I’ve been a pretty harsh critic of Truist (NYSE:TFC) management more than a few times – not only has the execution of the SunTrust merger left a lot to be desired, but the bank has been losing organic market share in its core markets and has struggled to define and execute upon a path of differentiated growth and return improvement. With that, the shares have continued to lag – lagging the peer group by about 10% since my last update (though up about 15%), while lagging by more than 15% over the last five years and 35% over the last ten years.
So why do I stay involved? Apart from the fact that it’s now a small position (I like to expand and contract positions in companies I know well as circumstances dictate), I do still see potential in this collection of assets. Management’s commentary in the wake of the sale of the insurance business is encouraging and expectations are not particularly robust right now. With the shares looking about 20% undervalued on adjusted growth rates below 3%, there’s definitely scope for the market to reward better performance here.
Selling The Family Silver Is A One-Time Opportunity
I don’t believe many investors were surprised that Truist elected to sell the remainder of its sizable insurance brokerage operations, but the speed/timing of the sale was faster than most seemed to expect. On the positive side, Truist got a decent price at 18x trailing EBITDA (not far out of line with peer multiples, particularly when considering differences in business profitability and structure). On the negative side, this was a capital-efficient business that generated attractive low-risk earnings and cash flows.
Truist has used the proceeds from the sale (a little over $10B after tax) to reposition the balance sheet, using the proceeds to offset and absorb the losses. Truist sold almost $28B in lower-yielding securities (a weighted average yield of 2.8%), booking an after-tax loss of $5.1B, and bought $18.7B in securities yielding about 5.3%. I’m a little surprised that Truist wasn’t more interested in longer-duration securities (by and large, you want to own longer-duration securities heading into rate cuts), but these moves do upgrade the bank’s securities yield (and overall asset yield), and should drive around $1.1B in net interest income leverage.
Management has elected to keep the remainder of the sale proceeds in cash and short-term securities. With this, the bank has a lot of “dry powder” for future moves – whether that is to further reshape the securities portfolio, grow the loan book without relying on higher-cost deposits, acquire other banks or fee-generating businesses, and/or accelerate capital returns to shareholders. While this move also better positions the bank for likely regulatory changes that will increase the liquidity and capital requirements for banks, this wasn’t a pressing issue.
At this point, I don’t have any significant objections to how management is handling this reallocation. I’m not sure I would have been so quick to sell the insurance business, but I can’t deny the benefits of repositioning the bank’s securities portfolio and freeing up capital for reinvestment.
The issue is that this is a one-time opportunity and I don’t have full confidence in management. You can only sell the family silver once, and I’ve been fairly disappointed with management’s commentary on the bank’s strategic direction and the excuses for underperformance (including seemingly never-ending one-time charges related to the SunTrust deal).
Opportunities And Risks Continue To Evolve
Truist’s Southeastern markets are some of the most attractive in the U.S., but that is a mixed blessing. Not only have smaller banks like Pinnacle (PNCL) targeted this region for growth, they’ve aggressively pursued Truist lending teams (as have other banks). Truist management addressed this in recent sell-side presentations, but the claim that employee retention has improved may have more to do with the fact that rivals like Pinnacle have already poached the people they wanted.
Truist has been losing organic market share in many of its key markets, with significant losses in Atlanta (some due to required divestments), Miami, Orlando, Tampa, Nashville, and Raleigh-Durham, minor erosion in markets like Baltimore and Washington, D.C., and mixed results in markets like Texas.
While branch-based deposit shares are certainly not a perfect metric (you most definitely lend in markets where you have a modest deposit base), commentary from companies like Pinnacle does suggest some erosion in loan share, and banks like Fifth Third (FITB), JPMorgan (JPM), PNC (PNC), and U.S. Bancorp (USB) have been getting more active in many of Truist’s key markets.
It’s Not All Bad News…
That being said, while Truist’s recent loan and deposit growth has been below average, the company compares pretty well on metrics like net interest margin, asset yield, and deposit costs, and very well on operating efficiency. With an efficiency ratio around 59% in the last quarter, Truist compares well to peers like Bank of America (BAC), PNC, Regions (RF), and USB with ER’s in the low 60%’s. I’d also note that while Truist has lost deposit share in many markets, they’ve done relatively better at retaining non-interest-bearing deposits, with a NIB mix of 28% that compares well to those same peers (though Regions is even better).
I would also note that Truist is trending pretty much in line with peers on credit quality, and the bank’s commercial real estate portfolio is not a significant issue in my opinion. Losses are rising (a 5.2% charge-off ratio in the last quarter), but it’s less than 2% of the total portfolio and Truist doesn’t have that much exposure to the most problematic markets.
Opportunities To Boost Earnings…
As far as opportunities go, I do see Truist enjoying an opportunity to benefit from ongoing repricing in this higher-for-longer rate environment. Every quarter Truist is putting more higher-yielding loans on the books (an average yield of 6.4% last quarter versus around 4% three years ago) and I expect deposit beta to start flattening out. I also opportunities for Truist to expand lending as the economy and loan demand recover – Truist won’t have the same degree of credit or liquidity repair as some regional banks, so will be free to lean into organic loan growth opportunities.
I also see opportunities to invest in non-banking growth opportunities. Capital markets have been recovering, and while Truist is a relatively small player in trading and investment banking, they have the capital to invest here if they choose. I also expect to see the bank invest into growing its payments business (a significant source of lucrative revenue for banks like JPMorgan and U.S. Bancorp); I don’t know how much of this plan will involve M&A, but I do think there are opportunities for selective deals that won’t break the bank.
The Outlook
Truist underperformed my expectations a bit in 2023 and my 2024 numbers are lower both on revisions to core banking (some Truist-specific issues and some sector issues) and the insurance sale. For the most part, though, my expectations are similar or better in the out years. I’m looking for Truist to get to 10% ROE a little faster than before, but I’m only looking for around 2% to 3% core growth over the next five years and longer term.
On the returns side, the sale of the insurance operations drops my expected return on tangible equity over the next few years from the mid-to-high teens to the low teens.
Discounting the core earnings, I get a fair value around $43, and I get similar results on the basis of ROTCE-driven P/TBV (1.5x multiple on adjusted TBV) and 11x my FY’25 EPS estimate. I’m raising my P/E multiples on banks in general given where we are in the cycle, but I’d note this is still below Truist’s long-term average forward multiple (by about 0.5x).
The Bottom Line
Truist has underperformed its peers by about 15% since the current CEO took over, and I do still have concerns about the strategic direction and priorities of the bank. Management is saying more of the right things lately, though, so perhaps some of the issues have been related to the challenges of integrating SunTrust (there’s a reason that investors are skeptical of large mergers of equals; integrating them is very difficult) and the bank can increasingly focus on more basic “blocking and tackling” branch banking improvement.
In any case, while Truist is not my favorite bank by a longshot, I do think the market is undervaluing the opportunities after the sale of the insurance operations. With low single-digit core growth supporting a respectable return and Truist still holding meaningful share in many attractive markets, this has a little more appeal now as a contrarian self-improvement story.
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