Truist Financial Corporation

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation's fourth quarter 2022 earnings conference call. Currently, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ankur B.S., Head of Investor Relations, Truist Financial Corporation. Please go ahead, sir.

Thank you, Jess, and good morning, everyone. Welcome to Truist's fourth quarter 2022 earnings call. With us today are our Chairman and CEO, Bill Rogers, and our CFO, Mike McGuire. During this morning's call, they will discuss Truist's fourth quarter results and share their perspectives on our continued activation of Truist's purpose, current business conditions, and our outlook for 2023. Clark Starnes, our Vice Chair and Chief Risk Officer, Beau Cummins, our Vice Chair, and John Howard, our Chief Insurance Officer, are also in attendance and are available to participate in the Q&A portion of our call. The accompanying presentation, as well as our earnings release and supplemental financial information, are available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides 2 and 3 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. In addition, Truist 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, let me now turn it over to Bill.

Thanks, Ockern. Good morning, everybody, and Happy New Year. Thank you for joining our call today. Truist delivered a strong finish to a pivotal and purposeful year. We completed our final integration and decommissioning activities and incurred the final set of merger-related costs. Adjusted BPNR grew a strong 12% sequentially ahead of our guidance and helped us deliver on our commitment for positive operating leverage for the full year. We'll cover the details on the quarter's results throughout the presentation, and we'll start with our purpose, the foundation of our company on slide four. Truist is a purpose-driven company dedicated to inspiring and building better lives and communities. Our purpose is the foundation for our success as a company. It drives performance and defines how we do business every day. Slide 5 highlights many examples of how we activated our purpose in 2022. For our clients, our mission is to provide distinctive, secure, and successful experiences through touch and technology. We achieved a major milestone along that journey With the launch of Truist One Banking, our differentiated product suite that reimagines everyday banking and includes two new accounts that eliminate overdraft fees and provide greater access to credit. These accounts meaningfully advance financial inclusion in our communities, and we're very encouraged by the positive perception they've received from new and existing clients alike. Based on August through December data, which reflects Truist One, branch checking production increased 10% from a year ago period and we achieved this result despite having around 400 fewer branches. The truest one suite now also includes our new cash reserve deposit based credit line up to $750, which launched in mid-December and expands our commitment to our clients and communities. Our ability to innovate at the intersection of touch and technology was greatly enhanced by the opening of our new innovation and technology center, which brings our cross-functional teams together with clients and large tech companies to reimagine banking experiences for everyone. We've already realized the benefits of the ITC as Truist One Banking and the new digital and hybrid investment capabilities launched throughout the year were all co-created with clients in our client journey rooms. We also continued to deliver on our mission for our teammates. In October, we took a bold step to improve the lives of our teammates by raising our minimum wage to $22 an hour. In the three months since this took effect, We've experienced improved teammate recruitment, retention, lower turnover expenses, better execution, and an all-around better client experience. We also enhanced our total rewards program to include an employee stock purchase program to further align our teammates' interests with those of our shareholders. As a company that champions diversity, equity, and inclusion, we achieved our goal to increase ethnically diverse representation in senior leadership roles a year early with aspirations for further progress. Finally, Truist has made a significant impact on the communities we serve by meeting and in some categories exceeding our $60 billion community benefits plan. Our first inspirational commitment is Truist and one that has served as a framework for similar plans across the industry. The execution of this plan was a testament to our purpose of building better lives and communities by elevating low and moderate income and minority communities through material support for affordable housing, nonprofits, small business, and community development lending. In summary, we're delivering on our purpose, and the significance of what our teammates have accomplished is just outstanding. We'll continue to raise the bar, and I look forward to the year ahead as we actualize our purpose, advance integrated relationship management, positively impact clients and communities through continued investment in touch and technology, and make Truist an even better place to work. Turning to slide seven, selected items for the quarter totaled $170 million pre-tax and included our final charges related to the MOE. Now that our integration activities are complete, MOE costs will exit our run rate going forward. This is a positive development for shareholders that underscores our pivot to execution and will simplify our narrative, enhance earnings quality, and improve capital generation. Turning to our fourth quarter performance highlights on slide eight. Two has delivered strong four-quarter earnings of $1.6 billion, or $1.20 per share, on a reported basis. Adjusted earnings totaled $1.7 billion, or $1.30 per share, up 5% sequentially, as strong PPNR growth was partially offset by higher provision expense. Adjusted ROTCE was 30%, and even excluding AOCI was 20%. Both data points are very strong. Net interest income grew 7% to $4 billion, a new high for Truist, supported by strong loan growth and significant margin expansion resulted from higher short-term rates and well-controlled deposit costs. Fee income rebounded 6%, primarily due to insurance seasonality, a full quarter of benefit mall results, and investment banking. Adjusted expenses increased sequentially, mostly as expected as the impacts of higher minimum wage, acquisitions, and targeted investments were partially offset by the final leg of some of our cost-saving efforts. Together, these factors drove a 12% increase in adjusted PPNR, exceeding our guidance. This performance also resulted in 370 basis points of adjusted operating leverage relative to the fourth quarter of 2021, our strongest operating leverage results of the year. Our adjusted efficiency ratio was 54.2%, our best quarterly performance and truest thus far. Asset quality remains strong, and the sequential increase in provision expense primarily reflects moderately slower economic assumptions. We also deployed 10 basis points of capital as a result of strong organic loan growth and the bank direct acquisition. Our capital position remains strong relative to our risk and profitability profile, and we remain confident in our ability to withstand and outperform in a range of economic scenarios. Turning to our full year highlights on slide 9. GAAP EPS was relatively stable year-over-year, as significantly lower merger-related costs were offset by higher and more normal provision levels. Adjusted EPS declined 10 percent year-over-year, as solid 4.4 percent adjusted PPNR growth was more than offset by the $1.6 billion increase in loan loss provision expense. Importantly, however, we delivered 60 basis points of adjusted and 680 basis points of GAAP operating leverage for the full year, which was a primary metric to which we held ourselves accountable to in 2022. This was our first year of operating leverage, as truest, and it establishes a firm foundation from which we can accelerate as we head into 2023. Turning to slide 10. Digital engagement rose steadily through 2022 as a result of changing client preferences and our improved agility as truest. We experienced strong growth in digital transactions, and Zelle in particular, as transaction volume increased 42% since the beginning of the year. Zelle continues to represent an increasing percentage of our overall transaction mix and highlights the importance of continuing to invest in money movement capabilities. Our agility and responsiveness have improved tremendously since we've migrated to one digital platform built in the cloud, resulting in better client experiences. We delivered three times as many production releases across retail, business, and wealth in 2022 as we did in 2021. And as a result, our mobile app was rated an average of 4.7 stars on Android and iOS a year in, up materially from a year ago. We introduced many new digital capabilities and solutions to clients in 2022 from Truist One Banking, Truist Assist, and expanded digital investment capabilities, some of which are highlighted on the right side of the slide. In 2023, our goal is to more fully activate those capabilities with our clients to improve acquisition, retention, and reduce cost. In addition to enhanced digital capabilities for our clients, our digital and technology teams successfully completed the largest bank merger in 15 years, decommissioned three data centers, successfully piloted a new deposit product on a next-gen real-time cloud-based core, enhanced credit decisioning and underwriting across certain consumer lending platforms, and upgraded our contact center technology stack and completed a 5G network and branch Wi-Fi pilot program. We have a great digital and technology team, and they've been battle-tested and have demonstrated incredible agility in responding to client needs during the integration period while also keeping their eyes on the future. Turning to loans and leases on slide 11. Average loan balances increased a strong $11.3 billion, or $3.6 billion sequentially, approximately 20% of which came from the bank direct acquisition. The improved loan growth we've experienced in recent quarters reflects our shift to execution and trues greater competitiveness for clients due to our size and capabilities, as well as broader industry trends. NI grew 7.2 billion, or 4.7% overall, and increased 3.2%, excluding BankDirect, as balances increased across most CIB industry verticals and product groups and CCBs. As in recent quarters, growth continues to be strong within our asset finance group as we continue to build that business with more talent, product capabilities, and a larger balance sheet. Macro trends such as supply chain management, infrastructure spending, inflation, and choppy capital markets are also supporting growth here. CIB delivered growth across most industry verticals due to a combination of new client acquisition, up-tearing our position with existing clients, acquisition activity, and business-as-usual liquidity management. Commercial community banks' C&I balances grew 3.7%, reflecting the strength of our markets and our team's focus on execution. Residential mortgage balances increased $3 billion, or 5%, sequentially due to previous correspondent channel production and lower prepayments. Excluding mortgage, consumer and card balances decreased on an end-of-period basis, primarily reflecting continued runoff in our student loan portfolio, as well as our decision to pivot away from lower-return portfolios such as Prime Auto. At the same time, we continue to invest in higher-return consumer finance businesses such as Service Finance, Lightstream, and Sheffield. Service Finance continues to grow and ended the year with over $3 billion worth of loans, ahead of the high expectations at the time of the acquisition. Going forward, loan growth will moderate from the robust levels in 2022 as clients respond to the impact of higher rates, high inflation, and a slowing economy. In addition, we also expect growth in residential mortgage and prime auto to continue to slow as we focus our capital on higher return opportunities. Truist remains well positioned to advise clients across a range of economic scenarios, given our broad capability, talented teammates, and increased capacity post-integration. Now turning to deposits on slide 12. Average deposit balances decrease 1.6% sequentially as effects of tighter monetary policy, inflation, and higher rate alternatives continue to weigh on balances. Deposit costs remain well controlled, reflecting the strength of our deposit franchise and our strategy to be attentive to client needs and relationships while maximizing value outside of rate paid. During the fourth quarter, interest-bearing deposit costs increased 52 basis points, contributing to a cumulative interest-bearing deposit beta of 27% thus far. As the interest rate environment evolves, we'll continue to take a balanced approach to maintaining and managing deposit growth and rate paid, giving our broad access to alternative forms of funding. Our continued rollout of Truist One and ongoing investments in treasuring payments will be key areas of focus going forward as we look to acquire new and deepen existing relationships and maximize high-quality deposit growth.