STI 2018 Annual Report

the past, and I certainly don’t want to relive that period, I cannot help but be incredibly proud of all that we have accomplished over the last 10 years. There were many lessons we learned in the Financial Crisis, and we have ensured that we truly internalized each of them, not the least of which is the importance of diversity. If you look at our loan portfolio today, we have significant diversity both by loan type and by geography, which is a reflection of our diverse business mix. While our discipline has been consistent over the last ten years, the sophistication of our risk-monitoring tools has improved dramatically. As an example, for the past few years, we have been working on an enhanced Risk Appetite Framework (RAF), which we formally introduced in 2018. This RAF gives us the ability to measure our actual risk position, on a granular basis, compared to our moderate risk appetite, across all risk disciplines (credit risk, liquidity & market risk, operational risk, technology risk, etc.). Our risk committees and the Board review our actual risk profile against our established enterprise risk appetite on a quarterly basis. In summary, the strength of our risk defense can be attributed to four main factors: (i) a strong capital and liquidity position which is appropriate for our risk profile; (ii) a diverse loan portfolio and Total Shareholder Return 7 SunTrust Peer Median 8 2012 61% 22% 2013 31% 37% 2014 16% 9% 2015 5% (2)% 2016 31% 30% 2017 20% 13% 2018 (20)% (17)% Cumulative Return 225% 123% Cumulative Return SunTrust Peer Median 8 3 year 27% 25% 5 year 53% 35% 7 year 225% 123% Overall, 2018 was a good year for our Wholesale Segment, with our success driven by the strategies I described above. Revenue was up 2% relative to 2017 and the business maintained a strong efficiency ratio of 45%. Capital markets revenues declined for the first time in 11 years, which is largely a reflection of market conditions and our intentional pullback in the leveraged finance space, which was down 20% compared to 2017. To frame up the opportunity we have in our capital markets business, today we have a 2-3% market share (for our addressable market), and we feel our market share can easily double. So how do we get there? It comes down to three main levers: (1) Deepen: we have an opportunity to deepen the relationships we have with our existing clients. Today, we serve as the left lead for approximately 15% of our clients, and we would like to see that continue to grow over time, which will in turn improve our average fee per transaction. (2) Heighten: we will continue to elevate our expertise. In essence, we want to see M&A and equity (the two more strategic products) comprise a larger portion of our revenues. Today, these two businesses represent 31% of our capital markets revenues, but they are growing faster than debt capital markets, a good indicator of our increasing strategic relevance with clients. (3) Expand: we have a significant opportunity to expand our client base by bringing data and analytics to more effectively prospect the future clients who will benefit from more expertise. This is particularly true for our Commercial Banking and CRE businesses. We are also expanding our geographical reach. In 2018, we opened our fourth Commercial Banking expansion market in Houston (a market where we already have Corporate Banking and Private Wealth teams). And now, we will have a new client base from BB&T that can benefit from the strategic advice, product suite, and industry vertical expertise that we have built within Wholesale over the past 15 years. We had good underlying momentum across each of these three levers in 2018—left lead relationships grew by 11%, M&A and equity originations had record performance and increased 15%, and finally capital markets revenues from non-CIB clients increased 49%. We are highly optimistic about the revenue synergy opportunities that our combined Wholesale banking business has with BB&T. We will have the opportunity to deliver a leading middle-market investment banking platform into an expanded and established corporate and commercial banking client base with a larger balance sheet. We are also increasing our capacity for continued growth in capital markets, which had grown to comprise 24% of SunTrust’s fee income but will represent approximately 15% of the combined company’s fee income. It is no coincidence that this is the longest section of my annual letter to you, our owners. Investing in growth and technology is key to our success—but in order to create capacity for these investments, we must improve our efficiency. Improving Efficiency & Returns We achieved a key milestone in 2018 by reaching our sub-60% adjusted tangible efficiency ratio target. We initially declared this target back in 2011 when our efficiency ratio was 72%. At the time, this was a highly aspirational target; we did not know when we would get there, but it was important to be ambitious. For each of the last seven years, we have been making progress toward this goal and in 2018, we achieved 150 basis points of progress, ending the year at 59.6% 5 . The four pillars of our efficiency opportunity are organizational efficiency, technology enhancements, real estate, and procurement. Equally important, efficiency is a means to an end— it allows us to create capacity to invest in growth and technology (all the things I discussed in the previous section of the letter). Relatedly, focusing too much on one metric will not maximize our long-term value, which is why we have a broader focus on returns. In 2018, our ROA improved by 23 basis points and our ROTCE improved by 350 basis points 6 . In fairness, much of this improvement is reflective of the benefits of tax reform, but some of it is due to our internal focus on maximizing risk-adjusted returns. We want to ensure that as we extend our balance sheet, we do so in a way that is profitable and is appropriately priced for the risk we are taking. Strong Capital & Risk Position I’ve spent the majority of this letter outlining what we are doing on the ‘offense’ side of our business (areas of investment, areas of growth, and drivers of improved profitability), but as a financial services company, we are equally as focused on ensuring we have a strong defense. To that end, it is notable that 2018 marked the tenth anniversary of the Financial Crisis. While I don’t like to live in conservative credit risk profile; (iii) a sophisticated and disciplined risk culture; (iv) and a low-market-risk business model. Our risk profile is validated by our performance in the Federal Reserve’s stress tests. While each year’s test is not a perfect predictor of how our portfolio will perform under stress, our consistent and strong performance under the different scenarios for each of the last five years validates the diversity and strength of our portfolio and processes. Importantly, the strong cultural alignment we have with BB&T also encompasses our risk cultures. Both SunTrust and BB&T have conservative risk cultures and that will not be compromised as we come together; in fact, together we benefit from increased diversity. We will also be in a unique position of producing best- in-class returns while having a strong balance sheet and low levels of credit risk. Purpose & Culture The most tangible way to measure our progress each year is through our financial performance. But the tangible results are the outcomes from our purpose focus. We believe we, as a Company, have a tremendous opportunity and responsibility to promote and enable financial confidence. This is why we exist, this is our purpose and our passion. Given this, I measure our success by asking, ‘How did we deliver on our purpose of Lighting the Way to Financial Well-Being ? How did we enhance our culture as a Company this year? How did we improve the lives and career trajectories of our teammates?’ As I reflect on our progress against these intangibles, I cannot help but be incredibly proud of our Company and the way we are building a different bank. Importantly, our orientation as a purpose-driven Company is the foundation for our culture. Our culture is one where purpose, performance intensity, teamwork, trust, and a client-first mindset successfully co-exist. We have worked incredibly hard to cultivate this culture, and I hope that those of you who interact with us can feel it. Our purpose-driven culture drives how we go to market, how we interact with our clients, and what products and advice 59.6% 150 basis points improvement in adjusted tangible efficiency ratio in 2018 5 16.9% 350 basis points improvement in ROTCE in 2018 6 1.34% 23 basis points improvement in ROA in 2018 7 Source: Bloomberg. Dividends assumed to be reinvested in security. 8 Peer group in 2017-2018 was BAC, BBT, CFG, FITB, HBAN, KEY, MTB, PNC, RF, USB, WFC. Peer group from 2012-2016 was BBT, CMA, COF, FITB, KEY, MTB, PNC, RF, USB, WFC. Cumulative return based on current peer group. 5 Represents adjusted tangible efficiency ratio (FTE). GAAP efficiency ratio (FTE) is 61.0% and down 210 bps from the prior year. See Table 29 in Item 7 (MD&A) of the Company’s 2018 Annual Report on Form 10-K for a reconcilement of non-U.S. GAAP measures and additional information. 6 Reported ROE for 2017 and 2018 was 9.7% and 12.1%, respectively. See Table 29 in Item 7 (MD&A) of the Company’s 2018 Annual Report on Form 10-K for a reconcilement of non-U.S. GAAP measures and additional information. Page 10