Truist mulls a restructuring of its underwater bond portfolio

Scott McIntyre/Bloomberg

Truist Financial is floating the possibility of selling a portion of its underwater securities portfolio as a way to generate capital in a more demanding regulatory environment, according to CEO Bill Rogers.

At an industry conference Tuesday in New York City, Rogers included a potential restructuring of the securities portfolio as "one of the other variables" that the Charlotte, North Carolina-based company "would have to consider" as it prepares for upcoming new capital requirements.

"I think that's in the mix," Rogers said about the idea of doing a large- or small-scale sale of the securities portfolio. "I mean, some could argue, in fairness, that's defensive. Some could argue it's offensive. So you could sort of pick your poison in terms of where you come out on that."

Truist isn't alone in thinking about how to move forward with its securities book. This year, banks large and small have sold parts of their underwater securities portfolios at a loss, and others, like Truist, say they are considering doing the same. 

The rationale: Banks want to ditch lower-yielding bonds, which they bought at a time of low interest rates, and replace them with others that pay twice as much, or more.

State Street in Boston sold $4 billion of bonds to reinvest in higher-yielding options. Cadence Bank in Tupelo, Mississippi, has said that it plans to sell $1.5 billion of low-yielding securities. 

Atlantic Union Bankshares sold $228 million of low-yielding securities. As a result, the Richmond, Virginia-based company recorded a $27.7 million loss. 

At the end of the third quarter, Truist's securities were worth about 20% less than what the company paid for them, according to a regulatory filing. 

Banks with at least $100 billion of assets are preparing for new risk-based capital rules —
in part by selling riskier businesses, offloading certain loans and reducing their expenses.

For such banks, the proposal calls for an increase in aggregate capital obligations of 16% on average.

So far, discussions about Truist's capital-generation options have mostly revolved around the idea of selling more of its Truist Insurance Holdings subsidiary. In April, the company sold 20% of the insurance brokerage to a private equity firm for nearly $2 billion.

That sale was intended to create "strategic and financial flexibility," Rogers has said. Truist estimates that its remaining 80% stake offers more than 200 basis points of capital flexibility.

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On Tuesday, Truist Insurance Holdings announced that it will split its existing wholesale operation into two parts — wholesale and underwriting. The change will be effective starting Jan. 1, 2024, the company said. As part of the revamp, Neil Kessler will be promoted to CEO of the wholesale unit, and Bill Goldstein will be promoted to CEO of the underwriting unit. 

Both executives will continue to report to Dave Obenauer, vice chairman and president of Truist Insurance Holdings, the company said.

Truist's ultimate decision on how to generate more capital depends on myriad factors, Rogers said Tuesday. "There is no one variable," he said. 

"That's not how we plan," Rogers added. "This is ensuring that we continue to maintain the strategic and financial flexibility, and how and when we use that will be determined by changes in market conditions and our opportunity to maximize shareholder value."