Dive Brief:
- Truist is exiting the near-prime auto lending business, including a $5.5 billion loan portfolio that makes up nearly all of the assets of its subsidiary, Regional Acceptance Corp., the Charlotte, North Carolina-based bank said Tuesday.
- The sale is set to generate $5.2 billion in net proceeds and a $535 million loan loss reserve recapture, the lender said.
- The transaction is expected to close late in the third quarter or early in the fourth. The bank didn’t disclose the buyer of the loan portfolio.
Dive Insight:
The sale is also expected to create $945 million of common equity tier 1 capital, and the bank will reposition some of its available-for-sale securities portfolio to offset that, said Truist CFO Mike Maguire.
The lender took “a pretty big swing” at that portfolio when it sold the insurance business, but wasn’t able to address it all, he said.
“This transaction was a nice opportunity to make a little bit more progress there,” the CFO said Tuesday at a Barclays investor conference.
The RAC decision represents a move away from noncore business, an outcome of a broader strategic review that’s ongoing, the $556 billion-asset bank said in a conference presentation.
During the second quarter, Truist stopped originating marine and recreational vehicle loans, and “significantly reduced” originations in other “less strategic and less profitable” lending segments such as prime and nonprime auto, Maguire said during the bank’s second-quarter earnings call in July.
“Our focus is on relationship-based things that also clear our profitability hurdles,” Bill Rogers, former CEO and now executive chair, said in July.
Truist sees the RAC sale strengthening its balance sheet and improving its credit risk profile. The transaction will provide “modest” return on tangible common equity and earnings accretion in 2027, the bank said.
RAC was “essentially break-even,” and although marine and RV lending is profitable, it’s “not to the degree that it would be accretive to our long-term profit objectives,” Maguire said.
RAC is “typically a loan-only, loan-first national business, where our opportunity to really have a meaningful relationship with these clients beyond that single loan product is extremely limited,” he said.
The bank is assessing strategic fit and economic contributions of its products and portfolios, and that review is likely to result in Truist focusing on fewer things that leverage its strengths, Maguire said.
“We want to get back to a place where we’re growing our earning assets in a profitable, strategic way, and that we’re funding that growth with good, core client deposit growth,” Maguire said.
With the arrival of new CEO Mike Lyons, “there’s a lot of urgency and intensity that’s been, I think, added to this evaluation that really started earlier this year,” Maguire said.
Lyons brings “a new, fresh, external perspective and an ability to to challenge some of the choices, the inertia,” Maguire said.
Truist had operated RAC for years and, at times, it had been profitable, but “that was changing” and Lyons and the board were “clear-eyed” on the need to let it go, Maguire said. He indicated there may be further opportunity for such choices.
Still, Lyons is eager to “get us, frankly, back into growth mode,” the CFO said. “He didn’t come to Truist to shrink to greatness.”
“Where we're not achieving our potential, we think there are things that we can do to get that in better condition,” Maguire said. He pointed to the bank’s plans to build new branches and refresh even more locations.
“It will surprise me if Mike doesn’t change the scale and the speed of some of those things,” he said. “But that's going to be a choice that's made in connection generally with trade-offs,” like dropping RAC.
Truist hasn’t done much in the way of de novo branching in recent years, and that’s something Lyons might change, Maguire said.
