Solidion Technology Inc. (STI) Q2 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SunTrust Second Quarter Earnings call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, today's conference is being recorded. I would now line to turn the conference over to our host, Ankur Vyas. Please go ahead, sir.

Thanks Julia. Good morning everyone and welcome to our second quarter 2017 earnings conference call. Thank you for joining us. In addition to today's press release, we have also provided a presentation that covers the topics we plan to address during our call. The press release, presentation and detailed financial schedules can be accessed at investors.suntrust.com. With me today, among other members of our executive management team are Bill Rogers, our Chairman and Chief Executive Officer and Aleem Gillani, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings which are available on our website. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.suntrust.com. Finally, SunTrust is not responsible for and does not edit, nor guarantee the accuracy of our earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcasts are located on our website. With that, let me turn the call over to Bill.

Thanks Ankur and good morning. I will begin with a brief overview of the quarter and then I am going to turn it over to Aleem for additional details including our results within the consumer and wholesale segment. I'll conclude with some perspectives on how this quarter's performance fits into our long-term strategy and investment thesis in addition to sharing some perspectives on our purpose and outlook for the future. We reported $1.03 of earnings per share this quarter, which is up 10% year-over-year. Overall I'm pleased with the results we delivered this quarter. Our performance is a testament to our ability to delivery on the commitments we've made to our owners. First, our focus on optimizing the balance sheet and business mix resulted in improve net interest margin and enabled us to deliver 2% year-over-year revenue growth despite the continued market pressures in mortgage. Second, improving efficiency remains a key priority across the company and our strong execution this quarter resulted in a tangible efficiency ratio of 60.6% which keeps us on track to meet our goal of improving our efficiency ratio for the sixth consecutive year and creates capacity for strategic investments in growth. Third, our ongoing commitment to maintaining underwriting discipline has resulted in consistently strong asset quality which not only benefits our profitability, but also enabled us to deliver on our commitment of growing capital returns. And as most of you are aware the Federal Reserve did not object to our 2017 capital plan which calls for a 54% increase in the dividend and a 38% increase in share repurchases, thereby keeping us on track to increase capital returns for the sixth consecutive year. Now getting into the specifics, this quarter we delivered 1% sequential revenue growth driven by higher net interest income as a result of a five basis point increase in the net interest margin. This more than offset the decline in noninterest income which was higher than the first quarter as a result of investment banking's record performance. Momentum across our entire wholesale segment remained strong with the business delivering record revenue and net income in the second quarter. As anticipated, expenses decreased sequentially driven primarily by seasonal decline in employee benefits related cost in addition to good expense control across the company. The efficiency improvements we've made also enabled us to deliver on our commitment to investing in growth across the company. Our ongoing investments and consumer lending initiatives such as LightStream and credit card drove solid loan growth this quarter. Similarly our long term investments in SunTrust Robinson Humphrey continued to yield results evidenced by the 17% year-over-year growth in investment banking. Asset quality continues to be an area of strength of the company evidenced by the 12 basis points decline in net charge-offs to multiyear low of low of 20 basis points. This performance can be attributed to our focus on maintaining a diverse high-quality balance sheet and consistent underwriting discipline. This perspective is shared by the Federal Reserve CCAR process where our loss rates and severely adverse economic scenarios are much below as compared to other banks, a relative position where we've been consistently at the bottom for the last four years. Big picture, the course we set on five years ago has us performing at a higher level and puts us in a position of strength for the remainder of this year and beyond. And with that as an overview, let me turn it over to Aleem to provide some more detail on this quarter's performance.

Thank you, Bill. Good morning everybody. We appreciate it is a busy day for you today, so we appreciate you joining our call. Let's move to Slide 4, where as Bill indicated our net interest margin improved 5 basis points driven by higher loan yields primarily as a result of the increase in contractual short-term rates, but also due to continued improvements in our loan mix. Net interest income increased 3% sequentially and 9% year-over-year as a result of the higher net interest margin and milder returning asset growth. Looking to the third quarter, we expect the net interest margin to be between 314 and 316 which would represent a sequential NIM expansion that is lower than the second quarter increase. This is driven by an anticipated increase in deposit betas which tend to lag the increase in short-term rates. There are also other factors such as potentially higher premium amortization expense which typically lagged the decline in long-term rates and day count. We will continue to manage through a moderately asset sensitive balance sheet while also being cognitive of opportunities to add durations as and if the yield curve steepens. Moving to Slide 5, you will see that noninterest income declined by $20 million sequentially primarily as a result of the record investment banking performance we delivered in the previous quarter. This is the third best quarter for investment banking, a great testament to the success that our teammates in CIB and the broader wholesale segment are having in strengthening client relationships and taking market share. Mortgage production income was stable sequentially as a decline in salable volume was offset by slightly higher gain on sale margins. Compared to the prior year, production income declined 55% due to the lower refinancing activity and lower margins. Mortgage servicing income was down $14 million sequentially as a result of lower net hedge performance in addition to higher decay expense. The higher decay expenses due to the fact that the MSR asset has significantly increased in value in the previous few quarters and thus incoming cash flow creates a larger level of decay expense all things being equal. Lastly, as a reminder, much of the year-over-year decline in noninterest income is due to the $44 million in net asset related gains recognized in the second quarter of last year. In addition to the impact of post moderate changes which were implemented in the fourth quarter of last year. Let's move on to Slide 6, noninterest expense decreased $77 million this quarter driven primarily by the seasonal decline in personnel expense in addition to ongoing efficiency initiatives. We achieved our goal of closing 6% of branches in the first half of 2017 in line with the objective we articulated in January. We are continuously evaluating opportunities to further optimize our branch network which will in part allow us to fund additional investments in digital channels to satisfy evolving client preferences. Compared to prior year our expense base grew 3% which is a reflection of several factors that somewhat mask the strong cost control we demonstrated in the second quarter. First, expenses from the Pillar & Cohen business we acquired in December which is efficiency dilutive but return accretive. Second, higher compensation costs in connection with strong revenue growth and our ongoing investments in talent. Third, higher FDIC premiums which stepped up in the third quarter of last year, and finally the reduction of amortized gains from prior sale leaseback transactions which also begin impacting occupancy costs in the third quarter of last year. While quarter-to-quarter our expense base has and will vary, we continue to maintain a high focus on expense discipline so that we can also make the requisite investments to serve our clients. Moving to Slide 7, you see the tangible efficiency ratio for the quarter was 60.6% which is down meaningfully relative to the first quarter and up 50 basis points compared the prior year. When considering the $44 million of net asset related gains we benefited from in the second quarter of last year, combined with the recent headwinds I discussed on the prior slide, the core efficiency progress year-over-year is strong. This strength combined with our positive revenue momentum and the ongoing efficiency initiatives we have underway enables us to remain on track to meet our goals of having a tangible efficiency ratio between 61% and 62% for this year and sub- 60% by 2019. Take a look at Slide 8, our asset quality metrics improved further this quarter, evidenced by the 12 basis point decline in net charge-offs and three basis point decline in nonperforming loans. The low levels of net charge-offs reflect the relative strength we're seeing across our C&I portfolio. Performance we're extremely pleased with, but we remain cognizant that there will be both lumpiness and normalization going forward. Given the strength of our asset quality performance in the first half of the year, we now expect an improved net charge-off ration for the full year somewhere between 25 to 35 basis points. Separately we continue to expect a relatively stable allowance level and therefore a provision expense that generally approximates net charge-offs. Let's take a look at the balance sheet. Average loans increased 1% sequentially primarily due to growth in consumer lending. On a year-over-year basis average performing loans grew $3.4 billion or 2% with growth driven by consumer lending and commercial. In particular our targeted investments in LightStream, credit card and other consumer lending initiatives are driving solid loan growth and also improving our return profile. Commercial loan balances have been relatively stable, which is the net result of two different trends. In corporate and investment banking paydowns have been elevated over the past two quarters, reflective of the fact that we have helped these clients access the strong capital markets and our focus on ensuring that we have the appropriate relationship returns. On the other hand loan growth in our commercial banking business is improving and it is broad based reflective of solid economic trends and the differentiated value proposition we are increasingly providing these clients. Going forward as clarity on various policy fronts develops we believe our clients will be ready to invest and we are extremely well positioned to meet their needs whether via lending, capital markets or other solutions. Turning to deposits, average client deposits were stable sequentially and up 3% year-over-year with growth across most products and businesses. Period end balances were down 2% in part due to seasonal trends with bonuses and tax refunds received in the first quarter and tax payments and spending in the second, but also due to our decisions to forego raising deposit rates for certain corporate clients. The strong deposit growth we have produced over the past several years in addition to our access to low-cost funding enables us to prudently manage our funding base and therefore more effectively manage deposit betas. Over time deposit betas will normalize. Nonetheless, we will continue to keep our focus on maximizing the value proposition for our clients outside of rate paid by meeting more of our client's needs via strategic investments in talent and technology. Slide 11 provides an update on our capital position. As Bill noted, the Federal Reserve did not object to the capital plan we submitted in conjunction with the 2017 CCAR process and our relative performance within that bank group continues to be strong. This is most notably evidenced by SunTrust consistently having amongst the lowest levels of loan losses in a severely adverse economic scenario relative to other CCAR banks. Our performance reflects the significant and cumulative actions we've taken over the past six years to derisk our balance sheet and improve the quality of loan production. The capital plan includes a share buyback program of up to $1.32 billion over the coming four quarters. We will also increase our annual common stock dividend from a $1.04 to $1.60 subject to board approval. In total this represents a 41% increase in capital return relative to our previous - a meaningful benefit for our owners. In addition, our current dividend yield of 2.9% is now at the high end of our peer group. This increase in capital return combined with issuances of preferred stock including the $750 million we issued in May will optimize our overall capital structure and help drive us towards a CET1 ratio below 9%, thereby improving our return on tangible common equity. The May issuance resulted in $6 million of increased preferred dividends in the second quarter and the whole $9 million dividend will begin in the third quarter. Moving to the segment overviews, let's begin with the new combined consumer segment on Slide 12 where we continued to deliver healthy overall business and revenue momentum. Our 2% sequential revenue growth was driven largely by net interest income which was up 3% and 7% year-over-year as a result of strong loan and deposit growth in addition to continued improvements in loan mix. Our targeted investments in consumer lending are consistently yielding good results, evidenced by the 1% sequential and 4% year-over-year increase in average loans. When extracting the declines in residential related lending, other consumer loan balances are up 14% year-over-year, which is meaningful in both the context of the company's overall growth and return profile. Noninterest income was stable sequentially and down 13% year-over-year driven entirely by lower mortgage related revenue offset by solid trends in card fees and wealth management. Within wealth particularly we're pleased with the improved momentum we have developed. Wealth management related revenue is beginning to stabilize and grow slightly. This is a reflection of our client first focus and continued improvement in capabilities, resulting in our ability to attract and retain top talent and grow AUM. Noninterest expense was down 4% sequentially as a result of the seasonal declines in benefits and was up 1% year-over-year. When considering the year-over-year comparison includes higher net occupancy costs and higher FDIC premiums, core expense management was strong. That being said, we continue to see opportunities to improve the efficiency and effectiveness of our consumer segment. As a reminder we integrated mortgage with consumer and private wealth management at the beginning of April to create the new consumer segment. As we noted last quarter, the goal is to create a more consistent, integrated and improved experience for our clients across all consumer products and services, somewhat akin to the integrated ecosystem Mark Chancy and his leadership team developed in our wholesale segment. While we were only three months in, we are pleased with the initial progress and teammates are optimistic about the opportunities we have to improve the client experience and therefore deliver more growth for our clients and owners. Moving on to wholesale on Slide 13, we delivered yet another record revenue quarter due to strong execution across all lines of business and favorable market conditions. Net interest income was up 3% sequentially and 13% compared to the prior year, driven primarily by improvements in the net interest margin. Average loan balances were down sequentially and stable year-over-year as our solid core production has been offset by recent elevated pay downs. In many cases, a trend we are very comfortable with as our focus is overall returns, not just loan growth. Average deposits were also down sequentially given our intentional discipline on rate paid in addition to typical seasonal trends with municipal clients, but were up 4% year-over-year as a result of our ongoing focus on deepening client relationships. Noninterest income increased 17% year-over-year, driven by investment banking which benefited from favorable market conditions, continued increases in the average fee per transaction and higher revenue across our entire spectrum of clients, the latter two of which reflect our increasing strategic relevance and differentiated value proposition for clients. Pillar & Cohen also provided roughly $20 million of incremental fee income year-over-year. While we are only a few months into the acquisition, we are highly encouraged by the early synergies that we are realizing by having the permanent financing capabilities that the Pillar & Cohen business provides for our CRE clients. Noninterest expense was up 10% year-over-year driven by incremental expenses from the Pillar & Cohen business in addition to increased investments in technology. Net income was up $29 million sequentially and a $109 million year-over-year, as a result of higher revenue, improved profitability and lower credit costs given the resolution of certain energy credits and overall asset quality strength. In conclusion, while market conditions can drive quarterly variability, our wholesale segment continues to set new records. Clear evidence that our differentiated business model of delivering full capabilities to mid corporate and middle market clients is enabling us to deepen client relationships, consistently grow market share and enhance the earnings profile of the company. With that, I'll turn it over back to Bill for some concluding remarks.

Thanks Aleem. So to conclude I'm going to point you to Slide 14, which highlights how this quarter's performance aligns with our overall investment thesis. So, first, the investments we have made in improving the diversity of our revenue mix was a key contributor to SunTrust delivering 10% year-over-year growth and earnings per share despite the 40% decline in mortgage-related revenue. At a high level much of our investment strategy has been the focus on growing and supporting our key areas of differentiation which has proven to be highly effective the more specifically. Within CIB we have been particularly focused on investing in our M&A and equity platforms to allow us to increasingly become the strategic advisor of choice. M&A has delivered nearly as much revenue in the first six months of this year as they did in all of 2016. Further, our equity related businesses are continuing to gain relevance in market share with our corporate and institutional clients. Within commercial banking and the broader wholesale platform we have invested heavily in developing our industry and corporate finance expertise such that we can deliver increasingly sophisticated solutions to all our clients. This quarter commercial banking produced record capital markets related income. And finally, the investments we made at LightStream, credit card and other consumer lending initiatives are providing top notch experiences for our clients in addition to consistent and profitable growth. Each of these are significant accomplishments and the product of our proven execution, our consistent strategy and a high caliber of talent. In addition, we continue to make meaningful investments in technology to modernize our infrastructure and deliver differentiated experiences which embody our purpose, meet evolving client needs and position us for growth. In the second quarter specifically we began on-boarding clients to SunView, our new online Treasury Manager Platform which provides an enhanced client experience. Improving our Treasury & Payment platforms is an integral part of our ability to fulfill our purpose and provide clients with capabilities outside of just rate paid. Additionally, we continue to test and pilot Robotic Process Automation in certain parts of the company where we expanded our class capabilities. Each of these investments will improve the client experience, help us to become more efficient and increase our flexibility and speed the market. Second, we further improved the overall return and efficiency profile of the company. Our balance sheet optimization efforts combined with the improved rate environment drove 15 basis points year-over-year expansion in net interest margin. These efforts in conjunction with our progress and efficiency improvements in asset quality and higher capital returns led to a solid 12.5% return on tangible common equity in the second quarter. While we made significant improvements we have accomplishments more to come. Going forward we will continue to build from this position of strength, maintaining a high focus on reducing cost that are not productive so we can invest further in talent and technology that provides for superior client experience. Lastly, the strength of our capital position combined with our strong underwriting discipline enabled us to again grow capital returns in the CCAR cycles a significant achievement for the company, but more importantly, a significant value driver for our owners. Each owner not only gains incremental ownership of the company as a result of our 38% increase in share repurchases, but also benefits from a 54% increase in cash dividends. Owners and perspective investors of SunTrust now benefit from an attractive dividend yield combined with our franchise and strong growth opportunities, given the investments we have made in key businesses, our attractive footprint and focus on making further improvements in returns and efficiency across the organization. So, before we conclude, I would like to highlight Momentum onUp, which many of you likely read or heard about this quarter via CNBC, NPR, or The New York Times. Momentum onUp is the industry leading workplace financial wellness program we initially developed for our own teammates. Our own results were so compelling we decided to run this as a not for profit program in order to help our corporate and commercial clients to equip their employees with the tools they need for financial success. The program provides a simple term key set up of tools and resources to help employees begin, sustain and track their progress towards financial concepts. Since the soft launch earlier this year we've had over 30 companies participate in the program. This is a significant way in which SunTrust is propelling Americans towards financial competence as a key manifestation of our purpose. Overall, we have got great momentum going into the second half of the year and beyond and my optimism remains high making me incredibly proud to be a teammate, a client and an owner of SunTrust. So with that, Ankur let me turn it back over to you.

Okay, thanks Bill. Julia, we’re now ready to begin the Q&A portion of the call. As we do that, I’d like to ask participants to please limit yourselves to one primary question and one follow-up, so that we can accommodate as many of you as possible today.

And our first question will come from the line of Matt O'Connor. Please go ahead.

Good morning.

Hi Matt.

Hi, Matt.

If you look over the last few quarters, your NIMs consistently coming better than, I think you've expected and I think many of us have expected, obviously some of that is the deposit rate is being less and from the next thing that you have done, but can you just help frame, may be what’s coming better than you've thought, maybe just those things and then kind of going forward were are some of the puts and takes where maybe you could come in better than the [indiscernible] that you talked about for 3Q?

Okay, well overall you're right. NIM has come in better than we had initially thought going into each of those quarters and you’re also right on the principle reason it's coming better. The deposit betas have remained remarkably low. And along with that I think we've generally benefited a little bit quarter-to-quarter in terms of premium am perhaps coming in a little bit lower than expected. But as I think about the third quarter going from here, what we're thinking is NIM is generally sort of with a range of zero to two basis points better than we ended the second quarter. What might make it better than that? All the premium am comes in a little bit better than we think, were including some effect of premium am in that number. If deposit betas come in a little bit better we think perhaps, but I think overall included in our guidance 0 to 2 we're including some effect of deposit betas creeping up and I think they are starting to creep up as we had expected you know some time ago, there's a little bit of that starting to show up. We've got day count in Q3, just the effective day count hurts us by a basis point. We're probably going to see a little bit of higher premium am in Q3 relative to Q2. I think that will hurt us by a basis point. So we're building all of that in Matt into that 0 to 2. If those things come in better that will help. And I think the other thing that could come in better and help is this real a long effort we've had on portfolio mix. Now we've been working hard in terms of our strategy, in terms of growing the right businesses, in terms of remixing the portfolio. And if we get more success in that than we expect and we've got good momentum then that change in deposit mix might help more than what we have in our guidance today, but what's in our guidance is what I expect.

Okay, that’s helpful and then just on the follow up what is the sensitivity to say a 25 or 50 basis point move in the long end, if you can help frame that?

We're sort of roughly balanced between the short and the long ends. We don't have, we're not overweighed right now in one end to the other and so if we get some steepening of the curve that will certainly help. But that's also a longer effect, if the curve steepens up in a quarter or two that will help on loan production in that quarter or two. It will also help in terms of reinvestment of our securities book in that quarter or two and just to give you some sizing, our securities book pays up we get cash flow out of that book about a billion dollars a quarter. So, that's what we're reinvesting every quarter and if we do get some steepening that will help with that reinvestment, but as you can tell, on a $26 billion securities book, a $140 billion loan book, regular quarterly production and regular quarterly investment, it will take some time for steepening to start to show up in NIM.

Okay, thank you.

Thank you. And next we have a question coming from the line of Ken Usdin. Please go ahead.

Hi, good morning guys.

Hi Ken.

Hey I just wanted to ask a little bit on the fee side of the business, some ones you pointed out were quite good and you mentioned some of the puts and takes on the service charges stuff. I was just wondering if you can just give us some thoughts on mortgage and then also the new business and the CRE business given the newness of it and the variability of it, I guess what do you expect to see out of growth of those and also I just wanted to ask you further on the investment banking pipeline? Thanks.

Okay, Ken. On the mortgage side, I think we're sort of, now into what I'd call a regular pattern. First quarter will be slower, second, third quarter will be better and fourth quarter will be slower. I mean we’re sort of end of that seasonal pattern and I think this year, would reflect that, although second half of the year probably won't look a whole lot different than the first half of the year sort of cutting those seasonal things in half. As it relates to the real estate side, as it relates to the fee part of that, I mean a lot of it weighted towards the back end, you see things like Pillar, we see now it is a little more weighted towards the backend. You've seen tradition things like SunTrust Community Capital for us is a little more weighted to the backend and that seems like that would sort of be what we're looking at based upon pipelines and business activity today. And then on the investment banking side, we’ve got a great first half of the year. I think we will have another good half of the year. I think the full year will be better than last year. I think we will continue that 10 years of growth in that business. So on those fronts, I feel second to feel really good.

Very good. And if I could just follow up on another new business, so can you just give us an update on LightStream, it looks like the yields might have been down a little bit, can you just talk about growth potential and competition just in that part of the business? Thanks guys.

Yes, year-over-year production in LightStream is up substantially. The yield was sort of very, a little bit of seasonality because there's a big home component into that, but does have a little bit of seasonal component into it in terms of the yield. Yes it’s very competitive, but it's been competitive. So there's some new entrants into the market, but the market had a pretty broad base of competitors before. I really like our positioning, so the fact that we've got LightStream that sort of has its independent part, but it also has departments tied in really tightly to the SunTrust franchise, so we're able to sort of push in a lot of different levers as it relates to growth of LightStream. So we can’t grow at 50% year-over-year forever. But we're pleased with the growth, we're pleased with the fact that it's accretive to everything we're doing from a return perspective and so we feel really good about our investors there.

And in general with a portfolio that is yielding 5.5% we’re very pleased with the overall results from that portfolio, so a couple basis points here and there don't really matter in that context.

Thanks guys.

Thank you. And our next question comes from the line of John McDonald. Please go ahead.

Hi good morning guys. I wanted to ask a little bit about loan growth, just a little bit of that core underlying trends you saw this quarter, where are you seeing opportunities, any areas where you might be a little more cautious on growing the loan book due to competitive conditions or are there other factors?

Yes, I mean, I think the loan growth story has got a lot of components to it and you know as we've talked about before, I mean we don't really sort of manage the loan growth, but we really look at the components that drive loan growth. We look at production, we look at pipelines, we look at paydowns and we look at utilization. And if we look at production it's up sequentially. I mean quarter-to-quarter it's up and it's sort of at 10 quarter kind of average, but paydowns were up a lot this year, this quarter excuse me, paydowns were up this quarter actually fairly substantially and up over the 10 quarter average. Now the good news and there is a little diversion, the good news on the paydown side is we're seeing the benefit of that in the capital market side, I mean I think those have a high correlations. So when we see a beta we're getting the benefit of it in terms of refinance. Pipelines are good. They are a little bit down from sort of pre-election, but I think that's not uncommon, but June was good and most of the categories and utilization was a little bit down year-over-year a lot of that was energy related. So I think the core part, if you break it down in terms of the wholesale CIB was down a bit, but commercial was strong. If you go into the consumer side and you look at the residential part of consumer that was sort of down, but if you look at the other components of consumer 14% year-over-year growth, so it’s got a lot of different, different moving parts to it. There are ways to think that we’re cautious about. I would say you see some of that probably in the CIB side and less of about credit and more about return. As we see some things rolling off, we're very focused on the return profile. As you know, we’ve had a lot of discipline around that, so if we've been in a cycle and we've been unable to achieve the kind of return, we're totally willing to move on and move to another opportunity where we think we can benefit more substantially. CRE production and this is probably a little bit lower, there are things that we're more cautious about and we'll be more be more careful about, but having said that, structures that we have on our books we feel really good about and even the production structures seem to be holding up from a credit profile standpoint.

Okay.

So we will make sure that is several of your questions. If you sort of net it all out, it’s going to grind upwards and I think the mix as we've talked about earlier is going to help NII sort of disproportionately.

That’s very helpful, thanks Bill.

Thank you. And next we’ll go to the line of Gerard Cassidy. Please go ahead.

Good morning Bill, good morning Aleem.

Good morning, Gerard.

I wanted to follow up your comments on capital return and CCAR. Obviously you guys had a nice increase this year as you pointed out Aleem about 41% increase, but I noticed that your CET-1 ratio even in severely adverse case is still over 7%. So can you talk to us about the target that you can see your CET-1 ratio and maybe how long it takes to get there? And then separately, you mentioned that you’re amongst one of the lowest on the loan losses in the CCAR, but I noticed that the other losses for you guys was $1.1 billion. When I compare that to the regional banks, nobody is close to that. The highest is P&C at 0.3, so can you give us some color on that and what that might do to impact your targets going forward?

Oh, I congratulate you on your detailed review of the FRB documents Gerard.

It’s a side of my life Aleem.

All right. Let me take those in reverse order if that’s okay.

Sure.

So [indiscernible] difference, yes when you take a look at that, that is actually the result Gerard of a very conservative interpretation that we took of an FRB guideline around loans that we had in our pipeline for sale to Fannie and Freddie. Since the result, since one of the fact was released, we've had a conversation with the FRB and we've agreed to change our interpretation of that guidance. And as the result of changing our interpretation the effect is that $1.1 billion going forward you probably see a number that will look more like $0.1 billion and that billion dollar benefit will show up in our overall CCAR loss rates. That's worth about 40 basis points. The capacity is in a severely adverse scenario, it’s actually about 40 basis points higher than was reported and that will benefit us and our ability to repatriate going forward. That I think leads into your first question which is sort of how do we think about capital ratios and what kind of capacity do we have overall. So we have as you said overall loan loss rates that are very low. We consistently or the FRB consistently models loan loss rates for SunTrust that are right around 4.5%. And that is not only at the low end of our peers, but it's also very consistently low there. So we have the lowest volatility against our peers and I think that says a lot about the diversity and quality of our loan book. So if capital is there to support risk and if risk at SunTrust is noticeably lower than it appears, I think that the capital ratio what SunTrust requires is also lower than you would see against peers. Therefore I think that that gives us capacity to return more capital over time. You know we've been on this path of returning more capital over the last several years. This year, I think we took a big step forward. I think we've right-sized our dividend now at around sort of 40% or so in terms of the payout ratio and I think over time, we're going to be able to grow the dividend perhaps a little bit, but also return more capital via buyback and get our ratio down from the current 9.5% rate to something under 9%. And further I would say I think we're going to be targeting to try and do that within the next couple of years or so, think about the next two CCAR cycles and we’re going to take a good swing at this. That was a long answer, did I get to your question?

Yes you did very detailed. Thank you. Just as a quick follow up, would you consider resubmitting to adjust this $1.1 billion issue this year to maybe even ask for more capital return or is this going to be more 2018 submission issue?

Gerard, you recall how many pages there are in a capital submission?

Quite a number.

I think we will look at this as an opportunity for us in the next couple of years. And we submitted a capital plan that we thought was in the best interests of our owners this year, that plan was not objected to. So, we're not actually needing to change it and I think we'll be able to take another swing at this next year and I hope our owners are happy with what we can do for them.

Yes, I think that’s the - wouldn't have changed this year’s submission, but it just creates more capacity for the future.

Great, thank you guys.

Thank you and our next question comes from the line of Saul Martinez. Please go ahead sir.

Hi good morning. Thank you for taking my questions. I guess if we can elaborate, if you can elaborate a little bit more on your comments on deposit betas moving up and just generally if you can comment on what you're seeing in terms of deposit pricing in competition are seen clients ask for higher rates? And I guess that the rest of the question really is, you know do you see, how do you gauge the risk of sort of a non-linear type of step up in terms of, in terms of deposit pricing in rates, especially as we move further along in the rate cycle?

Thank you for the question Saul. Actually we don't think of that as a high risk item. There is a lot of factors that go into a client's view of the value proposition they get from us and I guess generally from their bank. Certainly rate paid deposit rate paid is one of those, but the value proposition is so much more than rate paid right. It includes all the other services they get from banks and in our case it includes their capacity for example to transact with us via mobile, via tablet, via online to ATM, the advice that they get from our teammates and given the high liquidity that exists throughout the industry. I think if you look at what is it, 6,000 odd banks in the industry we've got a overall loan to deposit ratio that's something like 80% are under 80%, that's a substantial amount of liquidity. So, we think that the risk of a step up in deposit rates is driven very much by competitive factors and there is just given the amount of liquidity that's available, given the amount, given the value proposition that clients get from us, we don't see that as a substantial risk. Having said all that, to be clear deposit betas are creeping up and that is completely as expected. We've been saying for two or three years now that as rates start to climb we'll see deposit betas start low and move up over time and little by little that's happening. If you look at the deposit beta for SunTrust, total deposit beta for us in Q2 is on the order of 12%. And Q3 is probably in the range of 5% to 10% above that. So little by little they are, they are going to be moving up.

I would just add on your question on the competitive side. I mean it's a competitive market obviously and we're in a really high growth great market, so there are some cases uniquely competitive, but on the deposit side with occasional sort of, one bank here and one bank there, I think we've seen some consistency in the deposit pricing side. And then as Aleem noted, I mean we've been making lots of investments to go to create stickier deposits. I mean we've got really high adoption rate of our mobile technologies. Our deposit customers are 45% are sort of mobile users. So we've spent a lot of time and energy to put lot of barriers to the deposit beta script [ph] as we move forward.

That's helpful. If I could ask a follow up question, I guess a broader question on capital strategy in M&A, you obviously will talked about your excess capital position and the good results in the CCAR cycle, but how are you thinking about Bill, any incremental thoughts on your own strategy. You’ve obviously focused on bolt-on types of acquisitions, and that's e-generation capability, but any incremental thoughts there in terms of willingness to look at depository institutions for example as part of that strategy?

Yes, I mean I think the strategy stays the same. I mean the bolt-on part as you mentioned is a key part of what we do and some of those are deposit generators. I mean Pillar for example is a deposit business as well. So there were incremental things that, that came along with that. I think as you spend for two deposits are generated out of different channels. So we’re going to be careful about thinking traditionally about how you find deposits and what channels you find them from. So I don't - I think you are going to see us in the small and midsized bank acquisition mode. I mean we've been pretty clear about that. We don't think that’s accretive to a lot of things, not the least of which is our overall strategy. And I just don’t think that changes from the perspective of rising rates and the challenge with deposit betas.

Okay, that’s helpful and just to tag on on that, do you think, I mean obviously it may not be part of your strategy, but do you think as we do move further along the rate cycle and deposit betas move up that, that it does trigger some consolidation especially amongst deposit hungry banks or smaller banks who may be closer to100% loan to deposit ratio might be a little bit more strange, just how do you think about that in terms of just the M&A landscape more broadly?

Yes, it's hard to speak for the others, but I think it's one variable, but efficiency and investment in technology and acquisition of talent and there are a lot of other variables that go into that, does that may be take on slightly higher weighting yes, but I don't think it becomes the dominant weighting.

Yes, thanks.

And Saul as I've said a couple of minutes ago, you know we've got 6,000 banks across the country, there's going to be some consolidation.

That makes a lot of sense. Thanks a lot guys.

Thanks.

Thank you and next we'll go to the line of Stephen Scouten. Your line is open.

Hey good morning guys. You mentioned you guys have more capacity for strategic investments moving forward, can you note if there's anything of particular focus for you guys, any fee line item that you want to expand or move into or any kind of targeted investment strategy that you might have moving forward?

Yes, I think a lot of businesses that we're in and the investments that we've made, I mean so those would be consistent. So for some sort of a framework we're not familiar with thinking we have a hole in our strategy of a place to invest, so a lot of things that we can do or to put more fuel on fires that we’ve already started. So, you see that's clearly on the consumer side where the LightStream and the things that we're doing there on that comes in marketing and advertising and things that we can do to continue to grow that, building infrastructure within our own system. Clearly on the SunTrust Robinson Humphrey side, I mean we've been investing for 10 years and I don't see that slowing or changing. I mean we're going to continue to invest and we add talent and our capacity is sort of where we see it and where the opportunities exist within our platform. PWM is probably the place we've been investing in private wealth management a little bit more in the last year and I can see that where we're probably tilting a little bit more. Acquisition of talent, technology, capacity and we've been successful in on boarding teams and we've been successful in adding clients, so we've got a little momentum in that category. And then really technology that supports all of that, so technology on the call it the offensive side, from a client perspective and you see that in SunView and you see that and then see and know how we do a lot of originations, mortgage digitization, all those type of things. And then maybe what I might call more defensive or efficiency in terms of robotics and cloud infrastructure, data likes and those type of things. So, I think it's not, we wake up and we say that we're going to go, move right, where we're going to left. Now we're going to continue to invest in the things that we're are investing in and disproportionally a little bit on the couple things that I mentioned.

Okay, that's really helpful and one of your peers yesterday kind of mentioned an attitude of may be being able to run their bank more in their own view as opposed to in a regulators view. Would you guys comment if you share any of those sort of views that there are any tangible signs of a lighter touch from regulators and you guys might be able to run your bank maybe in some instances with more common sense and less of a just managing to do a certain test or metric?

I think our numbers great and we’ve been running our bank pretty well in an existing environment. And we live in a highly regulated business and we're creating the capacity and capabilities to do that well. I think we see lots of things on the horizon that could be potentials in terms of utilizing our capital better and utilizing our liquidity better and those type of things and I think those have opened might be sort of a bigger impact on what we can do as a company.

Okay, that's really helpful Bill, thank you guys so much.

Sure.

Thank you.

And Julia, this will be the final question.

Thank you, we have a question coming from the line of Marty Mosby. Please go ahead.

Thanks, I appreciate you taking the questions.

Hi Marty.

Good morning. As good as this quarter was on the front of net interest income, efficiencies and credit which are the three dynamics you can really see as catalysts. There were some things that I think are still there or pockets that can still improve upon what we had in this quarter, one is that you started to build provisions so some of the net charge-offs and how low it got, you actually built provision which offset some of that benefit which is positive as you start to move through and continue to grow the consumer side. The other thing is mortgage banking. It seems like there were some hedge ineffectiveness and servicing and just the gain on sales were lower. So just wanted you to comment a little bit about what you could see with mortgage banking and it seems like there is a little bit of a positive that you could get back if some of those unfavorable things went away.

Thank you, Marty. I think we might have to send you a consultancy. So when it comes to mortgage I'd say actually it wasn’t as much in the context of hedging effectiveness as it is in greater decay and so if you think about a mortgage asset that is MSR asset that is worth 60% more today than it was worth two years ago, every dollar of paydown from a client takes 60% more of that asset value out. So think about it in those terms rather than in terms of hedging effectiveness in terms of rate changes. So let’s say that’s what it was on the mortgage servicing side. On the overall credit and asset quality side, look you're right. Asset quality today is particularly strong. It certainly is beating our expectations and we've just improved our guidance from 30% to 40% to 25% to 35% as a result. But we don't expect this to last over a cycle and we don't expect that net charge-offs are going to stay at 20 basis points forever. If you think about the components of that within CRE, net charge-offs today are basically zero and C&I overall net charge-offs are 10 basis points against the norm of something will be closer to 50. And auto book, charges are very low that will probably normalize some and we've been working hard to remix our portfolio and add more consumer credit into our portfolio and that's helping on the loan yield side. But as those portfolios sees them, they'll probably see us modest increase in net charge-offs there. So, I think about the allowance overall, I think we're in the right place now and over time we probably should see some normalization of charge-offs and therefore slightly higher provisions over time.

That’s why I think the provision bill was going ahead of some of those trends which is nice. The other thing Aleem that I wanted to talk about was the swap and when we run those down a couple years ago we took a lot of – took a lot of pressure from that. That though was designed to help you in this particular quarter as you finally saw short term interest rates going higher. So when you mentioned that you do have duration, what I wanted to make sure we kind of put our finger on was that your net interest margin improvement, one is better than what many in the market expected because of your actions earlier on which is making you more asset sensitive which is short term rates go up, you’re benefiting from. It also gives you the trigger to extend duration whenever the longer end goes back up and that your loan mix is actually generating margin expansion as well. So there's a lot more going on here that could generate not just what we saw this quarter but actually benefits down the road as well.

You are 100% right. We designed our swap portfolio to have a limited duration and as that portfolio rolls off a little bit quarter-by-quarter, every quarter the duration of that portfolio comes in a little bit. And you’re completely right Marty, as that happens we’re naturally if we do nothing we’re naturally just going to become more asset sensitive over time. That is the way we design the balance sheet specifically and I think you’re right that is going to help us as I look out over the next 24 to 36 months.

And it creates more flexibility.

Yes and we’ve got good capacity to invest where we want to, if we get a good steepening here, we’re well positioned for that.

Thanks for answering my questions.

Thanks Marty and thanks everyone. This concludes our call. Thank you for joining us today. If you have any further questions, please feel free to contact the investor relations department.

Thank you. You may now disconnect.