Truist Earnings: Strong Fee Income Performance, No Exposure to Tricolor Collapse

Key Morningstar Metrics for Truist Financial

• Fair Value Estimate: $46.10
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Medium

What We Thought of Truist Financial’s Earnings

Truist Financial TFC reported OK results in the third quarter, with fee income growing 5% annually. Reported earnings per share came in at $1.04, up 5% from the prior-year quarter. The results translate into a return on a tangible common equity ratio of 13.6%.

Why it matters: The year-over-year increase in fee income was mostly driven by strong performance in wealth management and mortgage banking revenue. In addition, investment banking and trading income also grew by $118 million sequentially to $323 million.

• We are glad to see the recovery in investment banking and trading income fees. Truist is more exposed to middle-market advisory and has less trading exposure when compared with bulge-bracket investment banks.
• More recovery in middle-market M&A activity will boost Truist’s investment banking fees.

The bottom line: As we incorporate Truist’s latest results and guidance, we expect to maintain our $46.10 fair value estimate for the no-moat-rated bank. We assess the shares as slightly undervalued.

• We think Truist’s underwriting is solid, and we think it can handle its credit losses well.
• Truist has no exposure to Tricolor’s collapse, and its total exposure to First Brands was less than $200 million (less than 0.1% of its loan book). It was already included in the provisioning expenses in the quarter.

Key stats: We are also not worried about Truist’s exposure to non-depository financial institutions. The bank’s NDFI was around 11% of its loans in the third quarter.

• Around half of its NDFI is asset securitization and REITs lending. The remaining half comes from smaller asset classes such as capital calls, leasing, and business development companies.
• We assess Truist’s NDFI exposure as not having elevated credit risks and with a strong capital position. The bank had a solid CET1 ratio of 11% at the end of the third quarter, 400 basis points higher than its 7% regulatory minimum. This should give the bank plenty of excess capital to weather credit losses.