Company Reports

Narrow-moat-rated Truist reported net income to common shareholders of around $1.1 billion, or $0.81 per diluted share, on $4.9 billion of net revenue. An incremental $75 million FDIC special assessment charge related to the FDIC increasing its estimated loss from the March 2023 banking events, restructuring charges, and the acceleration of inventive compensation for Truist Insurance Holdings reduced earnings per share by 16%. We do not anticipate a material change to our $50 per share fair value estimate from more information regarding the sale of TIH and continue to view shares as undervalued.

Truist is selling its remaining stake in its insurance brokerage business at an implied enterprise value of $15.5 billion. The company expects to book a $4.8 billion after-tax gain on the sale that along with some changes in intangible assets will increase the company’s common equity Tier 1 ratio by 230 basis points to about 12.5% under current rules and tangible book value per share by $7.12, or 33%, to around $29. The sale improves Truist’s capital position from below average to above average compared with peers. We don’t anticipate making a material change to our $50 fair value estimate for narrow-moat-rated Truist and assess shares are moderately undervalued.

Our thesis on the U.S. banks following the Silicon Bank fallout was that all of the banks we covered, except for First Republic (which we downgraded to a $3 fair value estimate on March 20, 2023, and a $0 fair value on April 27, 2023), would be able to weather the storm. We believed that banks in trouble were in uniquely risky positions. We believe this thesis has largely held up, and sorting through banks based on their unique risk profiles remains necessary and valuable. To the extent that the market is selling off all banks because of what has happened to NYCB, we think there could be opportunities once again while acknowledging the significant time horizon risk (how long does it take for the banks to prove to the market they are fine) and the choppy waters that could occur in the meantime (we expect more commercial real estate related loan losses in the future).

Truist Financial’s fourth-quarter and full-year 2023 results were marred by a goodwill impairment charge and the company’s 2024 outlook is lackluster. For the fourth quarter, the firm reported a net loss of $5.2 billion, or $3.85 per share, on $5.76 billion of taxable-equivalent revenue. Included in the fourth quarter was a $6.1 billion goodwill impairment charge and some other unusual items (including a $507 million FDIC special assessment to cover regional U.S. bank losses in early 2023). Excluding the impairment and other unusual charges, adjusted EPS was $0.81. We don’t anticipate making a material change to our $50 per-share fair value estimate for narrow-moat Truist Financial.

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.

Narrow-moat-rated Truist reported EPS of $0.80 that was a bit below our forecast of $0.89; although once certain one-time items related to service fee refunds are factored in, the bank would have met our forecasts for the quarter. After disappointing in the previous quarter, current quarter revenue expectations stabilized and the expense outlook remained roughly on track, but adding in additional exclusions to the adjusted expense guide implies to us the bank is more likely to come in on the high end of the guidance range. The bank reaffirmed its 0%-1% expense growth target for next year as it begins on $750 million in gross expense cuts. Given the bank’s efficiency ratio, above 60%, and the disappointment in the lack of efficiency gains following the merger of BB&T and Suntrust, we think improving the efficiency ratio and keeping expense growth below peers will be a focus for investors.

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.

Narrow-moat-rated Truist reported disappointing results in our view. Some trends were similar to peers, as the revenue and net interest income outlook both decreased; however, the magnitude of the decrease was worse than average. Revenue is now guided for growth of 1%-2%, down from 5%-7%. Within this, we estimate that NII is set to barely grow in 2023 compared with 2022. Expense expectations also moved in the wrong direction, inching higher, as the bank expects to come in on the high end of its previous expense range of up 5%-7%. Management spent a good portion of the call speaking about strategic expense initiatives as it attempts to improve the current expense dynamics.

The Federal Reserve has released the results of its annual stress tests. Our key takeaway is that the banking system remains well capitalized, and stress capital buffers, or SCBs, are likely to be declining for nearly half of the banks we cover who participated in the test this year. This will bring some capital relief to some key names under our coverage, including JPMorgan, Bank of America, M&T Bank, Goldman Sachs, and Morgan Stanley. Whether or not management teams will actually lower their internal common equity Tier 1 targets is another story. As they await other potential regulatory changes, we expect most would choose to err on the side of holding more capital rather than less. Even so, we would view these banks as the big winners from this year’s stress tests as results are set to give these banks more buffer space for now.

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.

The Federal Reserve released its review of what went wrong with supervision and regulation of Silicon Valley Bank. There are still no official new regulatory proposals, but this is the first official clue about where the regulators are heading. Our thesis was that regulations were going to change but that they would be manageable changes phased in over a period of several years. This is why we do not think capital raises are likely for the banks under our coverage. We think this is a key point because prices currently seem to be implying permanently impaired profitability or capital raises for multiple banks under our coverage. We think this is too harsh.

Narrow-moat-rated Truist Financial reported first-quarter results that show some earnings pressure is building, but it is an amount that we view as quite manageable. The bank decreased its full-year revenue growth outlook to 5%-7% from 7%-9%. Given that this was driven almost entirely by lower net interest income, it implies to us a roughly $500 million drop in expected NII for 2023, or roughly a 3% decline from our previous outlook. This is nothing disastrous. We had already expected fourth-quarter results would approximate the peak for profitability in the current rate cycle, and while the drop-off from that peak has accelerated a bit, it is nothing categorically different. As we incorporate these results, we expect roughly a mid- to high-single-digit percentage decline in our $57 fair value estimate as we incorporate slightly lower revenue and slightly higher expenses. We still view the shares as undervalued.

As we look at the U.S. banks, we believe the sector is currently undervalued. However, in an effort to help investors focus their efforts, we are highlighting Comerica, U.S. Bancorp, and Citigroup—each has its own risk/reward setup.

We have updated our fair value estimates for a number of regional banks in our coverage (M&T Bank: $179 to $163, Fifth Third Bancorp: $42 to $38, Regions Financial: $21 to $19, KeyCorp: $24 to $21, Huntington: $17 to $15, Comerica: $86 to $79 , Zions: $66 to $58, Cullen/Frost: $133 to $124 ). We did this based on an expectation of increased funding costs, some pressure on deposit bases (in other words, deposit outflows), and potentially lower securities yields in the future due to potential changes in bank regulations (which would likely force banks to hold more short-term treasuries instead of their current preference for mortgage-backed securities).

We are increasing our Morningstar Uncertainty Rating on our U.S. regional banking coverage (excluding U.S. Bancorp and PNC Financial Services) to High from Medium, to reflect the increased uncertainty associated with predicting what the deposit base, funding costs, and regulatory costs will look like in the future. We’re leaving the Uncertainty Ratings on the largest banks unchanged, as we believe they are less likely to experience deposit base volatility.

With the U.S. banking system coming under heightened liquidity pressure, we had speculated that the Federal Reserve might step in and provide some sort of solution. There was a lot of speculation about what mechanism/s could be used, and one of our favorites was simply allowing banks to exchange their underwater securities, at par, with the Fed. This has the benefit of taking away any concerns about being forced to sell these securities at fair value and therefore taking a hit to capital while also exposing the U.S. taxpayer to minimal risk of loss, as most securities held by the banks are either agency-backed MBS or Treasuries.

Bank stocks sold off meaningfully on March 9 as Silicon Valley Bank announced that it would have to take a number of “strategic actions,” including selling off its entire available-for-sale securities portfolio (incurring a $1.8 billion aftertax loss, or roughly 15% of the bank’s tangible common equity as of Dec. 31, 2022), announcing it is seeking to raise $2.25 billion in additional capital, and increasing its use of “term borrowings” (essentially higher-cost but more stable funding). Aside from crypto-related meltdowns, this is one of the first banks we’ve seen that has really suffered a liquidity crunch that has forced it to restructure the balance sheet and realize losses on its securities portfolios.

As had been rumored for several weeks, Truist has indeed been pursuing a sale of a minority stake in its insurance business. The deal announced Feb. 16, 2023, values the common equity of the insurance business at $9.75 billion, with Truist also issuing preferred shares tied to the business segment worth $5 billion.

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.

Narrow-moat Truist reported fourth-quarter earnings of $1.20 per share, fairly close to FactSet consensus of $1.24 and in line with our own estimate of $1.21. Top-line revenue of $6.2 billion was also essentially in line with consensus and our own estimate. Expenses did come in a bit above our forecasts, up 3% sequentially versus our own expectation for flat expenses during the quarter. Half of the extra growth was from higher “merger-related” items while much of the rest was related to additional compensation. We were hoping that merger-related items would be over in 2023, but it is now expected that there will be another roughly $100 million or more of these costs once again. We would read some of this as simply inflationary cost pressures, which has been a risk we’ve highlighted for 2023 outlooks. Even so, the 2023 outlook for revenue growth of 7%-9% is still roughly in line with our original expectations for 2023. The expense outlook for growth of 5%-7% is only slightly above our original forecast. While we plan on raising our 2023 expense outlook slightly, likely by just over 1%, we would only expect our fair value estimate of $60 to decrease by a low-single-digit amount, and we still see shares as undervalued. We're hoping a 2023 with fewer one-time charges and the abatement of other merger-related items will help make more clear what Truist's true earnings capabilities are.