Good morning, everyone. My name's Ken Usdin. I'm the large-cap banks analyst at Autonomous. Thanks for being here this morning with us. I'm really proud to have Bill Rogers, Chairman and Chief Executive Officer of Truist Financial Corporation, with us this morning. Bill has been the Chief Executive Officer of Truist since 2021. He's led the company's transformation into one of the largest super-regional banks in the U.S., with almost $550 billion of assets, and a lot of growth and improvement coming along the way. Before we go, a quick reminder: if you have any questions, you can put them through the Pigeonhole Live, and we'll see if we can get them into the discussion. Bill with that, thanks for joining us. I appreciate it.
Great, Ken. Thanks for having me.
Excellent. Bill, maybe a big-picture starting point. It's been a long year and five months, a lot of things out there in the world. Maybe just your big-picture take on client customer sentiment across your footprint and what you're seeing just from a broad economic activity perspective.
Yeah, sure. I would say constructive. Client activity is active. I like to say I think on the wholesale side, I think clients have capitulated to uncertainty and rates. They're not waiting. They're going ahead and making the strategic decisions and building the warehouse, buying the trucks, looking at the strategic partnerships—things they need to do, recap their company. Our activity's strong, and it's strong across all spectrums. I think activity is positive on that side. On the consumer side, probably on the lower -income side, a little more discretion. I don't think it's a risk-off. Some people are continuing to be, but it's a little more discretion. On the upper income side, continue to see the trends that we've seen. Consumers are active, continue to be prospective, and are not changing their buying patterns significantly.
Yeah. Just one thing on the commercial side: you mentioned that people are kind of just moving forward.
Right.
It's kind of uncertainty, the new certainty, and you just hear your customers saying, We have to go forward. We have to go.
Yeah. Again, I think capitulating to uncertainty. I think that.
Yeah
It is an uncertain environment in many ways, but it has been an uncertain environment.
Yeah
as your introduction, for a long time.
Yeah.
I think they're looking at the need to continue to grow their business and continue to invest in their business. They're looking at the strategic alternatives and going ahead and advancing on those activities. Again, pipelines and dialogue, particularly on strategic types of investment, are actually still quite strong.
Yeah. One of the changes we've seen since the beginning of the year is that the rates backdrop has stayed higher for longer.
Right
which for Truist is a little bit of a ding.
Right.
You've maintained your overall earnings trajectory.
Right.
What gives you the confidence in that trajectory as we look forward, furthering the conversation?
Yeah. Ken, we've got several things. We have a lot of levers. NII is under a little more stress. In fairness, in the last couple of weeks, on the long end, you sort of see some opportunities. We have fixed asset repricing and securities repricing. That probably has a little higher opportunity on the other side.
Yeah.
Sort of our core business, I think about our fee-based businesses, we actually see a lot of confidence in our fee-based businesses. Think about investment banking and wealth and payments for us. Much more relationship-driven, much more franchise-driven. We just have more confidence in the ability of those businesses, long-term investments in those businesses, organic investments in those businesses. Highly relevant, highly competitive positioning. While we see a little bit of offset on NII, we see a little bit of offset on the positive side, on the payment side.
Yep.
Just the capacity to create better RWA focus on our company, create better looking at Basel, and looking ahead in terms of regulatory, more sustainability on things like the buyback. As we see not only the short-term capability in our confidence, we also took the opportunity to say, Let's set some longer-term targets out there. We see more confidence and more capability in our ability to improve our return, not only short-term and sustained but really long-term in the things that we're building.
Yep. As we start to talk about some of those building blocks, you talked about 3%-4% loan growth for the year.
Yeah.
What are the main drivers of that growth, and as you focus on getting more higher return incremental-
Right
business to the company?
Yeah. I think on the loan growth side, we're being competitive and discerning and focused on return. The quality of our loan growth is actually sort of significantly higher. Think about on the commercial side, 60% of our relationships now have some type of payments business associated with them. That's significantly higher than our back book.
Yep.
That says our product, our capability, our competitiveness is really strong. We have about a 24% increase in new clients, we're also winning new business and new relationships. You translate that onto the investment banking side of that, we're in more prominent positions related to that business. The quality of the business and overall return is really high. On the C&I side, we're competitive, we're focused. We see good growth on that side. On the consumer side, sort of the traditional strong consumer businesses for us, think about like Sheffield and Service Finance, we're entering into the cycle for those businesses. Think about HVAC and pools and things that people are investing in back to the consumer, still in the game, still see positive momentum on that side. They're client-driven, higher -return businesses. Think about things like the indirect auto.
We're actually just diminishing and lowering our expectations in that business. The returns are really small. The relationship-driven part of that's really small. I think what we're seeing is growth is where we want to have growth, and growth is accretive to return, and that's where we're going to be focused. Again, back to the earlier comments, that's what gives us more confidence in these return expectations.
Got it. Let's talk about the right side of the balance sheet. You've talked recently about making progress on the deposit side.
Right
Making deposit momentum in what's also not an easy environment. How do we think about the pace of that improvement, which has been some time in coming along, and the key drivers that can help support better deposit growth?
Yeah. Quarter-to-quarter, continuing improvement for us on the deposit side and deposit generation. On the wholesale side, more significant improvement, and again, back to quality operating deposits. In fairness, more interest-bearing than we'd like, but they're quality relationships, and they're a 60% payments business. These are things that still haven't funded part of a growing operating component. We'd rather have more non-interest -bearing, but we'd rather have the relationship. Being able to sustain that and have a sort of 2% kind of growth in the wholesale part of the deposit, we feel good about because the quality of that deposit growth is good. On the consumer side, really good deposit generation. We're sort of seeing that on our Premier side. We've been investing a lot in that. The 20% kind of plus focus on deposit generation.
Again, I would like to have more non-interest -bearing, but again, good growth and good focus. We'll have more focus on expanding those relationships. Products, capabilities, rewards, and insights: the things that we can do to expand those relationships with those clients create, again, the equivalent of the consumer's operating account as well. The quality of our deposit growth has been strong, and I think over time, that's the most important thing to have, the quality of the deposit rates. Rate cycles will change.
Yep.
When rate cycles change, we'll get more advantage from our earnings capacity and funding capacity of those deposits than we have today.
When you mention that you're getting more of the interest-bearing and you'd rather more of the non-interest -bearing, is that just because of the mix and just what's coming to you? How do you evolve that over time?
Yeah. A lot of it's, again, because it's funding operating accounts.
Yes.
You sort of have that component in it. Over time, you leverage that relationship. Earnings credit rates is a big part of that component today. That's a highly competitive, sitting at the top end of that spectrum. That changes over time. You have flexibility. Think about the equivalent of the back book on the consumer and the equivalent of the back book on the wholesale side, that you're constantly sort of challenging and looking at where those opportunities are. Also in fairness, also helping clients manage their deposits more efficiently.
Yep.
Their clients are much more efficient on the wholesale side from everything, from working capital to supply chain to liquidity, and we're helping them with those capabilities. We're providing the tools, and ultimately, the most important thing is to have that strong, fulfilled, deep relationship with that client. Over time, that accrues a lot of benefit to you.
Yeah. Speaking of that and furthering it, you talked about Premier, you talked about your payments and getting deeper relationships there.
Right.
Inside the branch network, things you're working on there as well. Talk about how that's all positioning to drive better growth, and what are the building blocks that happen over time in terms of getting those pieces more connected?
Yeah. If you think about it overall in terms of our franchise focus and think about the building blocks on return, it is really significantly leveraging the assets that we already have. We've got a fantastic franchise. We've got fantastic clients. We have great long-tenured relationships. Now we have much better product capability, competitiveness, teammates, and focus. Leveraging those existing franchises for higher return, leveraging those existing relationships, deepening those relationships. Investment banking, a 40% sort of increase in the relationships that come from the franchise. Same thing on wealth. +40 % increase in the relationships that come from the franchise. Using the Premier, using tools, AI, increasing the referral network, and building those stronger relationships. Those are things where we've already made investments, and we're increasing the returns. Same thing on the payment side.
60% of relationships are now with the payments business, which is significantly higher than the back book. We're creating return on investments that we've already made, and that's a big part of the return profile.
Yeah. I'm not sure how easy or difficult it is to say, but you mentioned that there's a lot more of that. Are these all in early innings, middle innings, in terms of that deepening? The growth shows it, that there's an increment that's coming on. How nascent are still some of those opportunities?
Well, the confidence that we set a longer -term, medium -term—
Yeah
...would say that we have a lot more innings in front of us.
Yep.
That we feel confident about the momentum and the exponential growth that is in terms of an opportunity.
Okay. Consumer, you mentioned Sheffield, some of your other businesses, LightStream, Service Finance, and some of the higher risk adjusted return areas. Are there opportunities to lean in further there? Or to your initial points about the consumer, do you have any concerns there? Where's the bid ask in terms of how much you want to step in further, and the opportunity sets for those businesses to grow?
Yeah. Remember, those businesses, particularly on the Sheffield and Service Finance side, these are high FICO score businesses, high return businesses, risk -adjusted return businesses. We're going to continue to lean in those. In both of those, we're market leaders. We have a capacity to lead in those markets. We're entering into the cycle again, sort of the summer months, where those businesses become more important. I think those are areas where we're continuing to lean in. We feel good about the relationship aspect of those. We're building more relationships with the vendors and the other support system that creates all that. That ecosystem overall is improving in terms of return.
Yeah. Do those businesses drive other throughput opportunities to other areas, or is it more just that you get such good returns, they're still additive to the franchise?
Primarily a return focus, but there is overlap. Those Venn diagrams do come together, and we can talk later, but the advent of tools and AI capabilities in terms of learning how to leverage those Venn diagrams better when those overlap, when a client has a relationship with us, with Service Finance, and maybe they also have a relationship, or they sit in another part of our geography, and we can leverage those. By the way, that's really early innings. If you talk about innings, that is very nascent. That's sort of the ultimate outcome. For now, they really drive really good high risk-adjusted returns, and that's the sort of the, if there were icing, that would be the icing on the cake versus the cake itself.
Got it. Your biggest fee generator, the investment banking and trading franchise, has been growing. You've expressed confidence in it—
Right
...continuing too. You mentioned earlier about customers moving forward. How much of the growth that you're seeing and expect to continue to see is driven by share gains? How much of it is that product build-out? How much is just the environment?
Yeah. It's several things. Remember, this is a business we've been building for decades, and we build it organically, which we think is actually really important. We think the cultural aspect of this business and having it not as a separate business but as a business that supports the franchise is actually sort of a really key differentiator. That's the emphasis. I think that's what reduces the beta over time in terms of the volatility of that business, because it's driven from the franchise. It's driven from our existing clients and that focus. That's been a key area for us. We see low double-digit kind of CAGR growth quarter- to- quarter. It'll be up and down for any particular different reason.
Predicated on the product and capabilities we've built and the talent we've built, not only in the investment banking side but also in the delivery side. Our middle-market client base and our middle-market teammate base, +20% of those are new to the franchise within the last year. They know how to leverage these tools. They know how to leverage these capabilities. They know how to leverage these client relationships. That's part of that building of that momentum of that business.
In terms of market share, where do you think you are? Where do you think you can go? Is it part and also of continuing to build out the product set, or is it more just executing-
Yeah
better against the competition?
Yeah. No, certainly, no. Clearly, on the market share standpoint, we're a small, single-digit market share. We have lots of upside relative to market share. We think about more market share about individual clients and individual businesses and specialties that we have and leveraging the existing franchise in terms of that growth. Not only do I think we've got organic growth, but we do have market share expansion. If you look at some of us over the last five years, we've had a consistent small market share advantage. For us on that base, that can actually be a significant contributor.
Yeah.
Again, the return aspects of those is important because it's against capital that we've already committed.
Yeah. Are incremental part of your fee business incoming from investment banking trading come from lending clients, or are you seeing more of a pivot where you're just getting the advice now, and it goes reverse inquiry onto that?
It's both sides. The core business starts with industry specialization, so that comes from both sides. We're important to a client in terms of our advice and our knowledge, irrespective of whether they're a client or not. That's one aspect of the business. The other aspect is we're important to the client because they're a client, and they're making a decision in terms of the recapitalization of their company, the sale of their company, and we're able to come on top of that with our specialization. It's the culmination of both, and the leverage of both is what creates the momentum.
Okay, got it. The other larger and growing fee area is wealth management, where you've put a lot of focus .
Right.
Talk about how , in the same regard, where does the growth come from there? Is that also advisor adds? Is it also connected to Premier? Walk us through that.
The good news is it's the same thing. It's both.
Right.
It's, one, it's slowing the attrition, which we've done significantly. We have a really great team on the field. We've provided a lot of tools and capabilities for them in terms of their efficiency and their ability to deliver great products and great capabilities to their clients. Their platform's been significantly enhanced, and their efficiency in how to deliver that platform's been significantly advanced. We've invested a lot in that capability. On the other side of that, and you mentioned the Premier side, is then creating that platform from Premier. The insights and the knowledge that we have about that client base create more velocity for the Premier capability in terms of the referral side. We're using AI-generated tools to help the referral network, so we know we have a lot of knowledge.
We have a lot of knowledge around when and how a client would want to be referred. What are the criteria? What are the top elements of success? How do we increase the batting average, so to speak, how do we create the add-ons? A combination of culture, talent, desire to work together, incentives, and now the advent of a little bit of technology to accelerate that is where that's coming from. As I mentioned earlier, +40% of the growth in the wealth side is coming from the existing franchise. This investment that we're making in Premier, the Insights that we're providing, and the leverage of the ecosystem is proving to be part of that growth dynamic.
The last growing incremental piece is treasury management, which kind of sits in the middle of all of this, more maybe connected to the prior points on investment banking and the commercial balance sheet. That's been a big part of a lot of regional banks' growth. Could you talk just about how you're continuing to build that piece of the business out and how that's adding to both the deposit-taking and the overall relationships?
Yeah. I mean, the last several years, a really significant part of our investment has been in our overall payments treasury management capabilities. This is an area for Truist, where we had a significant opportunity for penetration. We were under-penetrated relative to our opportunity. The good news is the ability to invest in product and capability, now is a real left lane opportunity. It used to be like mainframes and hard investments and took years to create. Now it's APIs and other tools that you can be really relevant to clients in terms of integrated receivables, payments capabilities, real-time payments, specifically related to their industry and their business and their working capital and what's relevant to them. Those are the investments that we've made, and that's where we're seeing the acceleration.
As I mentioned earlier, 60% of the new relationships now have a payments component attached to them.
Yep.
That says to us a pretty good signal that, one, we're relevant, so it matters. I mean, the products and capabilities and the tools and the teammates and their prowess and their effectiveness is relevant. In our back books, a lot less than that. That says we have a lot of opportunity to continue to expand that business and grow with our clients and be relevant for them on that part of the side.
Yeah. As a business, kind of bring that all together from a revenue perspective, the distribution between NII and fees is a little bit more NII than the longer-term path, 70-ish, 30.
Right.
With these fee opportunities, do you think that mix can change over time and become proportionally more fees? How do you think about what the right balancing act is? I know rates are a big, important part of that.
Yeah. I mean, it will change over time. That moves slower as a percent over time.
Yeah.
It will change over time, and that's back to how we started this conversation. We're seeing disproportionate growth in the fee income side, so more confidence in that, in the fee income side. NII has a little more pressure, but we're seeing single-digit kind of growth on that side. It takes a long time to sort of reverse the whole percent.
Right.
The return aspect of that—
Right
...accelerates pretty quickly. While the percent may not change as quickly, the return element, because you've already committed the capital on the side, actually accretes pretty quickly, and that's why we have the confidence in achieving our medium-term goals, but setting longer-term goals because we see that acceleration of the return aspects of this. While the geography of something in terms of a percent, or where it sits on the balance sheet, or where it sits on the income statement, we're not as focused on that as we are about, are we achieving the return objectives.
Yep
Are we achieving core EPS growth?
Yep.
I think we've got really good flight paths on both of those.
Got it. Using that as a pivot to talk about return targets and operating leverage. When you think about that path towards your higher return targets, how do you think about getting the top line to grow and then keeping the operating leverage band wide beneath it, while continuing to support everything you just walked through, which is a lot of investment in the franchise?
Right. Yeah. I think about the return objective, think about it as the waterfall. What are the components that you're building on the waterfall? Obviously, the biggest component is the core franchise, the NII franchise. Improving them, improving growth in NII, improving growth in the balance sheet, and deposit remix, that's your biggest element. You've got the fee-based business growth, which we talked about. Those are significant enhancements to the return objective. Going to your point, the efficiency side of that. The efficiency side of that is a couple of hundred basis points of operating leverage. All that with creating efficiencies to reinvest in the business.
Right.
I think we've got, now, a really sophisticated system for sort of the next dollar to save and the next dollar to invest, and creating the right formula for that. We're not going to miss out on an investment opportunity because the investment returns can be faster, and quite frankly, the savings returns can be faster. The efficiencies that we can achieve with the tools that we can use and think about software development or care centers or core operating business, we can achieve more efficiencies faster. We can also have things that we can invest in faster. That combination is where you're talking about that, and we achieve that in the overall operating leverage. For us, we have some tailwinds. We have some tailwinds and repricing.
Just as the short end of the curve has been a little more challenged, the long end of the curve is a little bit better.
Yeah.
We've got $40 billion worth of repricing in terms of our fixed asset repricing and what comes off the securities portfolio.
Yep.
Some advantages of that. We have some AOCI burn-off in terms of that. We have some natural tailwinds in that regard. The last one is the capacity for capital utilization.
Right.
With Basel III regulatory reform, you know, pick your number, 10% or so, in risk-weighted asset improvement, the things that we're doing on our own density focus, that just creates more durability in that capital return category. There are lots of elements of that waterfall to get there. Our confidence in setting these targets is that we don't have a dependency on one, and we have a lot more flexibility within all of those levers.
Understood. Okay. We'll keep digging on some of those as well. On the efficiency side, you and every other bank are now talking about AI as a really important enabler for the franchise, for the industry. As you look at it in terms of how Truist is putting it through the tech stack, what are the most important benefits you're seeing today, and how meaningful can that be towards productivity and efficiency over time?
Yeah. I think the first thing is we don't think about the AI budget. We think about AI as the propellant, AI as the accelerant to an efficiency play, or the accelerant, equally important to the client enhancement, the client experience, and the revenue side. That's how we think about the budgeting in terms of how we think about the AI component. Lots of obvious investments, and as I mentioned before, some of the software development care centers, sort of general process improvement categories. Every one of those efficiencies, we have an ability to reinvest in the business on the other side.
Think about Truist Insights, think about the referral networks, and things that we talked about that we use the technology to create more velocity and more effectiveness and more return against the revenue sides of the business, all while creating an infrastructure that allows that to run it at sort of a higher speed.
When you think about that creating efficiency for the investments across the board again? Some goes back into people, front office-facing people, some goes into furthering the technology product. Does it get spread out? Is it more focused? Can you think about that?
Yeah. A huge part of the initiative is to simplify our businesses so we can make those decisions.
We have a great framework for making those decisions and making those trade-offs. We announced we were going to invest in branches. Branches have a longer-term payback, so they're more in the five- to six-year payback. We have to offset that with shorter-term investments and shorter-term efficiencies to achieve that. Put that all in one big bucket. We can sit around the room literally at a small table, look at all those effective decisions, and make those decisions relative to what's going to create the highest value for our clients, what's going to create the highest value for our shareholders, and put that in a mix that allows us to make those decisions on short-term, medium-term, and the capacity to toggle all of those switches at the right time.
It's why I'm sort of always careful about saying it's going to achieve this level of efficiency, or you're going to have this level of dollar savings, or this, because you get into apples, oranges, and kumquats in terms of how to think about the cornucopia. What we'd rather say is, are we using all of these investments to achieve the return and the growth that we can achieve, and those are the potential of our company.
What about AI as a potential competitive threat?
Yeah
How you defend the fort, whether it's in any business really, comes up most on the deposit side but also comes up on other angles of payments and fees. How do you also get ready for that and prepare to just go up against how that evolution happens over time?
I think, like any tool, it's offensive and defensive. On the use of AI quote unquote, defensively against our franchise, the offensive side is we just have to become more relevant to our clients. Are we providing them more insights? Are we giving them ubiquitous access to all of the tools and capabilities and products and avenues and places that they transact with them? Are we deepening the relationships that we talk about? Are we their primary account? Are we their operating account? Are we the primary place? We've got the tools and capabilities to do that. While we see the threat, we're not immune to the threat. Also, those same tools make us highly competitive and create the individual moat with individual clients around our relevance.
Clients are going to choose to be the most relevant and the most primary with whoever's giving them the best advice, who has their best interest at heart, and who's giving them the most flexibility on their account. I think that's really, really critical. In our case, who's exhibiting the right level of care and purpose and understanding, and helping them achieve their life goals, and helping them build better lives.
Yeah. Just one competition question that'll also lead us into a credit discussion. Your sense of just the competitive landscape, across, not just because of AI, but just more broadly speaking, anything new or different or novel, whether it's in footprint or in some of your national businesses or any ways you're thinking about it differently from some of the angles you've already walked through?
It's a highly competitive environment. I'd say most importantly, we've never been more competitively well-positioned.
While it is highly competitive, there's just no doubt, and the competitors are as broad and as wide as you can possibly describe, Truist has never been more competitive. In terms of the talent we have on the field, the product and capabilities, the ability to leverage those, the ability to respond to our clients' needs in ways that make us effective and important to them, and the ability to offer advice to them in the ways that they want to receive advice, whether it's digitally, whether it's physically. I just think we've never been better positioned for a highly competitive market.
Yep. Understood. Talking about the broader credit environment today.
Yeah
dovetails back to where we started. What are you most focused on as watch areas, and how do you feel just about the overall health across the portfolios?
Yeah. If you look at sort of on a spot basis, credit's quite good. That really runs through the gamut. What we focus on is having a highly diversified franchise. I think one of the significant benefits of Truist is the diversity of our franchise in virtually any way that you want to think about it. When we think about areas that people might focus on, whether, well, pick your category, software, pick any category, for us, it's a small percentage of the overall portfolio because it's highly diversified. We start with this framework : we have a lot of discipline around creating a diversified franchise, and I think that's probably the most important component in terms of thinking about credit. As we look forward, we stress everything against that diversification.
We're going to stress against everything. We're going to stress against gas prices. We're going to stress against delinquencies. We're going to stress against consumer behavior. We're going to stress against virtually anything that we can think about, all ensuring that we've got enough diversity to not only weather that but also actually prosper in those environments and create disproportionate advantages. The watch items that we're looking at, obviously, we're going to look at anything on the consumer discretionary side just to ensure, and you can see sort of binary differences in different businesses, which is fascinating. We'll look at transportation and the cost of gas what's the influence of different things. We look at different consumers.
On the lower -income side, particularly, what is their different exposures , how are they thinking, and what is their payment streams? Looking at how they're spending money and decisions they're making. We're constantly stressing all of those components. Again, the strength for us in looking forward is just the diversity of the overall business franchise.
Yeah. It seems like even your points about the things you're watching for, even whether it's on the lower income cohort, the delinquency trends don't. You mentioned spot basis looks fine, but as everyone looks forward.
Yeah. Delinquency trends, in some cases sort of slight. That's not manifesting itself into losses.
Right.
Remember also, this cohort has got about a 10% increase in tax refunds.
Yep.
There's some sustainability in that. Those are areas that we're just watching really carefully and closely.
Okay. On the commercial side, you have to talk about the private credit ecosystem.
Sure
Both as a credit question and also as a growth challenge, and yet maybe an opportunity as well. How do you see this interplay, especially that you service it inside the investment bank as much as on the balance sheet as well, the interplay between banks and private credit? How do you see that as potentially being an opportunity over time?
Yes, you mentioned we've been in this business for a long time in terms of interplay with private credit. Going back to my other comment, highly diversified, in terms of the total percentage of our total portfolio, highly diversified. Within private credit as a whole, it is highly diversified. Within the whole NFI, highly diversified. Long-term relationships that have use of our capital markets capabilities. These are higher return relationships for us. We underwrite down to the loan kind of focus. These are clients that we've known for a long time, we have really strong relationships with. We think we're sitting at the right structures of those infrastructures. You and I were talking about the convergence between private credit and banks. I made the comment, I think it's converging. I don't know if it's converged.
It's certainly converging, where I think we'll see some more opportunities on the bank side. I don't think that's going to be a groundswell of change. You see some of that converging, where clients who maybe had typically gone private credit, now are also considering some of the other options, particularly as it relates to some of the funding differentials and the pricing differentials. As those two things converge, as pricing converge, and structures converge, those are probably closer today than they were a year ago.
Yeah. Seemingly, the banks will still be willing to grow it, and I think coming out of the April quarter, there was a lot more disclosure and confidence—
Right
...quality of the underwriting and the portfolios. Coming back to the return side, talk about capital a little bit. Obviously, we've got the proposal for the Basel III-
Right
...rules, a positive outcome for Truist and for other regional banks. First of all, if it goes through as is, any issues with that? Do you anticipate any changes happening as we get through a final rule?
Yeah, as you mentioned, a positive overall outcome for us. We have the capacity and capability to select. We have the optionality to select where we want to go. I think the general corpus of where this is seems like this is going to get through, whether it's the end of this year or the first of next year, I don't know. The timing is a little in flux. Back to our earlier comment, that just for us is another level of flexibility, another level of capacity, and another level of durability long-term for us in terms of capital return.
You mentioned the 10% CET1 level as kind of being your baseline—
Yeah
..expectation. As you get this extra help down the line, it'll take some years to get to it, as the AOCI continues to cure from the securities portfolio, how do you start to at least think about the possibility of, well, maybe 10% is not the right level? You obviously have a much lower regulatory requirement, that's a pretty healthy buffer to even keep today. Is that a potential thought process as you think further afield?
Yeah, I think that's a longer-term thing to think about. We've been pretty clear to say that within what we've outlined in terms of return expectations, we've assumed somewhere around a 10% CET1. I don't want to speculate whether that's conservative or not, but there may be future opportunities there. Again, back to our earlier comments, given the diverse nature of our franchise, I think an appropriate risk balance of our franchise could be an opportunity. We just want to factor that in. If there's another upside, if there's another opportunity, that could be a way to do that. We'll have to look at where rating agencies fall. We have to look at the competitive environment.
Yeah.
Quite frankly, where we are in an economic cycle, all those things, all those variables, all exist. We think for today, being able to say we can achieve these return objectives, and we're not assuming that we have to have an additional capital accelerant from a lower CET1 base should give us a lot of confidence in the ability to achieve those returns.
Yeah. One of the points you mentioned earlier, you talked about RWA optimization.
Right.
Can you talk about what that means at Truist and what's new or different about that from the past?
Yeah. If you think about when we came together, you had dozens and dozens of ways to think about it, like how to classify loans, where they should be, and what the categories are. If you look at us relative to others, we're a little more dense on the RWA than I think we should be relative to our portfolio, relative to how our company looks from a risk-weighted asset standpoint. We've brought in some help to help us think through this and help us be really sophisticated. Sometimes it's as simple as these loans should be classified this way, and we have a systematic way of doing that versus an individual making a choice. Others are things like our CLN portfolio, how do we leverage, how do we take things like some of the indirect auto portfolio and create more velocity around that?
Our Service Finance business, remember, we have it as a balance sheet business, but it grew up as a non-balance sheet business. We have the capacity to think about that as well in terms of how we maximize those opportunities. It's a combination of a lot of different things, and I think part of the return profile for us is, if you look forward for us, our growth's going to come with a lot less RWA growth. That's a significant element of this improved return profile for our company over time.
Yeah. To that point, you talked about getting to a 15% ROTCE in 2027, and then longer term, getting to 16%-18%. Maybe just take us through that waterfall and talk about maybe your stack rank of what the biggest drivers are to get to that next leg.
Yeah. Well, we've talked about it a little bit. The biggest drivers are the business drivers.
Yep.
The improvement in the overall mix, the improvement in wholesale funding, reducing the wholesale funding, increasing our deposit mix, improvement and growth in the loan side and the deposit side, and having them be better matched. That's the big bulk. Then we go to the non-interest income components of the business, and we go to the efficiency plays, and we go to the capital plays of all the things we talked about, and then the tailwind that we talked about. We've got several building blocks in that return profile. Again, don't have a 100% dependency on any of those. They all have levers and flexibility. Back to Basel III, that just provides, I think, more sustainability and more durability on the capital actions that we can take.
Got it. One question that's come in, I think , is a good one. Can you talk a little bit about cybersecurity?
Sure.
Which is a threat to all banks, especially given the Mythos threat. Is there a risk that you and other banks will have to ever increase your tech budgets to deal with this rising risk that the whole industry faces?
A significant part of the efficiency that we get is reinvested in our cyber resiliency. Yes, the answer is yes, that part of our budget is going up.
Yep.
It'll continue to go up, but that is being offset by the efficiencies in the other plays and the operating leverage that we achieve. 100%. I think people understand, but our industry is, I think, probably relative to other industries, the most cooperative.
Yep
weakest link view in our industry. You think about the ARC, FS-ISAC, and all these components. We're all in this together. If you think about the systems that we use outside of our core systems, these are common systems to all banks. We all have a really strong vested interest in making sure that our second, third, and fourth -party relationships are really strong. The standards for them are going to go up exponentially in terms of their resiliency, their patching capabilities, the expectations for that. That'll come not only from us, but also from the industry. We're all, again, leaning in collectively to affect this.
I think it's an area that we have an extreme area of focus on; continue to invest. The good news for us, if you think about the last three to four years, that's one of the areas that we've invested in significantly.
Yeah.
We thought about doubling the size of our company. We had to similarly create an infrastructure and resiliency and a defense mechanism that reflected that. We've been in a high cycle of investment on that, and that'll, maybe not at the same level, but that'll continue.
Yeah. That reminds me of another question that's come up a bunch, which is that the industry has rallied at important moments, like—
Yeah
...on cyber, creating Zelle as a competitive-
Right
...alternative to other mechanisms. This comes up a lot in terms of deposit discussion.
Right
The new tools that are coming up, how do you think the bank and the industry will prepare against whatever the outcomes are, as all these new digital tokens and stablecoins come about, and you prepare for just, again, defending the fort, so to speak?
Yeah, I think you highlighted. I think we would say, as an industry, we were slower on Zelle as a response than we should've been. You look at the response now in terms of the growth of Zelle and its influence and its importance, like significant, and that was a total industry, everybody's shoulder in. I'm optimistic, I think we'll be faster as an industry in responding. I can see an industry-wide tokenized deposit view. I think we all have a view that the client's assets and deposits belong to them. They don't belong to us. We have to create the platform that is a platform that has the safety components, the regulatory components, and the confidence components that reflect not only our bank but also our industry.
We're fully invested, as an industry, certainly Truist, fully invested as an industry to create a confidence-based ecosystem that has a bank infrastructure to it. I think ultimately, while I think the velocity of all that will increase, if you enter this with a concept of we're going to provide really great products, really great advice, really great capability, you should be the beneficiary of that velocity. Not be defensive and not be fighting it, but be proactive and lean in to make sure that you're going to be, as the options increase, you should be the best option. That's the approach we're taking as a company, and I think that's the approach we're trying to take as an industry.
Got it. As we wrap up and just think about everything we talked about, talk more, just kind of wrap us up on just your overall confidence here. You're laying out here in terms of both the potential for stronger growth, higher returns, and improved profitability. How do you kind of take us forward and give us that confidence? You mentioned it's been kind of a journey since—
Right. Sure
...the original merger of the two companies and bring this all together to us in terms of where we should be looking forward and seeing that improved success for Truist.
I think back to my earlier comments, if we think about the starting point where we are, we have some natural tailwinds. We are where we are. We have some natural tailwinds. On top of that, we've never been more competitive than we are right now. The investments that we've been making in product and capability and teammates and talent against an incredible franchise, an incredible opportunity, I think, just we're sort of extremely well positioned. Back to our earlier comments, we also have a lot of levers. We don't have one dependency. We have a lot of levers, and the environment today, I think, affords us an opportunity to navigate within those levers, which is why we have the confidence of establishing this longer-term goal. While it won't be a straight line, it will be a line.
We're going to see constant improvement sort of quarter to quarter, half year to half year- to- year.
Building that momentum. The geography, as I mentioned earlier, is probably not as important as do we have really core, good, strong EPS growth from where we are today. I think we feel really, really confident in that. Do we do that against a higher return expectation as we go along? We have really good EPS growth, and we have that against a really higher return profile.
Yep. Got it. Great. Please join me in thanking Bill for his time and our session today. Thanks, Bill.
Great. Thanks, Ken.