Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by Walkaway Suntrust third quarter 2019 earnings results Conference call.
At this time, all participants already listen only mode. Later, we will conduct a question and answers action 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 Investor Relations Mr. Walker, Yes. Please go ahead Sir.
Thank you Tony.
Good morning, and welcome to Suntrust third quarter 2019 earnings Conference call. Thank you for joining us in.
In addition to todays 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 Dot Suntrust Dot com.
With me today among other members of our executive management team, our 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 a reconciliation of these measures to GAAP financial measures in our press release or in our presentation and on our website investors Dot Suntrust Dot com.
Finally, Suntrust is not responsible for and does not add it nor guarantee the accuracy of our earnings teleconference. Transcripts provided by third parties. The only authorized live and archived webcast are located on our website.
That I'll now turn the call over to Bill, but something good morning, everyone. I'll begin with an overview of the third quarter, which we highlighted on slide three and then I'll turn it over to Allison for some additional details reported earnings per share where the dollar 30 pool and when excluding merger related impacts in the quarter earnings per share with the dollar reported.
Overall, we had a good quarter, particularly as it relates to the strengthened a number of our fee income oriented businesses and continued balance sheet growth both of which are reflective of our successful execution against a strategic initiatives of our consumer at wholesale segments as.
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 last quarter, a low rate environment dropped further pressure on our net interest margin offsetting much of the core growth, we delevering loans deposits and noninterest income.
Well that as an overview, let me highlight some of those specifics for Suntrust earnings in the third quarter loan growth remains healthy evidenced by the 1% sequential broke we de lever, which was generally broad based across most businesses.
Investments, we've made and delivering product in industry expertise to our corporate commercial in theory clients. In addition to our ongoing investments and digital consumer lending continue to drive good loan growth.
We're also seeing healthy growth, an indirect auto reflecting strong consumer confidence.
Bigger picture our clients remain relatively optimistic about the economy are committed to making ongoing investments in their personal lives from them their businesses. So the level of uncertainty has increased leading to some caution.
We also saw strong deposit growth from the quarter, which was largely driven by good results from our corporate liquidity products team. An addition to solid growth in consumer deposits.
Offset in the balance sheet growth, we delivered was pressure on the net interest margin given the rate dynamics, which also will discuss in more detail.
Excluding certain discrete items noninterest income increased by 2% sequentially up 7% year over year, reflecting increased client activity levels in mortgage investment banking commercial real estate and private well most of which is reflective of the successful execution against our strategies. That's also good representation of the diversity of our business.
I was Max.
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 ratio stable year to year to date in spite of the challenge and interest rate environment. This base performance puts us on good putting heading into the merger where our efficiency opportunities are significantly amplified.
And finally credit quality remains a strike when charge offs and nonperforming loans remaining below their historical averages.
When excluding the impacts of interest rate environment I continued to be pleased with the core performance of both our consumer and wholesale businesses.
We've developed and continue to enhance our competitive advantage on certain differentiated businesses like Suntrust Robinson Humphrey Lightstream.
We continue to make good progress and 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.
Just a few of the reasons why we entered into our proposed merger of equals a baby into from a position of underlying strength with an offensive mindset.
The ability to bring together two highly complimentary business models with different areas of relative strength, an opportunity I'd make is unique to this particular combination.
At the same time, the overall revenue environment has changed which also underscore somewhat defensive merits of our merger, including the synergy opportunities on our balance sheet positioning.
As we all know championship teams have great authentic and great defenses and this regard I think truest is uniquely well positioned.
Well manner for Charles continues to build and I'll conclude with further details on the progress we're making it in our integration planning efforts. In addition to some of the key items, we hope to accomplish and the first 100 days that's true us.
Before I turn it over to Alex I will highlight announcement, we made last week that Lenny Haynesworth was appointed to the Suntrust Board of directors and she will also serve on the Truest Board of directors Lenny was a 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 cyber security technology and innovation.
All critical skill sets and creating a strong foundation for true as and financial security and confidence for our clients. So with that let me turn it over to Allison.
Thanks, Phil let's start with net interest income.
You can see on slide four our net interest margin declined 10 basis points sequentially.
Slightly lower than our previous guidance.
Primarily driven by short term rates and long term rates declined more than we anticipated in July .
As a reminder, one month LIBOR impact approximately 22% of earning assets net of debt and commercial land spot.
In short term benchmark rates began to decline throughout August that the probability of a September rate had increased in late July .
Second long term rates declined approximately 50 basis points on average, which negatively impacted yields and prepayments that our fixed rate assets.
Our clean mortgage backed securities and mortgage line.
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 and interest rate.
On a standalone basis, I would expect our net interest margins declined by two to five basis points in the fourth quarter given the impact of the September rate.
We do expect deposit cost to begin to turn the corner and decline as we look into the fourth quarter.
Overall margin will still decline given the aforementioned net exposure to short term interest rate.
Now moving to slide five when excluding the insurance settlements in the second quarter, and a $5 million residual benefit in the third quarter.
Noninterest income increased by $18 million sequentially, driven primarily by mortgage income, which benefited from higher refinancing activity and improved gain on sale margin.
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 for strategic spend tech equity investment.
And that securities.
These gains were largely offset by $14 million negative adjustment the counterparty credit valuation reserve.
In connection with our interest rate derivatives portfolio for client hedging activity, primarily as a result of lower rate.
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 decommission.
Another $11 million costs were incurred primarily related to consulting expenses associated with the merger, which generally show up and other noninterest expense.
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 corner.
Compared to the prior year core expenses increased by 4% driven by higher compensation expense, partially in connection with the 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 initiative, 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 stable relative to 2018.
By year over year stability, we feel good about Brazil, given our forecast at the beginning of the year included two rate increases, whereas we have instead experience to rate cut with the possibility of more.
More importantly, given the synergies and scale, we will achieve by merging with BNP will have significantly greater capacity to invest in technology talent and innovation.
One of the key benefits of this transaction not just we have the opportunity to achieve best in class efficiency, which is of course, a great outcomes 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 nonperforming loan ratio was 38 basis 0.4 basis points relative to the prior quarter. The drivers of the increases in charge offs in Npls were generally idiosyncratic and also a reflection of credit metric.
Being an absolute low end benign level.
On a standalone basis, we still expect our full year net charge off ratio to be between 25 and 30 basis point.
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 their 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 good growth in average balances.
Importantly, the growth was diversified across most portfolios, including consumer direct indirect auto and theory.
Within consumer the ongoing investments we've made in our digital and point of sale lending capability, which provide for superior client experience.
So driving good growth and enhancing our return.
Our auto portfolio continues to demonstrate healthy growth and solid risk adjusted return.
Within theory, we continue to see growth tied to the investments, we have made and permanent lending and British 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 strategy.
We also benefited from targeted growth was certain corporate 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 to quarter increases of six and nine basis points respectively.
This quarter's increase in deposit cost reflects to some extent the lagged impact from prior rate hike and our desire to balance our funding profile.
As I said earlier, we do anticipate deposit cost to begin the kind of the three 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 process either coming couple of years.
Moving to slide 10, which provides an update on our capital.
Our estimated boggled three common equity tier one ratio with 9.3%.
The tier one ratio was 10.4% slightly higher than the prior quarter, given the suspension of share repurchase that.
Book value and tangible book value and per share increased by 3% sequentially given growth and retained earnings and the impact at lower rates had on improving the unrealized loss position and our security and derivatives portfolio.
We continue to expect capital ratios to trend upward given the suspension of share repurchases in anticipation of our merger would be DMT.
[noise] separately, we increase our quarterly dividend by 12% this quarter to 56 cents per common share providing for an attractive attractive dividend yield of 3.3%.
Moving to the segment overview I'll begin with the consumer segment on slide 11.
The positive lending momentum, we hadn't 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 fair lending partnership continue to be consistent contributors to our loan growth.
Over the past year, we've focused on enhancing our analytic improving automation, adding product offerings and growing our partnerships and referral.
All of which are key contributors to the 38% year over year growth, we delivered and Lightstream.
We've also made good progress and enhancing our point of sale lending capability and expanding our partnership network.
Lastly, we added two additional point of sale financing partner since quarter.
One focused on solar and the other focused on equipment.
These partnerships further our strategy of investing in digital lending channel, which meet clients, where they make purchase decision.
Consistent with prior quarter. 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, but the new product offerings, which were introduced at the end of 2018.
These products combined with effective targeted marketing campaign have led to a strong year over year increase and knew about deposit production.
Overall, the 7% loan growth and 2% account deposit growth offset margin compression and drove a 1% increase in net interest income relative to the prior year.
Consumer fee income benefited from strength in mortgage production income as a result of an increase in refinancing activity and improved gain on sale margin.
Mortgage income also benefited from increased adoption of Smart guide, our digital mortgage application, which has surpassed 90%.
This application, which provides for significantly better user experience and streamlined aspect of being taken underwriting process.
Combined with an improving backend process made our mortgage team very well positioned to help our client and the recent refinancing wave.
When looking at longer term trends, our consumer business has made significant strides over the last couple of years.
Revenues up 8% driven by strong balance sheet growth and strength in mortgage and wealth related fee.
Assets under management are up by 10% impart due to better partnership across the retail premier and wealth segment.
We've made significant strides in improving our front end client experience through ongoing enhancements to mobile and online banking.
Digital lending through smart Guy Lightstream and point of sale partnership.
Our enterprise client portal for private wealth clients has provided for a differentiated experience for our high network clients and is now being leveraged for our new portal for small business plan.
Our investments in our new account center has significantly improved the digital account opening experience.
And now over 90% of our consumer products and solutions can be Onboarded and service 100% digitally.
In addition to digital progress our brands 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 point.
Driven impart by 10% reduction and 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 return.
This progress combined with our strong presence across high growth markets on the southeastern mid Atlantic will be amplified when we merge would be BMT, creating retail and private wealth businesses that will be among the leaders in the industry across many dimensions growth efficiency talent and technology.
Moving to wholesale on slide 12, where our consistent strategy continues to drive good result.
Loan this slow somewhat in the third quarter largely as a result of increased pay downs within the Eni and our own internal discipline around pricing and structure.
Deposit growth picked up meaningfully as a result of success from our corporate liquidity product specialists team. In addition to several several larger temporary client deposit.
Investment banking income had strong performance across most categories categories despite market volatility.
With particular strength in debt capital markets and M&A.
Related Lee approximately 35% of our M&A fees year to date have come from commercial banking client.
Good indicator of the continued success, we're having and bringing enhanced advisory capability.
To a broader set of clients and wholesale.
This underlying strength was largely masked by the aforementioned negative 14 million dollar adjustment and trading income. In addition to a sequential decline in theory related fee 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 and restructured real estate doesn't.
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 over several key drivers including.
Lead relationships have grown at a 10% CAGR driving increased market share with our clients.
Revenue from non see I'd be quiet has grown at a 20% CAGR over last few years. The now represents roughly 20% of capital markets be.
In commercial real estate related fees has seen strong growth largely driven by the investments we've made in our agency lending capability through the acquisition of pillar in 2016.
We expanded our commercial banking business into a high and Texas and we launched a national expansion of our aging services vertical within commercial banking.
We've improved technology capabilities for clients and he made both for loan origination and our client facing treasury and payments portal.
Each of these investments in growth was self funded by ongoing efficiency initiative.
Typically our adjusted tangible efficiency ratio in wholesale has improved by 225 basis point.
And importantly, these achievements Raul accomplished in the context of consistent risks discipline and our ability to win based on a bite not structure or price pricing.
Each of these strategies continues to drive solid sustainable results and has created a strong foundation, which we can build upon as we merged with BNP and have the opportunity to bring our capability and our differentiated model to a broader set of corporate and commercial clients.
With that I'll turn the call back over double that's helpful.
The overall momentum we have on a standalone basis continues to validate my view that Sun Trust is approaching the proposed merger with Bbmg promo great position to strike.
Individually, we are two very strong companies and together, we're going to be able to accomplished so much more to gather them either almost could have alone.
That is 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 report Frost respect for one of them <unk>. Each other this has exceeded my already very very high expectations.
The team we can build your worked incredibly hard don't lay the foundation for true ups and as we do so there's no a great sense of excitement for the future.
You know Kelly Thanks for your collaborative leadership and the whole team. Thank you for your hard work you have the incredible integrity on the open no store on those processes everybody's rolling for true ups to its just sold.
We have all worked hard to share this excitement with all of our teammates both the Bbseven Suntrust. We thought over 30 formal sets of communication regarding merger updates. They have included organizational design technology ecosystem decisions benefits packages and so much more but those are just a formal said something new.
Occasions, we have multiple more and formal town halls listening sessions every form of communication possible overall, I'm really proud of the transparency and those process.
And the third quarter, specifically, we accomplished several key milestones on July 24th Kelly, not pure and before that helps financial services Committee, a and felt that the merits of those transaction were generally well received understood bar Representatives, who was a real honor to represent all things at Suntrust has done to bed.
Thats its clients and communities a and its heartening to hear back from brokers on those community groups in client.
On on how many fields, so positively about about some trials and also by began to.
On July Thirtyth, both Suntrust would be to into shareholders overwhelmingly approved the transaction introduction with our special shareholders meeting.
Well throughout the quarter, our leaders continue their organization and design process, which culminated in the announcement of nearly 8000 positions today consistent with the earlier phases of organization design. These leaders required.
Great talent in both companies, it's a tremendous balance between both BB empty and Suntrust great levels of diversity by both traditional definitions, but also by backgrounds experiences.
Backdrops, we just simply have a superior team.
We've been making bold decisions around compensation and benefits were curious do much when looking at the combined said all salary benefits.
I'm all for Tom that volunteerism career development resources.
Combined with the just incredible opportunities are going to be available for true teammates I, just fundamentally believe truest will be the premier financial institution to work for in the country.
We also made tremendous progress on selecting which systems will use for true has been creating roadmaps for integration.
We identified approximately 100 ecosystems as part of this process and feel confident that selections. We've made and are making are going to create a super foundation for true us by leveraging the best a boat architecting for the future minimizing integration rules and providing additional security.
Finally, and perhaps most importantly, we conducted a legal day, one readiness exercise with each of our approximately 100 merger work streams and the second half of September on the results confirmed our confidence that were on positioned to move very quickly after receiving regulatory approval.
[noise] Premier will continue to work closely with regulators to answer their questions and finalized.
There's process.
The dialogue has 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 we have several key milestones, which we plan to accomplishing our first 100 days as true.
First as you can imagine will present to the new Truest 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. I'm also excited to welcome all of them.
We will also engage with all of our teammates on true Cocos mission and values, which is just so critical to helping build our new culture.
I think as all of you know Suntrust would be BMT are about entering into this merger as companies that have strong focus on mission Foundation.
Upon which to build I will say formal personals perspective. This this work has really been rewarded.
And the approach that everyone's taken to build a truly purpose oriented company is very exciting, but think about well continue to refine all aspects of the true as brand with the goal of rolling this out in 2020.
As you know will still go to market as BMT Suntrust as divisions of true ups for some period of time as we get to the client conversion process.
And finally, we'll begin executing against the opportunities we've identified to harness expense and revenue synergies.
Great energy from our teams on the help of third parties, it's been a significant amount of time dedicated to creating clear.
Playbooks for achieving our cost saves.
Some of the near term opportunities they'll be your initial savings from we're moving duplicative positions across the company most of which had been identified as part of our organizational design process third party spend will be a key area of focus on scenarios, where we.
Both use the same vendor partner will have the opportunity to negotiate better contracts and quickly rationalize costs and scenarios, where we use different vendor partners will swiftly began an RFP process and work through a thoughtful selection process and followed will continue to refine our plans to rationalize our real estate flip from branch closures.
Not be down until after the first year, but there will 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.
Thats sort of a traditional way of explaining revenue synergies, but 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 truest go to market strategy, which I think we'll be increase.
Notably effective.
I feel very confident our future and I'm proud of all the work that's been done, but yet as to where we are today.
When we announced our name truth. We also declared the troops would stand for better better experiences better partnerships, better technology, and creating a better future for our teammates our clients in our communities.
Because of the team we haven't players the capabilities that each company brings EMEA identified synergy opportunities we have from leveraging each.
Companies Executional excellence I can already declared the true ups will be better with the objective of being the absolute so.
So before I conclude I will thank all of Suntrust teammates and BBSI Associates, who we're just working incredibly hard to make this merger success.
Whether it's directly in the integration planning managing risk investing in our communities or.
Most importantly doing that job they do everyday providing outstanding confidence in service to our class I want you to all know that your efforts are a significant part of making history. So with that hunker, Let me turn the call back over to you.
Great.
Tony we're now ready to begin the Q when a portion of the call. So you can start that process all right. Your thank you very much and ladies and gentlemen.