Truist outlines 'pivot' as deposit costs bite, says cost cuts coming

Truist Financial Corp. said it unloaded a $5 billion student loan portfolio and more actions are coming as funding costs and the turmoil in March hurt the operating environment for banks.

"This is not business as usual and reflects an important and significant pivot," Chairman, CEO and President William Rogers Jr. said during a conference call on second-quarter results.

Executives described some cost initiatives that are underway, but declined to provide specific guidance for 2024. "We have a lot of things that we're working on," Rogers said. "Expense growth is going to decrease materially."

Revenue pressure

Truist's taxable-equivalent net interest income declined 6.1% sequentially, and the bank lowered its full-year revenue guidance for the third time since January to an increase of 1% to 2%. CFO Michael Maguire said the lower revenue guidance reflected higher deposit costs, slower loan growth and lower investment banking revenue.

The bank said its cumulative beta, or the change in its deposit costs relative to underlying rates across the cycle, was 44% so far. In June, the bank said it expects the measure to ultimately move into the mid- to high-40s. Now the bank sees the measure "certainly piercing 50," Maguire said, but it is "really hard to pick a number at this point."

He said expectations that rates will stay higher for longer has hurt the outlook for funding costs, and the June guidance had contemplated a Federal Reserve rate cut this year. He said he expects a further decline in net interest income this year, though with the drop moderating successively in the third and fourth quarters.

Pivot

The bank increased its 2023 expense forecast to the top end of its April projection of up 5% to 7%, which Maguire said reflected spending on technology.

Maguire listed recent and ongoing actions to reduce expenses, including a previous decision to discontinue some market-making in middle-market fixed income that did not produce attractive profitability.

"We're actively working to identify and accelerate additional actions that could be implemented over the course of the next 12 to 18 months," he said. These include "a much more aggressive approach" toward managing employee levels.

The student loan portfolio was sold at carrying value, and Rogers said the move was an example of Truist's drive to focus on clients with broad relationships and away from single-product relationships.

Rogers said a worse operating environment "means being more disciplined about where we choose to compete and deploy our capital, whether businesses, clients or products, and looking deeper at more structural cost opportunities that exist at Truist."

Capital

Executives also cited expectations for tougher regulatory requirements, on top of an increase in Truist's required Tier 1 common equity (CET1) ratio to 7.4% that will become effective Oct. 1 after this year's stress test.

Truist finished the second quarter with a CET1 ratio of 9.6%, including a boost from its sale of a 20% stake in its large insurance brokerage business. It is targeting a CET1 ratio of 10% by the end of the year, and said it could lift the ratio by another 2 percentage points if it sold the rest of Truist Insurance Holdings Inc.

The bank is staying in capital-building mode since "targets are developing," Rogers said. Regulators are expected to introduce formal proposals soon, including changes that could require Truist to include unrealized losses on available-for-sale bonds in its regulatory capital.

Truist's accumulated other comprehensive loss, which includes these changes in the market value of its bond portfolio, increased 6.3% sequentially to $13.37 billion, which compares with its CET1 of $41.64 billion at June 30.

Based on current market expectations for interest rates and estimated cash flows, Truist estimated that its accumulated other comprehensive loss would diminish to $10.7 billion by the end of 2024, and $8.6 billion by the end of 2026.

"Assuming our current rate of organic capital generation remains constant, Truist should generate sufficient capital to offset the estimated remaining impact of [the accumulated other comprehensive loss] on CET1 over this time period, while maintaining the strategic capital flexibility with Truist Insurance Holdings," Maguire said.

Truist's shares were down about 5.7% at around 10:40 a.m. ET on July 20, while the KBW Nasdaq Bank Index was down 0.3%.