Truist Financial is facing increasing scrutiny from critics who say it's not meeting the expectations it established when the merger that created the company was announced more than four years ago.
While Truist has taken recent steps to cut costs, remix its balance sheet and achieve greater efficiency, some analysts and investors want the North Carolina company to move faster and make bigger, bolder changes to improve its stock price, which has tumbled more than 30% this year.
The pressure intensified after Truist's second-quarter earnings call, when company executives lowered their full-year revenue forecast for the second time in seven weeks while also increasing their spending projections and suggesting that positive operating leverage might be out of reach before 2025.
Some analysts expect Truist to announce a shift in strategy on Monday, when CEO Bill Rogers and Chief Financial Officer Michael Maguire are scheduled to make a presentation at an industry conference. The event will mark the pair's first widespread investor communication since July.
Investors are at "a boiling point" after the company's most recent earnings call, said Mike Mayo, an analyst at Wells Fargo Securities.
The frustration is largely due to the projected increase in Truist's expenses, which are now forecast to rise 7% year over year. That's the highest projected annual uptick in spending among the large banks, and it's happening at a time when Truist was supposed to start realizing the full cost-savings benefits of the merger, Mayo said.
"They need to start getting expenses under control, and if they don't have the right people in place, they need to get the right people," he said. "They need to have a better plan."
The 2019 merger between BB&T Corp. and SunTrust Banks created the $565.8 billion-asset juggernaut known as Truist. It remains the largest "merger of equals" in recent banking history.
The deal — which combined the $225 billion-asset BB&T in Winston-Salem, North Carolina, and the $216 billion-asset SunTrust in Atlanta — was supposed to produce annual cost savings of $1.6 billion by the end of 2022. But instead of declining, expenses have been going up.
During the second quarter, noninterest expenses totaled $3.75 billion, up 1.5% from the first quarter and 4.7% year over year. The company, now based in Charlotte, North Carolina, said the uptick from 2022 was partly the result of higher personnel expenses, including an increase in Truist's minimum wage that took effect last year, and higher regulatory costs.
Expenses aren't the only issue that's agitating Truist investors. Projected revenue growth for 2023 keeps shrinking. In July, management called for 1% to 2% growth versus the 3% growth that it had projected in May. And that wasn't the first, or second, change in Truist's revenue outlook.
In January, management forecast revenue growth of 9% for 2023. In April, the projection was 5%-7%.
The most recent adjusted revenue guide reflects lower net interest income as a result of higher deposit betas, slower loan growth and lower investment banking fees, Maguire said on the July earnings call.
To counteract some of the headwinds, the company is remixing its balance sheet, one part of an enterprisewide effort to cut costs, improve efficiency, build capital and simplify its operations.
The remix includes selling a $5 billion student loan portfolio and folding its online consumer lending platform, LightStream, into its broader consumer business in order to cut the costs associated with operating a second brand. Truist has also decided that it will no longer sell or trade mortgage-backed securities and certain bonds, and executives have warned that there could be more cuts both in the mortgage business and in the amount of real estate the company occupies.
In February, Truist sold 20% of its massive insurance brokerage subsidiary to a private equity firm, a move that executives said would fund future growth and boost earnings over time.
The sale helped lift Truist's common equity Tier 1 capital ratio by 50 basis points to 9.5% as of June 30, the company said. If more capital flexibility is necessary — a possibility that large and regional banks are considering, given new capital requirements — Truist could sell more of its insurance business, executives have said.
Exactly what Rogers and Maguire say, or don't say, on Monday is of keen interest to Wall Street. Truist declined to make Rogers or any other executive available for an interview, and instead suggested tuning into the presentation Monday at the Barclays Global Financial Services Conference to get "fresh perspectives."
During Truist's second-quarter earnings call, Rogers reiterated that the company is closely evaluating which business lines fit into its broader business model, and which ones don't.
"You could argue we should have been doing that faster," he told analysts. "I think that's a legitimate push, and I accept that, but I don't want you to think that it's not happening and that the focus isn't intense."
"It's more about trying to create more permanent change that's structural. Let's really change the fundamental structure of the company from an expense standpoint. You've seen me do it before, and you know we can do it again," he added.
Among analysts who follow Truist, Mayo has been the most vocal critic. In a late July research note, he wrote that five areas need immediate attention: rising expenses, missed financial targets, incentive pay and accountability, the composition of Truist's board of directors and management's tone and messaging around the company's stock and financial performance.
In an interview, Mayo said management is "getting paid as if they are exceeding targets" and took issue with the size of the firm's 21-member board, saying it is too big, and noting that no new director has joined the group since the merger's completion in December 2019.
He also criticized Truist's use of the word "stakeholders" in correspondence, arguing that it doesn't prioritize shareholders.
"I think the jury is out on whether this is going to be a best-in-class bank," Mayo said. "Either they get the message or put a fork in it and say this is a failed merger."
Mayo said he's "still holding out hope" that Rogers will drive change the way he did at SunTrust.
"Everyone has to earn their job every day, including the CEO. So the question is: Can Bill Rogers … do a major reset of Truist to turn around its extremely disappointing shareholder returns?"
Some analysts, including Christopher Marinac of Janney Montgomery Scott, are taking a less dire view. He thinks "there is too much short-term thinking" about Truist's position.
The company has "plenty of time to work through their capital concerns," Marinac said in an email.
Truist is actively reaching out to investors for feedback, according to Terry McEvoy, an analyst at Stephens Research. Last month, McEvoy had an in-person meeting with executives from Truist and three other regional banks.
In addition to concerns about expenses and revenue projections, some of the focus on Truist is related to the amount of unrealized losses in its securities portfolio and the duration of that book.
The company wants feedback "on what's the best course of action to potentially fast-forward the losses that are in the securities portfolio, which would then better position them from an earnings standpoint," McEvoy said. "I think they're analyzing the situation closely … daily, hourly."
While "mergers of equals are difficult," especially those as large as the one that created Truist, "some of the selling points of the merger, those synergies, it's not clear if those are showing up right now," said Ebrahim Poonawala, an analyst at Bank of America Securities.
"The next 12 to 24 months will be telling in terms of the concerns that have been expressed on the earnings call and in analyst notes," he said. "How will management react to that?"
Meanwhile, Mayo and others are ready to see more action.
"They need to own up to the shortfalls, take action with urgency and do it now," Mayo said.