Truist Earnings: Expenses and Revenue Both Moving in the Wrong Direction

Truist Financial Stock at a Glance

• Fair Value Estimate: $54.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow

Truist Financial Earnings Update

Truist Financial TFC reported disappointing results in the second quarter, in our view. Some trends were similar to peers, as its revenue and outlook for net interest income, or NII, both decreased. However, the magnitude of those decreases was worse than the 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 5%-7%. Management spent a good portion of their earnings call speaking about strategic expense initiatives as the bank attempts to improve the current expense dynamics.

While in some sense every bank is always going through different expense initiatives, the need for such initiatives and the types of projects highlighted (for example, full-time equivalent management and contact center optimization) cause us to wonder why the bank has not become more efficient in the roughly three and a half years since the BB&T/SunTrust merger.

This builds on a theme we have noticed for a while: The bank has been unable to fully hit some of its original efficiency ratio targets from when BB&T and SunTrust merged. We felt we had already sufficiently adjusted our projections for this trend, but these latest developments throw that into question. As we incorporate lower NII and higher expenses, we expect a roughly mid-to-high single-digit-percentage decline in our fair value estimate of $54. We would still view shares as undervalued, but among the big three regionals (the others are U.S. Bancorp USB and PNC Financial Services PNC), Truist has struggled the most, and we have had to make the largest adjustments to our fair value estimates.