Lowering Our Fair Value for Truist Slightly, Shares Still Materially Undervalued

Strategist

Eric Compton

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Truist is one of the larger regional banks in the U.S. and its presence is largely concentrated in the east and southeast. Truist has many of the typical offerings of a bank, including retail and commercial banking, however, it also has some more unique parts as well, including its insurance brokerage unit (roughly the seventh-largest broker in the U.S.), a sizable investment banking unit, wealth and advisory services, and its LightStream digital lending platform.

Truist has been through a number of changes over the last couple of years, not least of which was the large merger between BB&T and SunTrust in late 2019. We think the combination has formed one of the better regionals in the U.S. from a competitive standpoint. Truist boasts some of the best scale among the U.S. regional banks, and the bank also has a uniquely complete platform across retail, commercial, advisory, wealth, and insurance. Since the big merger, the bank has also made a number of bolt-on insurance acquisitions (multiple smaller acquisitions in 2020, Constellation Partners in 2021, and BenefitMall and Bank Direct Capital Finance in 2022) and added the consumer point-of-sale lender Service Finance, which focuses on homeowners and home improvement projects. We suspect the bank is still open to additional bolt-on acquisitions if the opportunity presents itself. 

2023 was set to be one of the "cleaner" years for Truist in recent memory from an earnings standpoint, as recent acquisitions reach their full-year effect and one-time charges from the BB&T and SunTrust merger finally fade away. However, the bank is now set to record some one-time charges related to its insurance unit, and additional FDIC surcharges are also likely to occur. The financials have been complex during the previous several years, and it looks like 2023 will be less complex but still not completely "clean."

It seems that Truist may not reach some of the original return targets it had hoped for back in 2019, such as a low-50s efficiency ratio, and while a low-20% ROTCE should be achievable in favorable rate and credit environments, we would expect mid to high teens in a more normalized environment, which is still quite good.

Business Strategy & Outlook

We assign a moat rating of narrow to Truist. With superior credit efficiency (stemming from BB&T's operations), operating efficiency in the top quartile of U.S. regionals under our coverage (particularly after incorporating cost savings from the merger), and a decent cost of deposits, we believe Truist deserves a narrow moat rating. We forecast Truist earning returns that easily exceed its cost of equity of 9%, with returns on tangible equity reaching the high teens through the cycle.

We believe bank moats are derived primarily from two sources: cost advantages and switching costs. We see cost advantages as stemming from three primary factors: a low-cost deposit base, excellent operating efficiency, and conservative underwriting, with regulatory costs being a final factor that must also be considered. BB&T has generally had superior underwriting as displayed by its net charge-off ratio and provisioning amounts through the most recent financial crisis. It is often only during a downturn that the true nature of a bank’s loan portfolio is revealed. During the heart of the crisis in 2009, when many U.S. regionals were experiencing provisioning levels of over 100% of net interest revenue, BB&T's peaked at roughly 60%. Avoiding these types of significant losses helps preserve returns on equity over the long term. We believe BB&T's superior credit culture will stay intact after the merger, helping Truist institute similar internal policies and abilities.

We believe the implicit switching costs in retail and commercial banking also help Truist maintain its deposit base and its banking relationships. While switching is nominally free, the benefits are often unclear. Moreover, switching is viewed by customers as troublesome, especially for customers--like those of Truist--who purchase multiple products from a bank. Truist does have credit card services as well as trust and wealth management, investment banking, and insurance operations, all helping to increase the number of services it can provide for each client.

Truist is one of the largest regional banks under our coverage, and we see this scale driving above average operating efficiency, further bolstering the moat.

Truist has significant nonbank operations, most notably its insurance brokerage business (from BB&T). For insurance brokerage, the size and depth of the network matter, and Truist is roughly the seventh-largest broker in the U.S. by revenue. We believe this is an attractive business for Truist and its network is an asset. This business boosts overall returns on equity for Truist, complementing its moat.

From a systemic standpoint, we believe the U.S. banking system has improved over the last decade, as capital levels supporting the banking system are at all-time highs. Further, regulation has become considerably stronger in the past several years. The U.S. banking market is quite fragmented, and Truist must compete with a variety of regional and community banks as well as large money center institutions, although this fragmentation has gradually decreased since the 1990s. While the banking sector is intensely competitive, the largest banks by asset size have generally been able to earn higher returns on equity for the last several decades, and still do so today. Our outlook is generally positive from a macroeconomic and political standpoint for the U.S. banking system, as the U.S. is still the world's leading democracy, has increased GDP at a steady pace for years, and maintains the world's reserve currency, all of which contribute to banking stability.

Truist is not large enough to be considered a global systemically important bank and therefore avoids some of the more onerous regulatory capital requirements. However, it is large enough to be subject to the Federal Reserve's annual stress tests because it has more than $250 billion in assets. The bank is only subject to the modified liquidity coverage requirements. We do not view Truist’s regulatory burden as relatively disadvantageous compared with the other U.S. regionals in its peer group. Truist’s size is large enough to help scale some of these costs and is small enough to avoid some of the extra costs faced by its largest peers. Further requirements will be triggered once Truist surpasses $700 billion in assets.

Narrow

Economic Moat

Truist Financial

Truist Financial Corp. is a financial holding company, which engages in the provision of banking services to individuals, businesses, and municipalities. It operates through the following segments: Consumer Banking and Wealth, Corporate and Commercial Banking, Insurance Holdings, and Other, Treasury & Corporate. The Consumer Banking and Wealth segment consists of Retail Community Banking, National Consumer Finance, Services, Payments, Wealth Management and Banking Products and Professional Services and Mortgage Banking. The Corporate and Commercial Banking segment consists of Corporate and Investment Banking, Commercial Community Banking and Commercial Real Estate. The Insurance Holdings segment provides property and casualty, employee benefits and life insurance to businesses and individuals and also provides small business and corporate services, such as workers compensation and professional liability, as well as surety coverage and title insurance. It offers a variety of loans and lease financing to individuals and entities, including insurance premium financing, permanent commercial real estate financing arrangements, loan servicing for third-party investors, direct consumer finance loans to individuals, credit card lending, automobile financing, and equipment financing. It also markets a range of other services, including deposits, life insurance, property, and casualty insurance. The company was founded on December 6, 2019, and is headquartered in Charlotte, NC.

Earnings data Q2 2023

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Amid the turmoil in the banking industry and recessionary fears, investors can watch the Truist Financial (TFC) stock for its solid dividend yield.

Is Truist Financial (TFC) Worth a Watch on 6.3% Dividend Yield?

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Capital One Financial Corp. COF, -1.33% raised $3.5 billion in a pair of corporate bond offerings while Truist Financial Corp. TFC, -1.05% raised $3.25 billion in two parts, according to filings on Tuesday. Truist issued $1.75 billion in medium-term 5.867% fixed-to-floating rate senior notes due in 2034, as well as $1.5 billion in medium-term 6.047% fixed-to-floating rate senior notes due in 2027.

Capital One and Truist raise a combined $6.75 billion in separate corporate bond deals

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CHARLOTTE, N.C. , June 2, 2023 /PRNewswire/ -- Truist Financial Corporation (NYSE: TFC) today announced that Chief Financial Officer Mike Maguire will present at the Morgan Stanley US Financials, Payments & CRE Conference at 2:30 p.m.

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CHARLOTTE, N.C. , May 26, 2023 /PRNewswire/ -- Truist Financial Corporation (NYSE: TFC) announced today that, after June 30, 2023, CME Term SOFR will be the replacement reference rate for certain outstanding floating rate and fixed-to-floating rate debt securities and preferred stock issued by Truist Financial Corporation and certain of its subsidiaries that use three-month U.S. dollar LIBOR as the reference rate and that are governed by U.S. law or the law of a U.S. state.

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CHARLOTTE, N.C. , May 11, 2023 /PRNewswire/ -- Truist Financial Corporation (NYSE: TFC) today announced that Chairman and Chief Executive Officer Bill Rogers will speak at the Bernstein Strategic Decisions Conference at 10 a.m.

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The regional bank stocks have endured a massive sell-off and if you believe the regional system stays intact, there could be some gems in the chaos. TFC has sold off so much that its yield exceeds 7%. The best part is that it has a sub 50% payout ratio based on the current forward EPS.

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An increase in operating expenses and a rise in provisions on a deteriorating operating outlook are major headwinds for Truist Financial (TFC).

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In collaboration with MIT Solve, more than $1 million in grants and comprehensive support will be given to nonprofits utilizing innovative technology-based solutions to support small business owners CHARLOTTE, N.C. , May 8, 2023 /PRNewswire/ -- Truist Foundation announced the launch of its second Inspire Awards Challenge, featuring a pitch and a capacity-building grant program for nonprofit organizations that are aiding entrepreneurs from undercapitalized communities.

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The banking crisis is doing a number on regional bank stocks, causing a sell-off of more than 30% since the start of this year. Truist Financial's stock price is among the victims, although its business remains in great shape.

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News for Truist Financial Stock (TFC)