Truist Financial Stocks: Most Negative Values ​​Are Priced at (NYSE: TFC ) (2023)

Truist Financial Stocks: Most Negative Values ​​Are Priced at (NYSE: TFC ) (1)


From my understanding, it appears that most of the risks associated with the US banking sector are already reflected in the price ofTruist Financial Company(NYSE:TFC) (TFC.PI) shares, both common and preferred. Yothey see this as an attractive opportunity to buy TFCs because the potential rewards outweigh the risks for people seeking long-term income.

Why do I think so?

Truist Financial Corporation, formed througha mergerbetween BB&T Corp. and SunTrust Banks in December 2019, is a prominent bank with approx. $574 billion in assets; the merged bank at the time was valued at $66 billion [market value].As the sixth largest bank in the United States, Truist operates as a holding company and offers a wide range of banking and trust services, primarily in the Southeast and Mid-Atlantic regions. Originally known as BB&T Corporation, the companyrenamed Truist Financial Corporation and was established in 1872 with headquarters in Charlotte, North Carolina.

The company is divided into 3 segments [net of eliminations from Other, Finance and Corporate], based on10-Qy10-Kapplication:

  1. Consumer Banking and Wealth[47.7% of total net revenue, Q1 FY23] – Covers 3 core businesses. Retail & Small Business Banking offers banking, loans, investments, insurance solutions and advice through branches, ATMs, digital channels and contact centres. It offers a range of financial products and services such as deposits, credit cards, loans, mortgages, brokerage and insurance. It also includes Mortgage Banking, which offers home loan products through retail and agent channels. Consumer Finance Solutions provides consumer loan solutions through direct-to-consumer and point-of-sale. Banking and wealth management products, including trust, brokerage, investment advisory and family office services, are provided to individual and institutional clients through the Wealth division.
  2. Corporate and Commercial Banking[47.2%] - consists of 4 main companies. Corporate and Investment Banking offers strategic advisory solutions, capital raising, risk management, financing, liquidity and investment for public and private companies. Investment Banking serves specific industry segments, while Corporate Banking serves clients in diversified sectors based on size and complexity. Commercial Community Banking offers traditional banking products and solutions to business customers, including non-profit organizations, government entities, health care, senior services and auto dealerships. Commercial Real Estate offers credit, escrow services and customized financing solutions for commercial real estate projects, including community development and affordable housing. It also provides banking and advisory services to SOCIMIs, foundations and public housing developments. Wholesale Payments provides treasury, merchant services and commercial card solutions to a range of commercial customers, from small businesses to large corporate institutions. ; and
  3. insurance holdings[5.1%] - A large insurance agency/broker network offering property and casualty, employee benefits and life insurance to businesses and individuals. Offers a variety of services including workers compensation, professional liability, warranty coverage and title insurance for small businesses and corporations. In addition, the IH segment includes Prime Rate Premium Finance Corporation, which includes subsidiaries AFCO Credit Corporation and CAFO Holding Company.

During the first quarter of fiscal year 23, Truist Financial Corporation exhibited a combination of positive and challenging factors. The company reported net income of $1.4 billion, or $1.05 per share, representing an increase of 6% compared to the same quarter last year. Adjusted net income before provisions [PPNR] increased 19% year-over-year, reflecting a strong start to the year. The company achieved 310 basis points of positive adjusted operating leverage, indicating increased efficiency.

However, net interest income fell 2.8% sequentially, primarily due to higher financing costs and 2 fewer days in the quarter. The net interest margin decreased by 8 basis points, while the net interest margin decreased by 7 basis points.

The management now expects revenue growth of 5-7% for the financial year 2023 (down from the previous 7-9%). The guidance also calls for adjusted expense growth of 5% to 7%, much of which is attributable to pension costs, higher FDIC premiums, wage increases and acquisition costs. Truist posted a reversal of loss provisions of $813 million in 2021, followed by provisions of $777 million in 2022. Loss reserves appear adequate, but loss provisions are likely to increase this year due to slowing growth. economy: see net default rate forecast guide [expected to rise to 42.5 in the mid-range due to more potential loan defaults]:

On the bright side, we see that the company has achieved merger synergies by reducing its total expense base by $1.6 billion; Cost reduction includes personnel, administrative integration, branch consolidation, third party expenses and corporate facilities.

Average deposits saw a modest decline of 1% sequentially and 2% year-on-year as customers sought higher yielding alternatives. TFC has the lowest investment portfolio performance in Q1 FY23 compared to its peers according to Credit Suisse analysts [19. May 2023, proprietary source]. Furthermore, since the end of April 2023, TFC has experienced one of the largest EPS downgrades in the entire peer group; perhaps this is what led to such a poor total return compared to the other banks.

Another reason that led to such a sharp drop in TFC's share price is its relatively high loan-to-deposit ratio of 81%, which is well above the median of 75%. Best performing bank - Citizens Financial Group (CFG) - is the only one in the group with a higher metric [90%]:

A high ratio can lead to higher profitability and interest income generation, but it can also indicate higher credit risk if loans are not properly managed; amid expectations of higher net write-offs, this will hurt Truist's profitability, and the market has really adjusted for that. fast as we can see.

However, Argus Research analyst Stephen Biggar writes in his post-earnings note [20. April 2023 - proprietary font] that Truist remains well positioned with its deposit base. Yes, in light of reduced revenue guidance, which reflects higher deposit and financing costs, TFC's FY2023 EPS cut to $4.65 from $5.19, and the FY2024 forecast is now $4.79 from $5.36. But he draws readers' attention to the company's warehouse franchise, which he says looks strong.

Also in the graph above we see a lower than median average cost of interest bearing deposits, which suggests thatTruist can attract interest-bearing deposits at a relatively lower price. This can maintain the bank's net interest margin and profitability as it can generate loan and investment income at a higher margin relative to funding costs.

Truist demonstrated a strong financial position with a Tier 1 capital ratio of 9.1% per 31 March 2023, which exceeded the statutory minimum of 4.5% required to be considered well capitalized:

When one of the largest banks in the US was sold due to the above problems, its current yield increased to 6.8%; even during the corona crisis in 2020, we did not see such high performance:

Truist Financial Stocks: Most Negative Values ​​Are Priced at (NYSE: TFC ) (7)

Including the company's preferred shares in series I, which can be redeemed after 15 December 2024, in25 USDstock, they now trade below $19.5 each:

The price of these preferred shares is variable, so the dividend isdeterminedbased on the greater of: 1) 0.53% above the 3-month LIBOR rate (which is a reference rate) on the specific date on which the dividend is determined or 2) a fixed rate of 4.00%. When the board approved a regular quarterly cash dividend of $0.52 per stock to common stockholders following its fourth-quarter results, it also announced a dividend per share. Series I Preferred Stock at ~$0.33119 per DS, which would now be equivalent to ~ 6.83% of the annual return.

LIBORit is now at 5.39% and has not fallen much despite market expectations for a faster rate cut from the Federal Reserve.

If the rate hike cycle ends soon and the Fed goes flat (my expectation), then LIBOR will remain relatively high. So TFC Series I should continuously pay out income-seeking investors until December 2024. Of course, there's limited upside here, but from what I can see of the company's financials, despite all the challenges, you seem to be fundamentally sound. fine and should be able to continue to make preferred payments in the future.

Common stock seems to me to be relatively fair value with an average tangible book value of 0.481 per share. stock:

Truist Financial Stocks: Most Negative Values ​​Are Priced at (NYSE: TFC ) (11)

Data from Seeking Alpha shows a price-to-earnings ratio of 6.81x for TFC stock, which is quite low for one of the largest U.S. banks with roughly the same market cap as the U.S. Bank. Bancorp (USB), TFC's dividend yield looks higher at about the same TBV per stock: it's just a question of sustainability here, as USB has a slightly lower loan-to-deposit ratio of 77%.

In my opinion, the potential risks associated with Truist Financial Corporation should already be heavily discounted in the company's stock. The significant decline of almost a third in market capitalization since the beginning of the year, combined with the technical oversold condition, seen at $25-29 per purchase of TFC shares.

As the Federal Reserve changes direction, TFC stock is likely to follow suit. In addition, the company's preferred stock also looks attractive, as it should show similar interest rate sensitivity to ordinary shares.

The verdict

At this point, it is quite difficult to be optimistic about the US banking sector as deposits continue to decline as households run out of funds and higher yield opportunities exist among money market instruments.

Banks like TFC, which have quite aggressive lending policies, are at serious risk if deposit outflows continue. TFC's share price could hit new lows despite its historically high dividend yield, which will become questionable if this risk materializes.

But the way I see it, TFC stock looks very attractive to investors looking for long-term income. I mean both common stocks here. TFC's preferred stock, which the company has the right to buy back 29% above the current price after the end of 2024 and whose dividend is almost the same as its common stock, also looks interesting. If at some point the Fed rate falls below 3-4%, the nominal price may rise, perhaps the administration will have to buy them back.

Interesting what you think about TFC - share your thoughts in the comments section below. Thanks for reading!

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