State Street Corporation

Ladies and gentlemen, thank you for standing by. Welcome to the SunTrust third quarter 2019 earnings results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. At this time, we'll turn the conference call over to your host, Director of Investor Relations, Mr. Ankur Vyas. Please go ahead, sir.

Thank you, Tony. Good morning and welcome to SunTrust's third quarter 2019 earnings conference call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation, and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer, and Allison Dukes, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. Please refer to the cautionary statements on page two of our presentation regarding forward-looking information, including some of the factors that might cause actual results to differ materially. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release or in our presentation and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcasts are located on our website. With that, I'll now turn the call over to Bill.

Thanks, Ankur. Good morning, everyone. I'll begin with an overview of the third quarter, which we highlight on slide three, and then I'll turn it over to Allison for some additional details. Reported earnings per share was $1.34, and when excluding merger-related impacts in the quarter, earnings per share was $1.40. Overall, we had a good quarter, particularly as it relates to the strength in a number of our fee-income-oriented businesses and continued balance sheet growth, both of which are reflective of our successful execution against the strategic initiatives of our consumer and wholesale segments. We also continue to benefit from strong asset quality performance as a result of our consistent underwriting discipline and a favorable economic environment. However, as we got of last quarter, the lower rate environment drove further pressure on our net interest margin, offsetting much of the core growth we delivered in loans, deposits, and non-interest income. With that as an overview, let me highlight some of the specifics for SunTrust earnings in the third quarter. Loan growth remains healthy, evidenced by the 1% sequential growth we delivered, which was generally broad-based across most businesses. The investments we've made in delivering product and industry expertise to our corporate, commercial, and CRE clients, in addition to our ongoing investments in digital consumer lending, continue to drive good loan growth. We're also seeing healthy growth in indirect auto, reflecting strong consumer confidence. Bigger picture, our clients remain relatively optimistic about the economy and are committed to making ongoing investments in their personal lives and in their businesses. So the level of uncertainty has increased, leading to some caution. We also saw strong deposit growth in the quarter, which was largely driven by good results from our corporate liquidity products team, in addition to solid growth in consumer deposits. Offsetting the balance sheet growth we delivered was pressure on the net interest margin, given rate dynamics, which Allison will discuss in more detail. Excluding certain discrete items, non-interest income increased by 2% sequentially and 7% year-over-year, reflecting increased client activity levels in mortgage, investment banking, commercial real estate, and private wealth, most of which is reflective of the successful execution against our strategies and is also a good representation of the diversity of our business mix. Overall, revenue was stable sequentially as this diversity helped to offset the 10 basis point decline in our net interest margin. Importantly, our continued execution against expense initiatives across the company has allowed us to keep our efficiency ratios stable year to date in spite of the challenging interest rate environment. This base performance puts us on good footing heading into the merger where efficiency opportunities are significantly amplified. And finally, credit quality remains a strength with charge-offs and non-performing loans remaining below their historical averages. When excluding the impacts of the interest rate environment, I continue to be pleased with the core performance of both our consumer and wholesale businesses. We've developed and continue to enhance our competitive advantage in certain differentiated businesses like Centros Robinson Humphrey and Lightstream. We continue to make good progress in enhancing the digital experience we're providing for our clients and remain focused on leading with an advice-driven model for our clients, particularly in our wholesale and private wealth businesses. These are just a few of the reasons why we entered into our proposed merger of equals with BB&T from a position of underlying strength with an offensive mindset. The ability to bring together two highly complementary business models with different areas of relative strength and opportunity I think is unique to this particular combination. At the same time, the overall revenue environment has changed, which also underscores some of the defensive merits of our merger, including the synergy opportunities in our balance sheet positioning. As we all know, championship teams have great offenses and great defenses. In this regard, I think Truist is uniquely well-positioned. Momentum for Truist continues to build, and I'll conclude with further details on the progress we're making in our integration planning efforts, in addition to some of the key items we hope to accomplish in the first 100 days as Truist. Before I turn it over to Allison, I want to highlight the announcement we made last week that Lynnie Hainsworth was appointed to the Centros Board of Directors, and she'll also serve on the Truist Board of Directors. Lynnie was the leader of the Cyber and Intelligence Mission Solutions Divisions for Northrop Grumman, and she'll bring a wealth of knowledge to our board as it relates to cybersecurity, technology, and innovation, all critical skill sets in creating a strong foundation for Truist and financial security and confidence for our clients. So with that, let me turn it over to Allison.

Thanks, Bill. Let's start with net interest income. As you can see on slide four, our net interest margin declined 10 basis points sequentially. This was slightly lower than our previous guidance. primarily driven by short-term rates and long-term rates that decline more than we anticipated in July. As a reminder, one-month LIBOR impacts approximately 22% of our earning assets, net of debt, and commercial loan swaps. And short-term benchmark rates began to decline throughout August as the probability of a September rate cut increased in late July. Second, long-term rates declined approximately 50 basis points on average, which negatively impacted yields and prepayments in our fixed-rate assets, largely mortgage-backed securities and mortgage loans. Net interest income declined by $25 million sequentially, or 1.6%, as good loan and deposit growth only partially mitigated the impact of the decline in interest rates. On a standalone basis, I would expect our net interest margin to decline by two to five basis points in the fourth quarter, given the impact of the September rate cut. We do expect deposit costs to begin to turn the corner and decline as we look into the fourth quarter. But overall, margin will still decline given the aforementioned net exposure to short-term interest rates. Now moving to slide five, when excluding the insurance settlements in the second quarter and a $5 million residual benefit in the third quarter, non-interest income increased by $18 million sequentially, driven primarily by mortgage income, which benefited from higher refinancing activity and improved gain-on-sale margins. In addition to strong investment banking performance, where we saw increased origination activity within debt capital markets and strength in M&A. Separately, there were several discrete gains in the third quarter from strategic FinTech equity investments and net securities gains. These gains were largely offset by a $14 million negative adjustment to counterparty credit valuation reserves in connection with our interest rate derivatives portfolio for client hedging activity, primarily as a result of lower rates. Moving to expenses on slide six, we recognized $33 million of merger-related impacts in the second quarter. $22 million of these were specific merger-related costs driven by legal and professional services, in addition to the write-down of certain technology development projects and progress, which were decommissioned. Another $11 million of costs were incurred primarily related to consulting expenses associated with the merger, which generally show up in other non-interest expenses. Excluding the merger-related impact, expenses increased by $22 million sequentially as a result of higher compensation costs, in part due to one extra day in the quarter, and higher operating losses in the quarter. Compared to the prior year, core expenses increased by 4%, driven by higher compensation expense, partially in connection with a 7% increase in core non-interest income, in addition to ongoing investments in technology. Importantly, these investments in talent and technology were largely funded by ongoing efficiency initiatives, which you can see on slide seven. The adjusted tangible efficiency ratio was 59.9% for the quarter, and year-to-date, our adjusted tangible efficiency ratio is stable relative to 2018. Despite year-over-year stability, we feel good about these results, given our forecast at the beginning of the year included two rate increases, whereas we have instead experienced two rate cuts with the possibility of more. More importantly, given the synergies and scale we will achieve by merging with BB&T, we will have significantly greater capacity to invest in technology, talent, and innovation. This is one of the key benefits of this transaction, not just that we have the opportunity to achieve best-in-class efficiency, which is of course a great outcome for our shareholders, but more so to have incremental capacity for investment. Now moving to slide eight, Our net charge-off ratio was 28 basis points in the third quarter, up six basis points relative to the second quarter. Our non-performing loan ratio was 38 basis points, up four basis points relative to the prior quarter. The drivers of the increases in charge-offs and NPLs were generally idiosyncratic and also a reflection of credit metrics being at absolute low and benign levels. On a standalone basis, we still expect our full year net charge-off ratio to be between 25 and 30 basis points. Over time, however, we believe that net charge-off ratios are more likely to have an upward trajectory rather than downward, simply given how strong performance has been in recent years, combined with the fact that there are increased levels of macroeconomic, political, and global uncertainty. Moving to the balance sheet on slide nine. We continue to deliver good loan growth. evidenced by the 1% sequential growth in average balances. Importantly, the growth was diversified across most portfolios, including Consumer Direct and Direct Auto and CRE. Within Consumer, the ongoing investments we have made in our digital and point-of-sale lending capabilities, which provide for superior client experience, are also driving good growth and enhancing our returns. Our auto portfolio continues to demonstrate healthy growth and solid risk-adjusted returns. Within CRE, we continue to see growth tied to the investments we have made in permanent lending and bridge lending capabilities for institutional borrowers, which is being partially offset by runoff in the construction portfolio. Across both wholesale and consumer, our underwriting discipline has not changed, and we remain highly focused on ensuring that the quality of our new production is consistent with the quality of our existing portfolio. On the deposit side, average balances were up 2% sequentially. The increased growth is reflective of strong production from our consumer segment, where we are benefiting from increased momentum associated with new checking and savings products, which were introduced at the end of 2018, along with targeted marketing and pricing strategies. We also benefited from targeted growth with certain corporate clients as a result of success delivered by our corporate liquidity product specialist team. Interest-bearing deposit costs increased by four basis points sequentially, lower than the prior two quarter increases of six and nine basis points, respectively. This quarter's increase in deposit costs reflects, to some extent, the lagged impact from prior rate hikes and our desire to balance our funding profile. As I said earlier, we do anticipate deposit costs to begin to decline in the fourth quarter, but we will also be thoughtful about remaining competitive, given our desire to maximize our ability to retain and grow clients as we embark on the merger and integration processes over the coming couple of years. Moving to slide 10, which provides an update on our capital position. Our estimated Basel III common equity Tier 1 ratio was 9.3%, and the Tier 1 ratio was 10.4%, slightly higher than the prior quarter, given the suspension of share repurchases. Book value and tangible book value per share increased by 3% sequentially, given growth in retained earnings and the impact that lower rates had on improving the unrealized loss position in our securities and derivatives portfolio. We continue to expect capital ratios to trend upward given the suspension of share repurchases in anticipation of our merger with BB&T. Separately, we increased our quarterly dividend by 12% this quarter to $0.56 per common share, providing for an attractive dividend yield of 3.3%. Moving to the segment overviews, we'll begin with the consumer segment on slide 11. The positive lending momentum we've had in consumer continued in the third quarter, with consumer lending production, excluding mortgage, up 7% year-over-year. The investments we've made in Lightstream and our point-of-sale lending partnerships continue to be consistent contributors to our loan growth. Over the past year, we have focused on enhancing our analytics, improving automation, adding product offerings, and growing our partnerships and referrals. all of which are key contributors to the 38% year-over-year growth we delivered in Lightstream. We've also made good progress in enhancing our point-of-sale lending capabilities and expanding our partnership network. Relatedly, we added two additional point-of-sale financing partners this quarter, one focused on solar and the other focused on equipment. These partnerships further our strategy of investing in digital lending channels, which meet clients where they make purchase decisions. Consistent with prior quarters, some of this collective growth has been offset by the continued decline in home equity. On the deposit side, as I mentioned earlier, we're experiencing good momentum with the new product offerings which were introduced at the end of 2018. These products, combined with effective, targeted marketing campaigns, have led to a strong year-over-year increase in new deposit production. Overall, the 7% loan growth and 2% deposit growth offset margin compression and drove a 1% increase in net interest income relative to the prior year. Consumer fee income benefited from strengthened mortgage production income as a result of an increase in refinancing activity and improved gain-on-sale margins. Mortgage income also benefited from increased adoption of SmartGuide, our digital mortgage application, which has surpassed 90%. This application, which provides for a significantly better user experience and streamlined aspects of the intake and underwriting process, combined with an improving back-end process, made our mortgage team very well positioned to help our clients in the recent refinance wave. When looking at longer-term trends, our consumer business has made significant strides over the last couple of years. Revenue is up 8% driven by strong balance sheet growth and strength in mortgage and wealth-related fees. Assets under management are up by 10%, in part due to better partnership across the retail, premier, and wealth segments. We've made significant strides in improving our front-end client experience through ongoing enhancements to mobile and online banking, digital lending through SmartGuide, Lightstream, and point-of-sale partnerships. Our enterprise client portal for private wealth clients has provided for a differentiated experience for our high net worth clients and is now being leveraged for a new portal for small business clients. Our investments in our new account center have significantly improved the digital account opening experience. And now over 90% of our consumer products and solutions can be onboarded and serviced 100% digitally. In addition to digital progress, our branch client experience scores are the strongest they've been in years. And finally, our adjusted tangible efficiency ratio in consumer has improved by approximately 480 basis points. driven in part by 10% reduction in branch count, which is largely tied to increased digital adoption, improved productivity, and strong revenue growth. All of this was accomplished in the context of consistent underwriting discipline and improved risk-adjusted returns. This progress, combined with our strong presence across high-growth markets in the Southeast and Mid-Atlantic, will be amplified when we merge with BB&T, creating retail and private wealth businesses that will be amongst the leaders in the industry across many key dimensions, growth, efficiency, talent, and technology. Moving to wholesale on slide 12, where our consistent strategy continues to drive good results. Loan growth did slow somewhat in the third quarter, largely as a result of increased paydowns within CNI, and our own internal discipline around pricing and structure. Deposit growth picked up meaningfully as a result of success from our corporate liquidity product specialist team, in addition to several larger temporary client deposits. Investment banking income had strong performance across most categories despite market volatility, with particular strength in debt capital markets and M&A. Relatedly, approximately 35% of our M&A fees year-to-date have come from commercial banking clients, a good indicator of the continued success we are having in bringing enhanced advisory capabilities to a broader set of clients and wholesale. This underlying strength was largely masked by the aforementioned negative $14 million adjustment in trading income, in addition to a sequential decline in CRE-related fees given the especially strong performance in the second quarter. When looking at broader trends, commercial real estate-related fees year-to-date are up 61%, reflective of our strong client relationships and deep expertise in the structured real estate business, the improved momentum from our agency lending business, given increased partnership between our coverage bankers and product specialists, and good core performance from SunTrust Community Capital. Similar to consumer, when looking at longer-term trends, our wholesale business has made significant strides over the last three years, Revenue has grown at a 5% CAGR with several key drivers, including lead relationships have grown at a 10% CAGR, driving increased market share with our clients. Revenue from non-CIB clients has grown at a 20% CAGR over the last two years and now represents roughly 20% of capital markets' fees. And commercial real estate-related fees have seen strong growth, largely driven by the investments we have made in our agency lending capabilities through the acquisition of Pillar, in 2016. We expanded our commercial banking business into Ohio and Texas, and we launched a national expansion of our aging services vertical within commercial banking. We've improved technology capabilities for clients and teammates, both for loan origination and our client-facing treasury and payments portal. Each of these investments and growth was self-funded by ongoing efficiency initiatives. Specifically, our adjusted tangible efficiency ratio in wholesale has improved by 225 basis points. And importantly, these achievements were all accomplished in the context of consistent risk discipline and our ability to win based on advice, not structure or pricing. Each of these strategies continues to drive solid, sustainable results and has created a strong foundation which we can build upon as we merge with BB&T and have the opportunity to bring our capabilities and our differentiated model to a broader set of corporate and commercial clients. With that, I'll turn the call back over to Bill.

Thanks, Allison. The overall momentum we have on a standalone basis continues to validate my view that SunTrust is approaching the proposed merger with BD&T from a great position of strength. You know, individually, we are two very strong companies, and together we're going to be able to accomplish so much more together than either of us could have alone. So with that as a context, let me provide a progress update on the merger on slide 13. The combined executive management team has been meeting weekly for nearly nine months now. Over this period of time, I mean, I think our teams have developed great rapport, trust, respect for each other. This has exceeded my already very, very high expectations. As a team, we continue to work incredibly hard to lay the foundation for Truist, and as we do so, there's a great sense of excitement for the future. Kelly, thanks for your collaborative leadership, and to the whole team, thank you for your hard work, the incredible integrity and the openness during this process. Everybody's rowing for Truist. It's just so apparent. We've all worked hard to share this excitement with all of our teammates, both at BB&T and SunTrust. We've had over 30 formal sets of communication regarding merger updates. They've included organizational design, technology ecosystem decisions, benefits packages, and so much more. But those are just the formal sets of communications. We've had multiple more informal town halls, listening sessions, every form of communication possible. Overall, I'm really proud of the transparency in this process. In the third quarter specifically, we accomplished several key milestones. On July 24th, Kelly and I appeared before the House Financial Services Committee and felt that the merits of this transaction were generally well received and understood by our representatives. You know, it was a real honor to represent all the things that SunTrust has done to benefit its clients and communities. And it's, you know, it's heartening to hear back from representatives, community groups, and clients on how many feel so positively about SunTrust and also about BB&T. On July 30th, both SunTrust and BB&T shareholders overwhelmingly approved the transaction in connection with our special shareholders meeting. Throughout the quarter, our leaders continued their organizational design process, which culminated in the announcement of nearly 8,000 positions to date. Consistent with the earlier phases of organizational design, these leaders reflect, you know, great talent in both companies. It's a tremendous balance between both BB&T and SunTrust. Great levels of diversity by both traditional definitions, but also by backgrounds, experiences, and perspectives. We just simply have a superior team. We've been making thoughtful decisions around compensation and benefits for tourist teammates. When looking at the combined set of salary, benefits, time off, retirement, volunteerism, career development resources, combined with the just incredible opportunities that are going to be available for Truist teammates, I just fundamentally believe Truist will be the premier financial institution to work for in the country. We also made tremendous progress in selecting which systems we'll use for Truist and creating roadmaps for integration. We identified approximately 100 ecosystems as part of this process and feel confident that the selections we've made and are making are going to create a super foundation for Truist by leveraging the best of both, architecting for the future, and minimizing integration risk and providing additional security. Finally, and perhaps most importantly, we conducted a Legal Day 1 readiness exercise with each of our approximately 100 merger workstreams. in the second half of September, and the results confirmed our confidence that we're in position to move very quickly after receiving regulatory approval. From here, we'll continue to work closely with regulators to answer their questions and finalize various processes. The dialogue's been extremely constructive, and given all that we know today, we're targeting a close at some point in the fourth quarter. Once we do close, we're in a position to hit the ground running, and we have several key milestones which we plan to accomplish in our first 100 days as Truist. First, as you can imagine, we'll present to the new Truist board all the proposed committee governance structures for approval legal day one. Our combined board, just like our combined management team, brings a unique and diverse set of backgrounds, experiences, perspectives, and skills, and also excited to work with all of them. We will also engage with all of our teammates on Truist's purpose, mission, and values, which is just so critical to helping build our new culture. I think, as all of you know, SunTrust and BB&T are both entering into this merger as companies that have strong purpose and mission foundations upon which to build. I will say, from a personal perspective, this work has really been rewarding, and the approach that everyone's taken to build a truly purpose-oriented company is very exciting to think about. We'll continue to refine all aspects of the Truist brand with the goal of rolling this out in 2020. As you know, we'll still go to market as BB&T and SunTrust as divisions of Truist for some period of time as we get through the client conversion process. And finally, we'll begin executing against the opportunities we've identified to harness expense and revenue synergies. With great energy from our teams and the help of third parties, there's been a significant amount of time dedicated to creating clear playbooks for achieving our cost saves. Some of the near-term opportunities, there'll be initial savings from removing duplicative positions across the company, most of which have been identified as part of our organizational design process. Third-party spend will be a key area of focus and scenarios where we Both use the same vendor partner. We'll have the opportunity to negotiate better contracts and quickly rationalize costs in scenarios where we use different vendor partners. We'll swiftly begin an RFP process and work through a thoughtful selection process. And finally, we'll continue to refine our plans to rationalize our real estate footprint. Branch closures will not begin until after the first year, but there'll be opportunity in the next six to nine months to harness savings from our non-branch corporate real estate footprint. And while it may take a little longer for revenue synergies to come to fruition, we're going to quickly start executing against the opportunities we have to bring a more fulsome set of products and capabilities to an expanded client base. You know, that's sort of a traditional way of explaining revenue synergies, but I see another important layer, which is the leverage we create by recognizing each other's executional prowess and go-to-market strategies. Our teams are choosing the best of both to define Truist's go-to-market strategy, which I think will be incredibly effective. I feel very confident in our future, and I'm proud of all the work that's been done to get us to where we are today. When we announced our name, Truist, we also declared that Truist would stand for better, better experiences, better partnerships, better technology, and creating a better future for our teammates, our clients, and our communities. Because of the team we have in place, the capabilities that each company brings, and the identified synergy opportunities we have from leveraging each company's executional excellence, I can already declare that Truist will be better with the objective of being the absolute best. So before I conclude, I want to thank all the SunTrust teammates and BB&T associates who are just working incredibly hard to make this merger a success. whether it's directly in integration planning, managing risk, investing in our communities, or, you know, most importantly, doing that job they do every day, providing outstanding confidence and service to our clients. I want you to all know that your efforts are a significant part of making history. So with that, Ankur, let me turn the call back over to you. Great.

Tony, we are now ready to begin the Q&A portion of the call. So you can start that process.

All right, sir. Thank you very much. And ladies and gentlemen.