Truist and Other Regional Lenders Haven’t Shaken SVB Fallout Effect

The collapse of Silicon Valley Bank (SVB) disproportionately affected regional banks, as its over-the-weekend failure last month spurred a deposit flight to the presumed safety of “too big to fail” lenders like J.P. Morgan, Bank of America and other financial giants.

That’s part of the reason why Truist Financial Corp. CFO Mike Maguire sought to reassure investors on Thursday’s (April 20) first quarter 2023 earnings call that his bank’s “disciplined focus on diversification” has resulted in “less risk than peers.”

Following the collapse of SVB, shares of Truist have been trading well below their fiscal year 2022 lows and remain trading down relative to levels not seen since 2020.

The company’s first quarter 2023 earnings missed analyst estimates, and the stock is trading down around 3% as of the time of writing.

The lender’s shares are down approximately 19% for the year.

“[We are moving into 2023] with a keen focus and eye on operating leverage,” Truist Chairman and CEO Bill Rogers told investors, adding that realizing efficiencies through “digitization and automation” is absolutely “on the table.”

Digital account opening increased by more than 50% quarter-over-quarter, executives noted.

“Digital onboarding delivered strong performance in driving deposit growth across new and existing client relationships,” said Maguire.

“People continue to assess bank-alternative products given the rate environment,” he added.

See Also: Regional Banks Show Card Spending, Digital Growth Steady

Moving from Integration to Growth

Truist, a Charlotte, North Carolina-based regional lender, and a top 10 U.S. commercial bank, was formed in December 2019 as the result of the merger of BB&T and SunTrust Banks.

The merger resulted in 919 branches closing, and executives on the call indicated that the bank is continuing to reduce its branch footprint as it seeks to move from an “integration to growth” strategy.

Maguire, Truist’s CFO, cited the bank’s strong performance with the Federal Reserve’s annual stress tests as a sign of the lender’s balance sheet strength, while separately noting that Truist’s average deposits declined $4.8 billion.

As PYMNTS wrote earlier this month, smaller banks and credit unions don’t have the power to shift national sentiment, which puts them at the mercy of the market at large.

SVB held bonds that they deemed “held-to-maturity” (HTM), which lost value when interest rates increased, creating losses for the asset side of their balance sheet and spurring panic and an eventual bank run when combined with other factors.

The collapse of SVB has increased scrutiny on the debt composition and books of other regional lenders, including Truist. At the end of the fourth quarter of 2022, Truist had about 170% of its tangible equity tied up in HTM securities.

Still, Truist management continually emphasized that it had “less volatility than peers” across its balance sheet composition.

Read More: An Inside Look at Building Client-Centered Digital Banking

Taking a disciplined, diversified approach

“In a challenging and unique quarter for the banking industry, Truist demonstrated strength and leadership that reflects our diverse business model, granular and relationship-oriented deposit base, and strong capital and liquidity position,” said the bank’s CEO Rogers.

“While the environment is tough, our strong balance sheet will help us succeed,” he added, underscoring Truist’s “strong risk-adjusted capital management” strategies.

Executives told investors that the lender had set aside more than half a billion in provisional rainy-day funds ($502 million) to cover for the contingency of its customers defaulting on their loans, which is substantially up from the $95 million reserve Truist set aside in the prior fiscal year.

Regarding commercial real estate (CRE), Truist CFO Maguire cited Truist’s second-lowest loan loss rate among peers, at 8% versus a competitor’s 11%.

“Our disciplined focus on diversification has resulted less CRE (commercial real estate) risk than peers,” he said, adding that Truist’s CRE strategy was “risk averse and highly selective,” focusing primarily on class A properties within the lender’s footprint.

The bank’s earnings results come at a time when regional lenders are faced with the daunting task of restoring their credibility among both customers and investors – reassuring clients that their deposits are safe, and mollifying investor concerns around any potential liquidity crunch.

“Truist is on the right path and I’m highly optimistic,” was the note the bank’s CEO Rogers ended the earnings call with.

Fortunately for smaller sector players, their consumers are not shy about what they want — and they have shown an increased interest in digital innovations offered by their primary financial institution (FI), as noted in the PYMNTS collaboration with PSCU, “Credit Union Innovation: The Race to Meet Customer Demand.”