Truist Financial forecasts a larger-than-expected increase in spending amid ongoing technology investments, a planned minimum wage hike and rising operating losses.
The Charlotte, North Carolina-based company now says its annual costs will rise 2-3% from last year, compared to the previous range – the “high end 1-2%” – that leaders established in April. The latest estimate excludes all remaining expenses related to the merger of BB&T and SunTrust Banks, which came together to create Truist in late 2019.
One of the main reasons for the BB&T-SunTrust merger was the promise of reduced expenses. Truist touts cost-cutting plans since the announcement of the agreement over three years ago.
On Tuesday, Truist executives tried to convince analysts that its costs were under control, in part by reaffirming the bank’s commitment to achieving positive operating leverage this year.
“No eye on the ball, I can assure you,” Chairman and CEO Bill Rogers said of the expense during the bank’s quarterly earnings call. “The skill we developed through the merger to manage spend, understand spend, create continuous improvements – all of that is still there and will be a big part of our spend story for this year and for years to come. “
The bank with assets of $545.1 million, which said it plans to eliminate $1.6 billion in annual expenses by the end of the year, has taken several measures to reduce costs, notably by closing branches and consolidating back-office functions. Other cost reduction measures await us, in particular the dismantling of old data centres.
Still, Truist needs to spend money in certain areas right now, Rogers said. These priorities include various technology upgrades and a previously announced minimum wage increasescheduled for October, which is intended to be a long-term game to attract and retain employees.
Trusit also incurs some operating losses “related to customer experience,” Rogers said. The bank did not disclose the exact extent of those losses, which are recorded under “other expenses,” during the second quarter.
Although Rogers is “confident” that operating losses “will normalize over time given the investments” the bank is making, these losses are “higher than we think,” he told analysts. .
When pressed by Deutsche Bank analyst Matt O’Connor whether the operating losses were related to Truist’s technology integration in February, Rogers did not offer a direct answer. The integration, which involved moving nearly seven million former SunTrust customers to the new Truist digital platform, spurred months of complaints long wait times for customer service, lack of access to cash, and other transaction difficulties.
“There are decisions we made around the customer experience,” Rogers said of the operating loss. An example, “on the fraud side, gives the customer the benefit of the doubt from the start. … It’s a one-time increase, but over time it normalizes.
Truist reported net income of $1.5 billion in the second quarter, down 6.7% from the same period last year, mainly due to additional provisions for credit losses. The bank’s provision in the second quarter was $171 million, compared with a reversal of $434 million a year earlier.
Earnings per share totaled $1.09, beating the average estimate of analysts polled by FactSet Research Systems by 2 cents. Net interest income totaled $3.4 billion, up nearly 5% year-over-year due to higher interest rates, lower deposit fees and the growth of the Bank’s securities portfolio.
Non-interest revenue fell 6.5% from the prior year period to $2.2 billion, reflecting double-digit declines in investment banking fees and trading, as well as residential mortgage activity and other income.
The commission revenue outlook for the remainder of the year is “stable compared to the first half,” Rogers said. While insurance revenue is expected to remain strong, mortgage revenue “will likely be a bit flat” in the second half, while wealth management fees “will likely be a bit down,” he said.
Overdraft fees are also expected to decline. The bank on Monday launched two chequing accounts with no overdraft fees it will reduce those revenues.