know, a valuation standpoint, as we're thinking about how, you know, individuals over time can, you know, can develop value from the insurance business.
We're creating that separation of investment, and that's a multi-year process. That doesn't sort of happen overnight. You know, what we might do in the future is just, again, all about strategic and financial flexibility. An IPO is not in the short term, you know, spectrum of where we are, but if that were part of a much larger acquisition, if that were part of, you know, developing a really great value for Truist shareholders, then that might be something we'd contemplate. You have to give, you know, minority shareholder the opportunity to create liquidity. But that's flexible. There's an IPO opportunity, but Truist could also buy back the shares. You just create this financial flexibility.
It's not something that's off the table, but it's not something we're currently, you know, contemplating. We want to create this strategic and financial flexibility, if and when that was a good opportunity and possibility for our shareholders.
Yeah, having the separate financials and everything else just helps to know what degree of.
It creates the platform such that you're not trying to do that in an emergency.
Yeah.
That's always harder to do.
Can you talk a little bit about the environment for credit quality? you know, it seems that metrics are still pretty good across the banking industry, but there's obviously lots of things to worry about. Maybe just start off with commercial real estate, and office is the area, obviously, of most concern. Office is not a big exposure for Truist, but maybe give us a little perspective on how you see office playing out and what kind of loss content you might see in the industry.
Yeah, I mean, as you noted, office is not a, is not a big exposure for us. That was one of the decisions in integrate, for example, is we said, okay, we're actually not gonna, you know, put our, put our foot on the accelerator on real estate. We're just gonna integrate what we have, and actually sort of a net reduce of what we had from a total exposure standpoint. I do think office is gonna see some stress. I think we're gonna see some stress in office, and I think it's gonna be a little more idiosyncratic to markets and class of offices.
You know, there are some large urban markets that I think are gonna be really tough and really tough for a long time, and tough in both A, B and C, you know, food groups within that, within that real estate. I think in the markets, in our business is about 75% of our business is in our markets. It's about $5 billion, and it's, you know, runs off about $1 billion a year. We've got, you know, we've got some good timelines to think through that. And then in better markets, I still think you're gonna see some stress in B and C properties. And I think it'll be idiosyncratic. You'll have certain cities that are gonna have more stress than others, certain building properties that are gonna have more stress than others.
I do think we're in for a, you know, a bit of a little bit of a bumpy ride on overall office.
Pretty manageable for banks as a whole, do you think?
Well, I think so, because what we talked about, I mean, but because, you know, most banks don't have a really large exposure in office, and most of it has a longer tail to it. Again, something could dramatically happen to change that scenario, but I think, and particularly for us, I mean, even in the most dramatic scenarios, we still have, you know, it's over a multi-year basis, and it's, you know, highly diversified.
In terms of other areas of credit you're thinking about and how are you feeling maybe about the consumer?
It's interesting on the... you know, to your earlier part of this question is, you don't see a lot of stress in the system today. CRE office is sort of the example, the other example, where 35% or so classified, you know, so you see a little more stress there. In the rest of the commercial system and the corporate system, we're just not experiencing a lot of that. That's not to say we're not worried. That's not to say we're not talking to a lot of clients. That's not to say certain businesses are doing better than others, certain markets better than others. The overall credit quality is still relatively strong because I think they entered into this, they were stronger, back to my earlier comment. They entered into it more liquidity.
I think business owners are more conservative than they were pre-crisis, so they haven't, you know, accepted sort of a lot of the leverage, and they've been, you know, anticipating diversifying their own businesses. On the consumer side, a little bit of the similar is the consumer entered into this with a lot more cash, a lot more liquidity. You know, some of that was, you know, supplied into the system. The consumer overall is holding up pretty well. You're starting to see a little stress in the subprime side. You've seen that from some of the other, you know, companies that have bigger subprime portfolios. We don't have a much of a subprime portfolio. You're starting to see a little more stress in lower income clients.
I think maybe $50,000 and below in income. They're starting to see a little more stress, starting to feel, you know, the liquidity from stimulus, whatever. That's coming off a little bit. That's coming off faster than the rest of the portfolio. Matter of fact, disproportionately faster.
Mm-hmm.
You could see out in the next couple of quarters that consumer is gonna feel a little more stress. Even saying that, and that'll manifest itself in some more delinquencies. The loss content, you know, today I'm a little more optimistic about because of employment. The loss content really comes with, is more correlated to employment than anything else, more correlated than FICO scores or LTVs or those things. It's really highly correlated to, you know, I have a job in the family or two jobs in the family, and being able to sustain that.
Yeah. Just wanna circle back, on the regulatory front. Are you expecting to have to have some TLAC debt, phased in over the next couple of years? Just talk about how manageable that feels in the case of what you would have been issuing otherwise.
I mean, I think the, you know, in the, in the battles won and lost, you know, post SVB, I mean, TLAC is coming to, you know, banks of our size.
Yeah.
I don't know where that line will be below, but I'm 100% sure, you know, that TLAC will be part of our place. Whether it's tailored or not, I don't know.
Mm-hmm.
There are lots of good conversations about that. I think, you know, more holding company and bank versus just holding companies, I think that will be. You know, if that's tailoring, I think that'll be a component. You know, for us, if I look at sort of, you know, hypothetical, what that might be, and then look at our regular way issuing, and if you assume some timeline, so if you assume some multi-year timeline, we cover really the bulk of that sort of from regular way issuing. It'll be a little more expensive. We'll carry a little more debt than we would have, you know, otherwise. But I see that as a, you know, absorption, you know, absorption challenge that's not the high bar that everybody was worried about.
Yeah. Can you put that all together on the regulatory side and how things change? Think about ROEs for the industry and banks your size.
Yeah.
Do you expect that we'll see some degradation of ROE over time with higher capital and liquidity rules?
Yeah, I mean, I think you have to, right?
Yeah.
I mean, you know, we're, you know, to the point we started this conversation, I mean, we're in a bit of a capital build mode. We'll operate at a higher capital level, we'll have to figure out where that's gonna be, but it'll be higher than where it is today. You'll see some, you know, pullback in ROEs. I think the construct of our business, the diversity of our business model, the lower risk model we run, I still think, you know, we should be able to be, you know, top quartile kind of return.
Yeah.
You know, it's a, it's an absolute and a relative game all the time. You know, you gotta run your business on an absolute basis, but you're measured against a relative basis. I think we'll be relatively, you know, well-positioned on that, going forward, given, again, markets we're in, the diversity of our business model, and so our ability to, you know, maximize the amount of capital that we'll be required to hold.
Yeah. We've covered a lot of ground. We've talked about near-term trends. We just wanted to give you a chance. Are there any other thoughts you wanted to share about the near-term environment or updates on, you know, your outlook for the second quarter or your goals for the year?
Yeah. I think the, you know, the near-term environment, we've talked a little bit about this, it has a lot of pluses and minuses. It's got a lot of give and takes. There's a lot of uncertainty. I was, you know, talking to our commercial team yesterday, and we were having this conversation where our production levels are down. We see that. Some of that's self-induced, if we think about production as loans, but our near-term pipeline is up. That's a, you know, that's a bit of a dichotomy of we see some slowing, but sort of the near-term part of, you know, processing through, you know, looks relatively positive.
If we think about sort of overall, think about the, maybe in the bucket of revenue, you know, we probably thought we'd be a little flattish on revenue, probably a little bit down.
Yeah.
Yeah, just because of all the things we talked about.
Sure.
You know, capital markets, a little more uncertain than it was. You know, NII and deposit betas being a little bit higher. That's a quarter issue. It doesn't change my perspective on the opportunity long term and sort of where we are and the ability to generate, you know, above normal PPNR growth over the long haul. Things are slower. I mean, you can clearly feel in the, you know, last 30 days, things are a little bit slower than they were at the end of the first quarter, but not stopped.
Yeah.
You know, if that, if that makes sense. again, I think, our relativity is. I think because of all the positives in migration, all the things that are happening in our markets, I think we'll be relatively stronger as it relates to that slowdown.
Yeah, like you mentioned before, the operating leverage goal for the year gets tougher.
Yeah, that, yeah.
You push that out, but you are committed to that, and you've got some efficiencies that you're gonna kinda double down on.
No, no doubt. The trajectory just changed.
Mm-hmm.
It just did.
Yeah.
I mean, that happened from you know, the rate increase of that substantial nature. Our ability over long term to bring some of those expenses down to create that top of the funnel on the revenue side, I'm probably more optimistic, actually, long term about our ability to build and sustain operating leverage, but a little more challenged short term.
Yeah. Just as we wrap up, remind us again, you know, you've talked about the relative positioning of Truist.
Yeah.
You realigned the incentive system for your leadership team, really to deliver performance to all of your stakeholders. Just remind us of what the focus is on that new realignment and how it'll help deliver for shareholders and all your stakeholders.
Yeah, I think we're totally consistent with integrate to operate. In, in the integrate mode, our incentive system was really primarily related to absolute ROTCEE and absolute ROA and EPS growth. I think that was actually really smart because you had all this uncertainty and all these things, but our business model should afford us that kind of opportunity. Well, going forward, the business model still affords us that opportunity. We still ought to have absolute high ROTCE and high ROA, but we've got to grow. We've got to grow into, you know, the expectations that we have from our franchise.
What we did is took some of those relative things down and said, "Okay, now we're going to put a more absolute growth component to that." Maybe our timing wasn't perfect, but I think long term, it's exactly where we should be. Then we added an ROCE component to say, "Hey, we've actually got to think about that from that standpoint," and then added our relative TSR. Because ultimately, you know, that's one of the ultimate measures.
Mm-hmm.
It's a, it's a pretty significant shift. you know, our team is, you know, sleeves rolled up, fully supportive of, you know, we have this incredible opportunity that's Truist, we have to actualize it.
Yeah.
That should be reflected in how we're compensated.
We've got a couple of minutes, just a couple of quick, lightning round audience questions.
Oh, great. Okay.
In terms of growing capital, are there things that you could do to further optimize RWA? We've heard banks talk about, you know, securitizations, selling MSRs or other things. Are those in your mindset that you're thinking about now as well?
Yeah, they would all be, John, in the optimize. We don't have to do because of this organic way, that we don't have to just, like, get our RWA down-
Yep.
Do things that would be dramatic and that would, you know, be a significant shift in our strategy and our business. That being said, you know, I'm a fundamental believer that the increase in the velocity of the balance sheet is really important. Things like, I mean, if I would use an example, things like Service Finance, which had a originate to sell model. We purchased the company. We're really excited about it, but, and we did it as originate to hold. Okay, it's a new day. It's a new environment. All the things that we're doing in creating great, you know, client experiences, creating great relationships with our corporate clients, using Service Finance, really incredible what we're doing there.
We'll probably increase the velocity of the sell component of that, you know, so that would be an example where we use securitization.
You were going to hold a bunch.
We're going to hold a bunch, and we'll probably hold less, but we still like the business. Strategically, we don't have to change the front end of what we're doing, but just create a little more velocity around the, you know, the assets that are generated from there. We have other examples like that, but they're all, you know, around the edges, optimizing, increasing velocity versus, you know, we don't have a, we have to get our RWA down by X% because we've got to build capital. We're building capital on a more normalized kind of basis.
Sure. The last question is just comment on what you're seeing in auto in terms of demand, pricing, and you've got some, subprime auto exposure, and how you feel about that.
Yeah, it's, and it's interesting. The Regional Acceptance Corporation, you know, which is a subprime business, but actually what's happened over the, you know, over the last several years, one, it hasn't grown, but secondly, it's become more of a near prime business. Because subprime sort of got squeezed out of the market, I mean, it strategically, that sort of happened. That business is, it typically has a 6% kind of loss rate, but it is way below that right now. The Manheim, you know, used car index is had a little more volatility, but it's still held up, you know, pretty high. The, you know, the need to still have a car and the alternative is not there to have a used car.
You know, people are keeping the car and continuing to make that payment. I expect that'll normalize over time, but we're just not seeing it quite yet.
Mm-hmm.
Again, that business has translated to more of a near prime. It's hard for me to make a really, you know, strong sort of what's happening in the subprime market.
Sure. You feel good about your business?
Feel good about our business, and the overall auto portfolio is strong. I mean, it's starting to, you know, that's starting to normalize, but that is a, you know, really slow migration.
Got it. Well, Bill, we've covered a lot of ground. Really appreciate it.
Great.
Thanks for coming, and hope to have you back next year.
Right. Thanks, John. Good to be here.