Truist Earnings: Funding Costs Accelerate, but Hit to Profitability Should Be Manageable

Truist Financial Stock at a Glance

• Current Morningstar Fair Value Estimate: $57.00
• Stock Star Rating: 5 Stars
• Uncertainty Rating: High
• Economic Moat Rating: Narrow

Truist Financial Earnings Update

Narrow-moat-rated Truist Financial TFC 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.

Truist’s deposit base declined 2% sequentially, and management expects there could be another 1%-2% decline from here, which is not materially different from the pre-March outlook for slight declines in the deposit base. Deposit costs are accelerating a bit faster than our previous projections, but even as we incorporate these higher deposit costs, we have a tough time getting to today’s market price.

Truist has had a hard time getting away from the “one-time” extra expenses, and it will be adding a few more in 2023 and 2024 related to its insurance unit. We do not know how much yet, but this does seem to build on a theme we had noticed before: The bank has been unable to fully hit some of the original efficiency ratio targets from when BB&T and SunTrust merged. We had already adjusted our projections for this trend, but now it seems that these charges and higher FDIC charges will lead to an even higher expense base for the near term.