Q1 2024 Earnings Summary
- Strong Investment Banking Performance and Positive Momentum: Truist Financial's investment banking segment showed significant growth, with particular strength in M&A and equity capital markets. The company has been investing in talent and industry verticals, adding over 30 new managing directors, which supports confidence in continued momentum into the second quarter and beyond.
- Strengthened Capital Position from Sale of Truist Insurance Holdings (TIH): The pending sale of TIH is expected to generate approximately $10.1 billion in after-tax proceeds, significantly boosting the Common Equity Tier 1 (CET1) capital ratio by about 2.5%, providing capacity for growth, balance sheet repositioning, and potential share repurchases.
- Commitment to Improving Return on Average Tangible Common Equity (ROATCE): Leadership acknowledges the current ROATCE as a starting point and has plans to enhance returns both in the short and long term through capital deployment options, including securities repositioning and share repurchases, as well as growth in core businesses.
- Under proposed Basel III rules, Truist's fully phased-in CET1 ratio would decrease to around 5.9% to 6%, significantly below current levels, raising capital adequacy concerns.
- Management acknowledges that a Return on Average Tangible Common Equity (ROATCE) of 12% is not acceptable long-term and it's too early to specify when higher targets will be achieved, indicating potential challenges in improving profitability.
- The company anticipates more rigorous liquidity requirements and is focusing on shortening the balance sheet, which could impact growth and earnings.
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Net Interest Income Outlook
Q: What's changed in NII expectations and guidance?
A: Management adjusted NII guidance due to expecting fewer rate cuts—now anticipating 3 cuts instead of 5. This puts pressure on NII, so they project NII to be down 2–3% in the second quarter, with Q2 being the trough. They expect modest improvement in Q3 and Q4, assuming rate cuts occur. The guidance excludes any benefit from the $10.1 billion cash proceeds from the TIH sale. -
Impact of TIH Sale
Q: How will the TIH sale affect earnings and tangible book value?
A: The TIH sale will generate $10.1 billion after-tax proceeds. Management plans to redeploy this cash, improving tangible book value per share by roughly one-third. Guidance does not include this benefit yet. -
Capital Deployment Plans
Q: What are the plans for deploying capital post-TIH sale?
A: Management is considering options including balance sheet restructuring, investing in growth, and resuming share repurchases. They aim to replace the earnings from TIH and improve returns in the short and long term. -
Return on Tangible Equity Targets
Q: Is a 12% ROTCE acceptable long-term?
A: Management views 12% ROTCE as a starting point, not acceptable long-term. They plan to increase returns through capital actions like balance sheet repositioning and share repurchases, aiming for meaningful growth over time. -
Balance Sheet Restructuring Timing
Q: When will the balance sheet restructuring occur?
A: The intent is for restructuring to be simultaneous with the TIH sale, expected in Q2. They plan to redeploy proceeds into cash and securities, optimizing for earnings and liquidity. -
Credit Quality and CRE Exposure
Q: What's happening with CRE loans and reserves?
A: Nonperforming CRE loans decreased as they addressed stressed office exposures, reducing CRE office loans by $222 million or 4.5%. Reserves for office loans increased to 9.3%, and for institutional-style office loans, to 11.8%. Other CRE segments are holding up well. -
Loan Growth Expectations
Q: Are commercial lending pipelines improving?
A: Commercial lending pipelines are building, with clients discussing expansion plans. The bank is more relevant, adding nearly 60% new relationships in the quarter, indicating potential for loan growth. -
Competitive Funding Environment
Q: How is competition affecting funding and deposit pricing?
A: Operating in attractive markets brings competition, but management isn't seeing irrational behavior. They focus on supporting clients and acquiring net new accounts, with strong acquisition rates and improved attrition.