Truist Financial invested heavily in technology and related professional services in the second quarter of 2023 as rising expenses overshadowed income growth.
Truist’s software expense rose 10.7% quarter over quarter to $237 million from $214 million, according to the bank’s earnings supplement. This hike was accompanied by a 12.7% QoQ growth in professional fees and outside processing, to $352 million from $314 million, to build enterprise technology.
These investments, combined with a 215% year-over-year jump in credit loss provisions to $538 million from $171 million due to increased economic uncertainty, led diluted earnings per share (EPS) to tumble to $0.92. This drop marked a 16% decrease YoY from $1.09 and fell short of the $0.98 analysts predicted, according to Zacks Investment Research.
THE BIG PICTURE: On the heels of its Q2 results, Truist cut its third-quarter guidance by 4%.
Yet the $555 billion bank cast its rocky last quarter as an “inflection point,” with Chief Executive Bill Rogers saying in a question-and-answer session with analysts that the bank is planning to alter its core strategy.
“Our commitment is to really [change] … the fundamental structure and the business model,” Rogers said, adding that he would shift to “running the company in a way that reflects the current environment.”
BY THE NUMBERS: In Q2, Truist reported:
- Net interest income rose 7.1% YoY to $3.7 billion from $3.4 billion;
- Average deposits fell 5.6% YoY to roughly $400 billion from $424 billion; and
- Digital transactions rose 5% QoQ to make up 61% of total transaction volume.
WHAT THEY’RE SAYING: Considering the sharp drop in EPS, analysts questioned the bank’s overall strategy and its optimistic presentation during the Q&A session.
“The shareholders, I think I can safely say, are not happy,” analyst Mike Mayo, of Wells Fargo Securities, said to Rogers on the call. “I’m not happy about the expense growth. And they’re not happy about the negative optimal average … I just wonder if you’ve been a little too soft and not taking the tougher actions like some of your peers have.”
NOTEWORTHY: Truist customers have rapidly adopted the bank’s AI-powered virtual assistant, Truist Assist, since its launch in September. The chatbot has hosted more than 500,000 conversations with more than 380,000 clients, Rogers said on the call.
Increased usership of the chatbot will help “lead to lower volumes on our call centers” in the future, Rogers predicted.
FLASHBACK: Earlier this month, IBM joined Truist’s Innovation in Residence program to research quantum computing applications within the bank. IBM joins Amazon Web Services and Verizon in Truist’s program.
FUTURE LOOK: Facing calls from analysts for increased discipline, Rogers said Truist is committed to cost-cutting reforms, including hiring freezes and other moves to lower expenses in the second half of the year.
Yet such initiatives would be in the service of a larger strategic shift for the bank toward a more efficient business model, Rogers said.
“The intensity, I can assure you, here [is] around expenses, but not just expenses … [also] redesigning the chassis,” he said.
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