STI
#Thank <UNK> and good morning everybody
Thank you for joining us this morning
Moving on the Slide 4, net interest margin improved 4 basis points, driven by higher loan yields as a result of the increase in short-term rates and a steeper yield curve
I'm pleased that net interest income increased $35 million sequentially and $96 million year-over-year as a result of higher NIM, strong balance sheet growth and our continued focus on optimizing our loan portfolio
Looking ahead, we expect the net interest margin to expand further by 5 or 6 basis points in the first quarter
From there, NIM trends will be dependent on the interest rate environment
We will continue to manage to a moderately asset sensitive balance sheet while being cognizant of opportunities to add duration if the yield curve continues to steepen
Moving on to Slide 5, you will see that non-interest income declined by $74 million sequentially primarily as a result of declines in mortgage
Mortgage production income declined by $40 million given lower refinancing activity due to the increase in long-term rates
Mortgage servicing income decreased by $24 million as a result of higher decay expense, which is recorded at loan closings and increased hedging costs given the more volatile rate environment in the fourth quarter
Assuming relatively stable rates in the first quarter, servicing income should return to a normalized run rate north of $50 million
Capital markets revenue also declined sequentially from our record performance in the third quarter
However was up a substantial 23% compared to the fourth quarter of last year
This is a reflection of the continued success we're having in expanding SunTrust Robinson Humphrey and meeting the capital needs of all wholesale banking clients
We also delivered a $41 million increase in other non-interest income which is primarily driven by higher client transaction activity within certain wholesale banking businesses notably structured real estate and SunTrust Community Capital
Lastly, we implemented our enhanced posting order process on November 1st, with actual results generally in line with our expectations
Let's move on the Slide 6. Non-interest expense was modestly lower this quarter, driven primarily by lower personnel related expenses and lower operating losses
Outside processing and software costs were $16 million lower, which included contract renegotiations we executed with a key supplier
Compared to the prior year, our expense base grew 8% as a result of four primary factors
The investments we're making in driving growth, our improved business performance, investments we continue to make in technology, and lastly, increased regulatory and compliance costs
As a reminder, personnel expenses should increase by $75 million to $100 million in the first quarter do the typical seasonal increase in 401K and FICA expenses, and also return to more normal accrual rates on certain incentive and benefits costs
Big picture, our philosophy is not to avoid expense growth if those investments can generate positive returns either from revenue growth or future expense reductions
For this reason, we believe the metric that is most representative of our discipline and focus on smart growth is not our absolute dollar expense level, but rather our full-year tangible efficiency ratio, which as you can see on Slide 7 declined a full 65 basis points relative to 2015 and more notably makes 2016, the fifth consecutive year of efficiency ratio improvement for SunTrust
Congratulations to all our teammates for their significant contribution to this ongoing success
Despite this improvement, we cannot rest while our task is still incomplete
Going forward, we are executing a number of tragedies to continue to make the company more effective and efficient
To be specific, first, in December, <UNK> outlined our plan to reduce the size of our branch network by approximately 10% over the next two years
We are accelerating this initiative
And will now execute the first 7% of that planned reduction by June 30th of this year
These savings will fund key investments in talent and technology for our clients
Second, we will look to realize returns from technology investments we have made in new loan origination platforms, particularly wholesale and mortgage, end to end operations, overall process automation, and cloud-based computing, so that our teammates are better equipped with the tools they need to increase productivity and we're able to reduce cost in certain areas
Third, we remain highly focused on managing our supplier relationships
As I mentioned earlier, we renegotiated a contract with a key supplier in the fourth quarter which drove a reduction in outside processing and we're looking for additional opportunities like this
Each of our businesses is highly focused on optimizing their supply relationships and making adjustments where the returns don't merit the expenditures or where we can bring the processes in house
And four, given the anticipated slowdown in mortgage production, expenses within this business will decline
Though this won't match up perfectly quarter to quarter as there is a bit of a lag effect
This set of strategies and activities combined with the positive momentum we have seen and should continue to see on the revenue side gives us increased confidence in our ability to achieve our sub-60% tangible efficiency ratio goal in 2019. Meeting this target does assume that the forward rate path will generally follow the current market expectation
But irrespective of rates, we're working diligently towards our goal of becoming more effective and efficient each year
For 2017 specifically, we expect a sixth consecutive year of improvement
This will require us to achieve an efficiency ratio between 61% and 62%, with where we land in the range somewhat dependent on the economy and interest rates
This improvement relative to 2016 is even more meaningful when considering that posting order changes, higher FDIC assessments and the acquisition of pillar are already known efficiency related headwinds for the year
Moving on the Slide 8. Overall asset quality remains very good and we made significant progress this quarter and working through our problem energy credits, which drove the 8 basis point reduction in the non-performing loan ratio and the 3 basis point increase in the net charge-off ratio
Net charge-offs were also modestly impacted by higher losses in auto and CRE
Some of which was due to normalization, while some was idiosyncratic and market specific
In aggregate, we have now taken approximately $160 million of charge-offs related to energy over the past five quarters, which is the vast majority of our total expectation
The ALLL ratio decreased 4 basis points from the prior quarter, primarily due to the resolution of energy credits
Provision expense remains stable as the decline in the energy ALLL was offset by higher long growth and the modest increase in non-energy charge-offs
Looking into 2017, we would expect the net charge-off ratio to remain within a range of 30 to 40 basis points for the full year as lower energy charge-offs may be offset by some normalization in other asset classes
With regard to the allowance, we expect a relatively stable allowance ratio, which should result in a provision expense that approximates net charge-offs, although there will always be some quarterly variability
Taking a look at loans on Slide 9. Period end loans increased a solid 1% from the prior quarter, primarily due to growth in consumer lending and C&I
As a reminder, we completed a $1 billion auto loan sale in the latter part of the third quarter which suppressed average loan growth
On a year-over-year basis, average performing loans grew $7 billion or 5% driven by consumer direct which is the result of our targeted efforts to grow LightStream, credit card and our other initiatives
We continue to see good success which not only drive loan growth but also improve the return profile of the company
D&I and commercial construction were also key drivers of our year-over-year growth reflecting generally positive momentum across our wholesale banking business
Overall, we're pleased with the solid 5% long growth we produced in 2016. Going forward, if economic growth does accelerate, we believe we have good relative opportunity given the investments we've made in our businesses combined with the above average growth profile of our Southeast and Mid-Atlantic footprint
Let's take a look at deposit
Our deposit momentum continued this quarter with average client deposits increasing 2% sequentially and 7% year over year, primarily due to growth in NOW and DDA accounts
More importantly, our growth is broad based across both CPWM and wholesale banking, which reflects the company wide focus on and success in depending client relationships
Rates paid on deposits were stable sequentially and up 4 basis points year-over-year, given the increase in short-term rates over the past year and a modest shift towards wholesale banking versus consumer banking clients
Looking to 2017, we remain highly focused on maintaining our deposit growth momentum while also ensuring that our approach towards deposit pricing focuses on maximizing the value proposition for our clients outside of the rate paid
Moving to Slide 11. Our estimated Basel III common equity tier-1 ratio on a fully phased-in basis was 9.5%, down 20 basis points from the prior quarter as we successfully deployed excess capital to our clients in the form of increased loan growth, closed on the acquisition of Pillar Financial and incurred the impact of a larger MSR asset
Tangible book value per share declined by 4% this quarter as the increase in long-term rates drove a decline in AOCI
Despite this, tangible book value per share still increased by 5% year-over-year given solid growth in retained earnings
Lastly, we grew the security portfolio by $1 billion on a net basis in the fourth quarter to ensure that our LCR stayed above the new 100% regulatory requirement
Going forward, the securities portfolio will generally only grow in line with the overall balance sheet
Moving to the segment overviews, I’ll begin with consumer banking and private wealth management on Slide 12. Net income decreased $18 million sequentially and $45 million compared to the full-year 2015, primarily due to a higher provision expense as a result of lower reserve releases related to our home equity portfolio
Revenue momentum in the segment has been solid
Most notably, net interest income was up 2% sequentially and 5% for the full year benefiting from strong loan and deposit growth and our balance sheet optimization efforts
LightStream in particular continues to be a tremendous success, growing approximately 70% compared to the prior year
Our clients continue to appreciate the simplicity, speed and convenience of LightStream, which has created high satisfaction rates resulting in good repeat and referral business
More broadly, our investments in digital continue to payoff, with self-service deposits, mobile usage, and digital sales all continuing to track upward
This progress combined with changes in branch traffic and our already strong and dense market position gives us further opportunity to optimize our network
Specifically by June 30th, we plan to close 99 branches and open eight new branches
So that on a net basis, our branch network should decline by almost 7%
This is even more notable when considering that over the past five years, we had already reduced the size of our network by 17%
Nonetheless, the branch system will continue to play a very important role in our delivery model both with regard to maintaining and building our brand and meeting the more complex needs of our clients
The latter of which is evidenced by the fact that almost three quarters of consumer needs are still met in the branches
Non-interest income declined 2% for the full year entirely due to lower wealth management related income, both as a result of lower trust and investment management income, which was negatively impacted by choppy market conditions in the first half of the year and lower retail investment income as we continue to make the strategic shift from more transaction-oriented business to managed money solutions for our clients
As we've said in the past, while this is a negative for near-term retail investment income growth, it is positive for clients and the long-term health of our business
Assuming reasonably stable market conditions, we would expect wealth management related revenue in 2017 to build from 2016. Expenses in CPWM increased 4% for the full year due to continued investments in our branch network and associated optimization efforts
Increased investments in technology and our growth businesses such as LightStream and higher operating losses
Bigger picture, CPWM made significant progress this year in optimizing the balance sheet, meeting more client needs, and advancing our omni-channel strategy
The savings generated from optimizing our branch network will allow us to invest in increased talent and technology thereby delivering more value for our clients, while also being a critical component of achieving our company's efficiency goals
Overall, we're optimistic about CPWM's ability to increase the financial confidence of our clients and communities, improve effectiveness and efficiency, and thus deliver further value to our shareholders
Moving on the wholesale banking on Slide 13. We had record revenue per both the quarter and full year due to strong execution across all lines of business
Specifically, revenue was up 4% both sequentially and for the full year due to growth in both non-interest income and net interest income
Net interest income was up 5% sequentially and 3% for the full year, as positive loan growth was partially offset by margin compression
Our 10% deposit growth is reflective of the success that our corporate liquidity product specialists are having in strengthening client relationships
Non-interest income increased 2% sequentially and 5% for the full year, primarily due to strengthen our capital markets business and more favorable economic conditions
Investment banking income was up 7% compared to 2015, evidence that we continue to see the results of our consistent focus on expanding and deepening client relationships and meeting the capital market needs of all wholesale banking clients
More specifically, our M&A and equity-related businesses, which have been key areas of investment for us continue to grow faster than the rest of the platform, another proof point that our clients increasingly view us as a trusted strategic adviser
Further research rankings from institutional investors continue to improve giving us a larger share of investors trading commissions, validating investment and talent in this business
Lastly, capital markets income from non-CIB clients was up 24% compared to last year as we are working better together as one team to become the preferred advisor to our commercial, CRE and private wealth climes
Net income was down 9% for the full year entirely due to the higher provision expense for energy, a trend that began to abate in the fourth quarter
Lastly, we closed on our acquisition of Pillar Financial in December, and as a reminder Pillar will increase wholesale’s annual revenue by roughly $90 million beginning this year
Pillar’s efficiency ratio is roughly 80% to 85% and while this will be dilutive to the overall efficiency ratio, the acquisition of Pillar will be accretive to our capabilities, net income and ROE
Welcome to our teammates at Pillar and we look forward to partnering with you to drive continued success for our clients
In conclusion, while market conditions can drive quarterly variability, our differentiated business model and wholesale banking continues to deliver strong results and we expect to see further growth in 2017, particularly if economic growth accelerates and client sentiment remains strong
Moving onto mortgage, unsurprisingly revenue in the quarter was down 23% compared to third quarter as higher interest rates created a more challenging backdrop for the business
Mortgage production income declined 40% sequentially as application volume declined 30% and gain on sale margins compressed given the more competitive environment
As a reminder, the majority of our production income is recorded at [indiscernible]
Servicing income also declined as decay expense which is recorded as loans pay off increased, and the more volatile rate environment made hedging more expensive in the quarter
However, as I noted earlier, both of these trends are somewhat temporary and servicing income should bounce back in the first quarter as rate volatility abates
For the full year, total revenue increased 7% as increases in both production and servicing income more than offset slight decreases in net interest income
We grew our servicing portfolio by 7% year over year as a result of portfolio acquisitions
In the fourth quarter, we acquired another $9 billion of UPB of servicing, $3 billion of which was reflected in our year-end servicing portfolio and $6 billion of which will transfer in the first quarter
Net income was down $32 million sequentially and $104 million compared to the full-year 2015. In both cases a higher provision expense contributed to the decline
While the asset quality of the mortgage portfolio continues to be strong, reserve releases are abating
Overall in 2016, the mortgage business benefited from its investments in improving the client experience, smart market share growth across production and servicing and lower rates creating value for our clients and contributing to the bottom line performance of the company
While the higher interest rate environment will create challenges for this business looking into 2017, growth in our servicing business, targeted market share gains, and reduced expenses will help to partially mitigate the decline in market refinance volumes
With that I'll turn it over to <UNK> for concluding remarks
Well, rising rates are obviously helping
That's a positive and what's a little bit different this time compared to the rising rates we saw a year ago was that this time, we've got rising short and long-term rates
And so both of those are helping us because we’re relatively balanced in our exposure across the rate curve, but along with that, we also got some nice loan growth
We've had a little bit of mix change across our loan portfolio
That's helping us particularly well and because we're able to provide our clients I think with really good value across our product mix, we're able ---+ we've been able to manage deposit rates and showing clients value across the relationship outside of rate paid
And so we’ve been able to manage to pay them relatively well also
So I think all of those things have been helping our NIM, Matt
Our overall sensitivity is about 2% and so for $5 billion of interest income, you're looking at about $100 million per 1% increase
So a quarter of that for 25 basis points, but remember we model our beta on our asset sensitivity using a beta of around 50. If your view of beta for the next 25 is substantially lower, our ---+ then you would model asset sensitivity rates higher than that
Let me give you just a quick rule of thumb if that will be helpful to you
For every ten points of beta below our modeling, our asset sensitivity goes up about another 2%
So we’re 2% at around 50. We’re 4% at around 40. We’re 6% at about 30. Does that help?
Yeah
Michael, let me add to that also, as <UNK> said on the rate curve, we're just assuming the forward curve, so that right now when you look at market expectations for ’17, the forward curve picks up two rate hikes, June and December, the December one doesn't really help us much obviously
So it's really basically only the one in June
And as you pointed out, headwinds in ’17, the ones we’ve noted are pillar and FDIC expenses in terms of the expense side
On the revenue side, we've got the full year posting order and the decline in mortgage business across the country
So we've got, we know we've got expense headwinds, we know we've got revenue headwinds, but despite all of that, we still think we can make the company more efficient knowing what we know
So from a capital ratio perspective, what we've said in the past is that we think, given our relatively low risk profile, which continues to show up in CCAR after CCAR after CCAR in the Fed numbers, we think we can operate the company with a common equity tier 1 ratio that starts with an 8, somewhere in the 8. If you look at us today at 9.5, I think that does give us capacity to deploy capital, whether that is via increased production doing more client business, as you saw, this quarter, a little bit of it went toward the acquisition of Pillar, which will be helpful for ROE and net income growth going forward
So we think we can deploy some capital, but we think we can also return capital
And when you look at us over the last several years, you've seen a pretty steady increase from SunTrust, both in dividend and buybacks year after year
We expect that in ’17, we'll be able to do that again
In context of your comment about CCAR ’17 and ’18 and what might happen, we are waiting right now on the instructions to come for CCAR ’17. So until those come and hopefully those will come very soon, until those come, we won't know exactly what the instructions are and what CCAR looks like and how much of the improvement can show up in ’17 or ’18, but over the course of the next two years, I do expect that banks our size with our relatively simple business model, we will be able to continue to increase the repatriation of capital toward our owners
Well, the difference in premium and this quarter relative to last quarter was $3 million, slightly less premium and the effect that that had on NIM for us this quarter was one basis point
So we got 1 basis point advantage in NIM Q4 versus Q3 with rates moving a little bit higher in Q1, we might get a little bit more benefit in premium in Q1 also
In terms of the rest of the year, what you see from us and I expect kind of the same pattern this year relative to last year, when there is a rate hike, you see NIM for us improved and then in the quarters where there is a rate hike, as liability rates catch up, as beta catches up and as our portfolio, just new loans roll off, old loans roll off, you see NIM grind down a couple of basis points
And that’s kind of the pattern I would expect to see for us again, a rate, a NIM increase in the quarter, we get a rate hike and a grind down in the quarters where we don't
Well, we obviously do continue to invest in all regulatory and compliance costs and I expect that we will continue to do so in ‘17. So I think that cost curve is just going to continue to go up generally for the industry
We're not going to be any different in that base relative to anybody else
And in terms of headcount overall, we did have a little bit of a headcount increase in Q4, but remember that the Pillar acquisition closed in December
And so a substantial number of that headcount increase that we get in Q4 was actually as a result of growth, which is going to help us in revenue in 2017.
That’s a little bit of the composition of the balance sheet
When you have a negatively convex balance sheet with mortgages on it, what will happen as rates climb is you will become a little bit less asset sensitive, just as a result of the math in the models, which is certainly what we're seeing
What's interesting though is because this is just math, it doesn't consider as much sort of human behavior as we actually see in reality
So if the economy does better and our clients feel better about those prospects and they move up or they trade up, the asset sensitivity that we're showing that comes out of just the math model as a result of rates, we’ll be understated
So that change you see is primarily rate related, but I think if ---+ it can be offset by improvements in GDP and consumer confidence
Overall, we manage our swap portfolio kind of between $15 billion and $20 billion of notional
And remember that portfolio is there, basically, just the hedge against our floating rate commercial loans, so that our balance sheet doesn't get too short
And notional, we're still sitting between $15 billion and $20 billion
No dramatic changes in that overall book or view
We are modestly asset sensitive
We expect to stay modestly asset sensitive
Good question, <UNK>
So on the first one, we've actually had really good success in deposit retention historically at SunTrust
Think about deposit retention, north of 90%, 12 months in
So 12 months after we close the branch, as those clients move to a different one, we’re still able to retain greater than 90% of those deposits
And we feel pretty good about our ability to do that this time around
And in terms of rate rises and how that affects client behavior, I think the real question, sub-question there is how fast they come
If rate rises come very fast, i
, we get four this year, that actually has the potential to affect client behavior somewhat I think
But if rate rises come at a very measured pace, as [indiscernible] has signaled, and we get only 1 or 2 per year, I think that client behavior doesn't change that much in that type of environment
So the duration in our overall securities portfolio right now is only about four years or so
And we kind of typically keep it in that 2.5 to 4.5 range most of the time
So we're in the upper part of that range right now and I wouldn't expect it to change much from here
We actually were able to take advantage of the higher rates we saw in the latter part of the quarter as we invested into that portfolio and grew it for LCR purposes to get higher yields from the new investments we made
So overall, we feel pretty good about that portfolio right now, <UNK>
In terms of AOCI and the effect that’s going to have on the portfolio, yeah, as rates go up, absolutely
The unrealized gain turns into an unrealized loss
Those securities sit there and the result of that is simply that we end up getting a higher NIM overtime as opposed to realizing it upfront
So I’m not expecting much of a change in overall capital ratios as a result of this and even if there is a 10th or 2, here or there, it's really not going to make a difference in terms of our overall capital strategy, <UNK>, if that's where you’re headed, because we're still substantially above where we think we need to be in terms of operating the company
<UNK>, look, you're completely right about that
We were pleased to see Governor Tarullo’s speech at Yale and the kind of comments he made about opening up capacity for relatively smaller and relatively simpler bank like SunTrust, given our business model
So we're pleased to hear that
I think we've got the capacity to do exactly as you say
We do have the capacity to do all of those three things that <UNK> noticed
We think we can grow
We know we can and so we've got capacity to do that
We would certainly like to be able to increase dividends and increase buybacks
We've got a really good history of doing that over the last several years
We've heard from our shareholders as to what their preferences are and we continue to elicit feedback from them as to how they like to do it
And I think over the next couple of years, you can expect to see us do all of those things
One, grow; two, increase dividends and three, increase buybacks
