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

Narrow-moat-rated Truist TFC 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.

While in some sense every bank is always going through different expense initiatives, the need for such a focus on these initiatives and the types of projects highlighted (for example, FTE management and contact center optimization) does make us wonder why the bank has not become more efficient in the roughly three and a half years since the BB&T/SunTrust merger was completed. This does build on a theme we have noticed for a while, which is that the bank has been unable to fully hit some of the original efficiency ratio targets from when BB&T and SunTrust merged. We felt that we had already adjusted our projections for this trend, but these latest developments throw into question if we had adjusted enough. 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 admittedly among the big three regionals (U.S. Bancorp, PNC, and Truist), Truist has struggled the most, and we have had to make the largest adjustments to our fair value estimates.