If everyone could take their seats. We will continue with this morning's strong run of large cap bank speakers. Next up, very pleased to have Truist Financial . From the company, their Chief Financial Officer, Mike Maguire. Mike, welcome.
Yeah. Thank you, Jason, for having me.
For those that may not have seen this morning, Truist posted a slide. I guess to me, the two biggest takeaways were, one, they announced the sale of $5.5 billion of auto loans, representing substantially all the assets of the Regional Acceptance Corporation, basically a subprime auto unit. They also mentioned the quarter's tracking as expected. Mike, is that correct? Maybe just fill us in on some details of the strategic rationale, financial considerations of the transaction, and maybe any updates on the quarter.
Yeah, great. Absolutely right. We did affirm this morning with our slide that we are affirming the quarter and the year, so no outlook changed. That obviously does not take into consideration the transaction impacts related to Regional Acceptance. Just to talk maybe a little bit about RAC. We are under contract to sell the $5.5 billion in near-prime auto loans and essentially exit that business entirely. As we thought about this business, and you think about the year so far and some of the decisions that we have made around stopping originations in marine and recreational vehicle , de-emphasizing some of our national prime auto lending businesses. This was, in many respects, sort of along those same lines and consistent with that strategy. If you think about the strategic boxes, the financial boxes, we believe all are checked here.
From a strategic perspective, Regional Acceptance is typically a loan-only, loan first national business where our opportunity to really have a meaningful relationship with these clients beyond that single loan product is extremely limited. From a financial perspective, and we did in our slide outline, the concept of pairing the sale with an AFS repositioning to offset the increase in capital that the transaction would create. You see a pretty compelling financial case. You see improvement in EPS, albeit modest, ROTCE, Tangible Book Value per share. Across the board, modestly accretive. The concentration in non-performing loans and charge-offs in this business as well creates an opportunity to really, I think, improve our overall credit profile. You will see that we believe both charge-offs and non-performing loans as a percentage of loans will decline by 10-plus basis points, call it 20%.
With the proceeds that are generated through the transaction, we also have an opportunity to reduce some of our borrowing, improve our funding profile just a little bit. The AFS repositioning we outlined in sort of an illustrative way, essentially takes that full call it $950-ish million of increased capital and offsets it with what will be a one-time loss to reposition and recoupon some of our AFS portfolio. As you know, Jason, in 2024, when we sold TIH, we had an opportunity to take a pretty big swing at the AFS portfolio. But we were not able to address it all, and so we felt like this transaction was a nice opportunity to make a little bit more progress there.
I guess the slide says that this business was kind of break-even in the first half of the year. I guess despite the fact that the credit quality is really good.
Yeah.
I guess why would not this business, I guess, contribute more profitability?
It's interesting. We've operated this business for a long time and through a number of cycles. There's been an evolution in our own credit risk appetite in this business, and you'll notice that we sort of headline the business as near-prime. There was a moment where we operated probably a more true subprime, deeper subprime business, where we would've seen asset yields and spreads wider. That has tightened over time as our credit appetite has changed, and the loss experiences remained somewhat elevated. So, you think about despite the fact that this is a higher yielding asset, maybe call it 12% plus or minus with a funding charge, call it our marginal funding cost 4%. You take into consideration the loss experience in the 7% to 8% area, you just run out of economics. So for us, this was a sort of an easier one, non-regrettable.
We really don't impact any of our, what I consider our sort of true strategic client base. You see the financial benefits across the board, especially with it not being profitable.
Got it. I guess you also talked about in the past, scaling back regular auto. You discontinued, I think, marine and RV lending last quarter. Just maybe talk to are there any other areas that maybe you need to also examine for fit or whatnot, or maybe just aren't profitable that we could-
Yeah
-Redeploy better?
Yeah, sure. Here is how I think about it. First, obviously, everybody knows we have our new CEO, Mike Lyons , is on the ground. I think it is technically day 15, but it feels like he has been with us for a lot longer. We had a chance to onboard with Mike and get him involved in a meaningful way earlier this summer. It has been great to have the benefit of his perspective. There is a lot of urgency and intensity that has been, I think, added to this evaluation that really started earlier this year. You saw decisions like de-emphasizing originations in Prime Auto, the ceasing originations in Marine /RV, and then ultimately, RAC fell out of this process too. Mike is applying a framework that I think everybody can appreciate. Number one is, are these businesses aligned to our strategy?
Look, Mike, in due time, will articulate his vision for our business and how we will become a top-performing bank. I think in the most simplest form, it is going to be focusing on fewer things that frankly leverage our strengths, that are going to go drive a great funding franchise and a great collection of wholesale businesses that will fit hand in glove. As we think through these portfolios, whether they be Prime Auto or other loan-only products or less strategic products, that will be the first question. Does this fit? Will this matter? Will this drive business value in line with our strategy? Then number two, to the extent that it does not fit perfectly, what are its economic contributions? Maybe not immediately, but even potential over time.
To the extent that these businesses or certainly these assets do not fit our eye and do not fit the economics, then we are going to stop doing them. I think it is that simple. That work is happening now, and this is, I think, a good example on the balance sheet and capital side of something that was pretty clearly and obviously does not fit. There may be a few other things, but I think Mike is eager to conduct that review, make those choices, and then get us frankly back into growth mode. He did not come to Truist to shrink the greatness. I think there is going to be some recalibrating, and then it is going to be really more focused on getting back to growth and improving profitability.
I guess from your seat as CFO, how do you think investors should think about the continuity of the company's current plan and just maybe where do you see the biggest opportunities for fresh perspective as Mike gets up to speed?
I think from a continuity perspective, I've given you a couple of examples of we were at a moment where, and hopefully you guys have all felt this, where we've been very focused on improving profitability and getting back to offense. I think what Mike has really brought to the table that's been really important is a new, fresh, external perspective and ability to challenge some of the choices, the inertia, whatever it might be. RAC's a good example, something we operated for a long time. There were moments in time when it was very profitable. I think in some of our minds, RAC would always sort of offer that opportunity. The realities were that that was changing. Mike was clear-eyed on that. Our board has been involved in that. They're clear-eyed as well. Just a good example of coming in and having a fresh perspective.
Mike also brings a lot of expertise to the table in areas where we believe we have a lot of opportunity to improve. Some really obvious examples of that would be payments technology and products. He ran a really successful offense in his prior life in commercial and corporate banking, delivering treasury products to clients. That's been an area where we've really under kicked our coverage, however you think about it. We don't have a card program that is, we think, suited to support our deposit franchise. That's an area where Mike brings a lot of expertise. He's got a lot of experience in that broader corporate and institutional business as we think about capital allocation and pricing discipline and relationship profitability discipline. There's a lot of things that I think Mike just brings to the table, not to mention just a real intensity around accountability and performance.
From a continuity perspective, I think in some respects, Mike's come in and really added urgency, added really nice tone from the top. As it relates to things like what we aspire to achieve, I think it's just doubling down. I think he and the board both, and management are aligned that we will be a top-performing bank in the United States. We get asked a lot of questions this morning about things like, what are our ROTCE targets? Are those changing? Will we get there faster or slower? I don't want to speak for Mike. He'll have chances later this year to articulate his vision, and we'll talk about 2027 later. But I know that he's not backing off the 16% to 18% ROTCE target.
I think, again, he'd probably say, "Hey, that's table stakes." There are companies that are peers of ours that are going to be operating at an even higher level of performance, and that's where his mindset is. I'd feel pretty confident that we are going to stay the course on profitability improvement, but also just the plus here would be a real focus on growth.
That's helpful. We're going to double-click, I think, on a lot of what we've said so far. Let me just kind of pull back for a second and just talk about kind of the backdrop you're operating in at the moment, and just what are you hearing, seeing from your commercial clients, consumer clients? You have a good footprint in some of the better markets. Just any differences kind of across geographies and the like.
I think the overall backdrop remains constructive. Credit's going to be a bright spot. I'm sure we'll talk a little bit about that. I'm not sure if you've heard much different today from any of the other management teams. We're not seeing a lot of signal from either our consumer or our commercial clients and corporate clients, institutional clients that there's some emerging stress. Clearly, we have our eyes on, it's a less certain world even today than yesterday. Geopolitics play into that. We've got a little bit of a volatile rate environment at the moment. I think that's a watch item, at what level and at what point might an even higher for longer rate environment begin to impact consumers and their spending habits and savings rates or even commercial and corporate clients.
By and large, pipelines in commercial banking and in investment banking, again, credit performance, which is probably our best signal in savings rates and consumers, are relatively stable. Certainly, we have all the antenna up just given all that's going on around the world.
I guess as you're kind of pulling back in some of these consumer-related areas, maybe just talk to kind of just where you see the best opportunities to grow the overall portfolio. I think last quarter you talked about pocket strength, particularly on the commercial side. You've talked to, I think, 4% loan growth target for the year.
Yeah.
Is that still the right way to think about it?
Yeah. We've spent some of our time in the last couple of minutes talking about some of the areas that maybe don't fit the portfolio. I think areas that we really like are that sort of core commercial, middle market, industry-oriented, certain pockets of CRE. What's maybe a little newer that I think Mike's bringing a lot of good challenge and ideas to the table around is if our goal is to own the relationships, whether they be commercial clients, corporate clients, consumer clients in our markets, to truly own them, we have to think about the products that we offer that can more fully serve those clients. I mentioned already, historically, we haven't had a credit card offering that's been sizable and I think probably has opportunities from a future perspective.
That's an area we'd love to see grow in addition to that kind of core commercial, corporate middle market stuff. A home equity line. You haven't heard us talk much about HELOC in the past, or even retail mortgage. Those are important products to borrowers, and to frankly, our deposit, our DDA clients in their financial lives. I think you're going to see us really try to focus on some of these products and the aspects of our distribution that more fully serve these clients, and probably spend less of our time on things that frankly aren't aligned to that core client.
Got it. Maybe on the deposit side, obviously gotten a great deal of attention of late, particularly southeast deposits. Maybe just talk about in terms of what you're seeing in terms of balance mix pricings and maybe segment between the corporate side or the consumer side.
Yeah. We provided a little bit of an update in July when we reported second quarter earnings around just some of what we perceive to be a challenge on mix, at least relative to what we would've expected at the beginning of the year. I'm not sure that's worsened or improved. We've seen overall balance production actually be quite good, especially in the wholesale business. I feel like our bankers are out having great conversations. We're onboarding a lot of new clients. We're winning a lot. We want to win more, but we're winning a lot. But what we have seen is just product selection, and then even some product rotation into just higher rate products. I don't think that's necessarily a Truist comment.
I think that's an industry-wide comment, and when you're at some of the psychology that goes into the mindset of a consumer or a commercial or corporate client around storing their liquidity, environments like this just tend to have a little bit more rate awareness. That's not a new update from July. That's just sort of a continuation of what we've seen and so we're working really hard to first and foremost defend all the right relationships and then bring the right relationships to Truist and feel like we have the resources we need. I think one thing you'll see us do is amplify our focus on our deposit franchise even more so. We think we've got the most attractive markets in the country, and a lot of you agree with that.
We hear a lot from you guys, and so we want to make sure we're growing at least as fast as our markets.
Got it. Maybe tie together in terms of net interest margin, and I guess maybe let's segment this discussion into two pieces. I guess pre-transaction and then maybe post-transaction.
Sure.
But you were 298 in the second quarter. We talked about loan with deposit growth. There's obviously some balance sheet remixing that you've kind of already talked about. Just how do you think about the NIM trajectory from here? The Fed, I'm told, is going to hike tomorrow. How does that impact-
Yeah
-Kind of core NIM-
Yeah
-over time?
Well, the hike tomorrow we've had in our outlook, so that's not news to us. I think we said this back in July, that we would expect our net interest margin to modestly improve throughout the second half of the year. Some of that is just that fixed rate asset repricing in the background, albeit at a slow pace. So that's the bonds rolling up the curve. Traditionally, you would've seen some of these consumer loan portfolios, which we are de-emphasizing a touch, roll up the curve, so to speak, as well. You're seeing that, but maybe to a lesser extent given that we're running on fewer loans than we're running off in some of those portfolios. But then I think you also have some nice benefit at the end of the year around some seasonal public funds balances that we see.
We will see net interest margin improve a touch, at least. I mean, ex-RAC for the third and the fourth quarter. RAC is a good example of that will obviously be NIM dilutive, and it will reduce our overall NII. But obviously one of the most obvious benefits of that transaction is our credit losses will go down significantly, and as we have already mentioned, our earnings will actually improve. So maybe on a RAC impact on NIM might be call it 4 to 5 basis points. But I think a trade-off that is well worth it. Again, accretive to ROTCE, accretive to DPS.
When you say 4 to 5 basis points of NIM on RAC, is that net of the securities portfolio repositioning or pre?
Sorry, yeah. That would be net. So I am thinking about you probably get a few basis points back on securities repositioning, so 4 to 5 basis points net.
Net of the repositioning.
Yeah.
I guess on the repositioning, you took a bite of the apple after the insurance transaction.
Yep.
Another bite of the apple after this transaction. In terms of securities portfolio, there's also some swaps. How much more of the balance sheet, not that capital is infinite, but like-
Yeah
-is kind of low-hanging fruit to do if you had an offset?
Yeah. Well, if you size them, you look at the AFS portfolio, around roughly $75 billion of book value. Probably $40 billion of that we've purchased, call it since early 2024. So I'll call like the legacy, longer duration, sort of out-of-condition portfolio is closer to $30 billion. So look, and again, that does include the TIH repositioning. So look, if you think about the, call it $950 million, give or take, of capital that we'll see created from this transaction, and you size what would be an AFS positioning to perfectly offset that probably gets you close to $9 billion in book value. So you'd be about a third of the way through sort of what's left in terms of the real opportunity in the AFS portfolio. Does that track?
Yeah, that's exactly what I was looking for.
Yeah.
In terms of swaps restructuring, is there something you could do there?
Yeah. There's not like a restructuring, so to speak, opportunity with the swaps. The received fixed swaps are there really to transform sort of the degree to which the asset and liability and equity yields are moving together. To the extent that we change that positioning, that contract is in place, whether it's changing dynamically with rates or whether you sort of strike the NPV of the swap and amortize it over the life of the swap. So that's not so much an opportunity, at least not one that's sort of similar in style to the securities.
Got it. Just maybe tying all this NII discussion together. I think you were looking at 1% to 1.5% NII growth for the year, I think 1.5% for the third quarter. Is that still the right way to think about it? Then kind of looking ahead, obviously this transaction changes things, but just how you're beginning to think about 2027.
Yeah. The 1.5% for this quarter, we mentioned we feel fine about that. You've got an extra day, you've got some of the dynamics that I've already sort of mentioned in terms of fixed-rate asset repricing, et cetera. For the year, feel fine with that guidance as well. We talked a little bit about some of the seasonal benefits on the deposits and some of the earning asset growth that we'll see. So we feel fine with the outlook for the quarter and the year. Not ready to talk about 2027 yet. There's a lot of moving parts right now at Truist. But one thing that we are sure about is that we want to get back to a place where we're growing our earning assets in a profitable, sort of strategic way, and that we're funding that growth with good core client deposit growth.
If we can do that's going to be the way that we grow NII and frankly have even an opportunity to accelerate expansion of our net interest margin.
Got it. I guess on the fee income side, certainly been a bright spot. I think you're calling for I think almost 10% growth for this year.
Just kind of walk us through the key drivers. We get asked a lot about massive banking and trading-
Sure
-Payments, wealth management. Any insights you can provide?
Yeah. No, I think fees has been a bright spot for us this year. Just maybe the three places where we probably spend the most time talking about are banking and trading and wealth and our payments business. So I will give you a little bit of color on each, perhaps. Banking has been performing really well this year. Broad-based across our industries that we serve and across the various products. We always look at things like the proportion of our deals. My team is working closely with Mike and the businesses and so on and so forth to make sure that we have that right amount of capacity and allocation into those businesses without significantly altering our expense trajectory.
I guess you say that. I think one of the, not concerns, but one of the theses out there is all of a sudden now Truist is going to kind of just start ramping up spending, and invest in all initiatives, and open more branches, and hire all these people to kind of maybe accelerate growth now that there is a new CEO in there.
Yeah.
I guess your kind of thoughts around that notion.
I think we talked about it a little just now. I think at the end of the day, we've got a lot of financial resources. Many of them are directed at activities that ultimately Mike and many of us will determine aren't aligned to our core strengths and our core banking business. To the extent that we identify those, we're going to stop doing those things, and we're going to make sure that we can do the things that will matter the most. I think there's a big opportunity to remix. Again, Mike, we're doing this work. I think Mike has a forming view of what matters the most. It's going to be leveraging these amazing markets we have, this deposit franchise that we have where we're not achieving our potential. We think there are things that we can do to get that in better condition.
Again, give you a good example. In the last year or so, we've talked about our distribution network and beginning to get back into the business of de novos and refurbishing some of our branches. It will surprise me if Mike doesn't change the scale and the speed of some of those things. That's going to be a choice that's made in connection generally with trade-offs, right? RAC's a good example. There are other activities that we are investing in today that are not aligned to where we're going tomorrow. I think there'll be enough of a trade-off on both sides of the ledger to continue to make great progress from a profitability perspective. Look, Mike's day 15, I think. The work must continue.
Maybe to talk a bit about last year we started off, I think, this presentation talking about your branch initiative, I think 100 new branches, 300 renovations. Maybe just kind of update us in terms of where you are with that, kind of early returns on some of those investments, just the success or not there.
Yeah. I think it's important, and I just touched on it very briefly. When we completed the merger a lot of branding was done, essentially all the branches were touched, right? I think since then there's been less incremental investment in terms of sort of just broad maintenance and so that's an opportunity for us. The commitment around 300 branches over the next several years is one that is underway. That's the easiest work to begin. Again, that's a multi-year investment program. As I just mentioned, it will surprise me if we don't change the scale and the speed of that. That's something I know that Mike's giving some thought to. Same thing with the de novos. When we did the merger, we had 3,000 branches. We closed 1,000 of them and really haven't been in the de novo business since.
We've opened a few locations that are more kind of LMI oriented. So getting back into de novo branching I think is important and again, something that I would suspect Mike will put his fingerprints on and potentially change the speed and the scale of that. But the de novo openings were always going to be over a five-year period and sort of begin in the second and third year. So not a lot of progress there. More so on the rehab side, but again, I'd expect that program to accelerate.
Got it. Then maybe on credit quality. You pulled back Marine/ RV selling near-prime auto. Any of that decision credit related, then any other areas of the book you're watching closely? Then maybe a third question. 55 basis point, I think, normalized charge-offs. I get 45 basis points at RAC, but then you're doing some other things. Just how do you think about normalized NCO? So three questions in there.
Yeah. So the first question, was it concerns about credit that drove the decisions around MRV and RAC? The answer to that is no. It was really, again, single product, national dealer network, broker network, less strategic, not aligned to our core kind of deposit-gathering client was sort of gate one and then gate two in both those cases, those businesses. In RAC's case, essentially break even. Marine/ RV actually is profitable, but not to the degree that it would be accretive to our long-term profit objectives. So didn't pass those two tests, and so to us, that's straightforward. Mike were here, I think he'd say there are no sacred cows, right? Fairly rigid allocation of capital, the balance sheet work that we'll do, and then very rigid discipline focus on the expense dollars to the conversation that we just had around the P&L.
So that was the motivation around those two choices. I remember your third question, so I'll answer it. About charge-offs. We do believe that RAC will reduce all things equal our annualized net charge-offs by call it 10 basis points. So guiding this year 55, which we feel good about, you're right, would change that to call it 45. So down by about 20%. What was your second question?
Just areas of concern.
Oh.
You look at the book, there's always something I got to think keeps you up at night.
Yeah.
It feels good now, but-
Yeah
-Things are going up, maybe.
Gosh, knock on wood. I am sure you have heard this maybe from others. Conditions still, all things equal, remain relatively benign. There are always going to be little pockets within commercial where you see a little bit of stress. That is not been widespread and something that we are spending a lot of time thinking about. We are wary of the overall rate environment, especially even higher for longer, and whether that may ultimately, especially the lower income band, the consumer, things like that. Again, I would say the bulk of our borrowing exposure in the truly low income consumer, we have just divested ourselves of. So it really is not a place where we are particularly concerned at the moment. I think that being said, we are surveilling all that is going on in the world.
Again, one of the really nice benefits is I think several people, we have met a few this morning, have been surprised by the concentration of non-performing loans and overall charge-offs for the enterprise that we are in this very small business. So we think that is a really nice enhancement to our overall credit profile as a company.
I guess, your slide reiterated the $5 billion buyback for this year. I think you have talked to getting to a 10% CET1 by the end of next year, although new capital rules should be beneficial. Maybe just talk about kind of current capital priorities. I know you have a new boss, but just how you are thinking about that.
Yeah. Look, it seems like the direction of travel around Basel seems relatively set, timing to be determined. We are doing a lot of work right now to create readiness for, again, at this moment, based on all that we know about the proposed rule, moving to very likely the IRBA approach. So that will obviously create a benefit in early 2028. Between now and then, we have said that we believe 10% is an appropriate area to operate the company. We are obviously in an excess position today, and therefore we have the buyback sized the way it is. We actually took the buyback up earlier this year to $5 billion. We are still committed to that. We mentioned that in our slide this morning. We are committed to maintaining a buyback that is elevated next year as well. That is going to glide us to that 10%.
The puts and takes on that is we'd love to see high-quality earning asset growth. To the extent that we see more loan growth than we might otherwise expect, that's our first priority, will be to serve our clients. But after that, it's the dividend and the buyback. Obviously, we really like the idea of pairing this capital creation transaction with the AFS repositioning.
Got it. You've outlined a path to 15% ROTCE for 2027, 16% to 18% over time. You mentioned you didn't think Mike would change those objectives, and if anything, strive to be top quartile. Just maybe talk to what do you think are the big drivers to close your gap to peers and becoming a higher performer?
Yeah.
Does this change your leadership, maybe change the timing of getting to those returns, even if ultimately they are going to be better?
No, I think that 16% to 18% was framed as a medium-term target. I don't think Mike will shy away from that at all just to hit that. At the end of the day, there are a lot of different ways, a lot of irons in the fire around improving profitability. Some of them we've talked about today, just more disciplined balance sheet management, capital management. But at the end of the day, it's driving more capital efficient revenue through our business. Our fee businesses are going to contribute to that in investment banking, in wealth. The treasury opportunity is going to be a huge contributor to that. We do believe that over time, there's structural opportunity in our net interest margin as we think about the securities portfolio, whether that happens in sort of episodic actions like we're talking about today or whether that happens more slowly.
Obviously, the HTM portfolio, call it $45 billion in bonds with a 165 yield is something that doesn't sort of change overnight, but that's a structural long-term opportunity too, that's happening in the background. Look, we're committed to continuing to manage the business in an efficient way. There are a lot of drivers out there that'll impact that. Some of it's some of the cultural practices that I mentioned earlier around remixing and being very rigid there. Then there's other aspects like some of the productivity benefits that we're seeing from things like AI and otherwise, non-AI, like just good old-fashioned automation.
Sounds good. Maybe just in closing, when you think about Truist, call it three years from now, what, if anything, do you believe will look meaningfully different than it does today? Then what metrics should investors focus on as a term of whether you've been successful?
Yeah. Maybe this will feel a little soft, but what I'd say is today we're winning a lot, but we're not winning enough. I think Mike will have time later this year to articulate his vision and to simplify our focus and talk about how we're going to invest in certain areas to drive a lot of value. But I think at the end of the day, where we're focused on is winning more. Especially in our markets, in our core banking businesses, owning clients. That's not where we've been operating. Again, we win plenty, but we're not winning enough. I think that's more of a feeling, and you'll see that in our financial results as well. But that's our vision, is to get back to winning.
Great. On that note, please join me in thanking Mike for his time today.