Truist Looks Better Placed Than Many Banks For Better Growth In 2023

Banking is all about leverage, and Truist (NYSE:TFC) looks to be better-placed than most peer banks to drive rate and operating leverage in 2023, setting the bank up for relatively better operating performance. In the context of what I think is a still-too-low valuation, that's a positive set-up for investors looking for names in the still out-of-favor banking sector.

Truist had been outperforming its peer group since my last update, and a well-received earnings report certainly didn't hurt. While I would be careful not to project too much onto a company that has struggled to meet expectations since the transformative combination of BB&T and SunTrust, it does seem as though this bank may finally be getting its legs under it, and I still see opportunities to drive growth and value creation from here. Below the mid-$50's, I think this is a name to consider.

 

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Truist Looks Better Placed Than Many Banks For Better Growth In 2023

Truist: Underwhelming Results In What Should Be A Supportive Market

I wrote earlier this year that 2022 should be a better year for “Main Street” banks like Fifth Third (FITB), Regions (RF), and Truist (NYSE:TFC) versus more “money center” banks that are more reliant on capital markets activities and business with large multinationals. That thesis has held up, but Truist has not performed as well as expected (or as well as many peers), and the shares reflect this – falling almost 30% since my last update and significantly underperforming regional banks (as well as money center banks as well).

The SunTrust deal was supposed to create both cost and synergy opportunities for Truist, and these were supposed to propel the company to above-average growth. So far, the results have been underwhelming, and in a macro environment that should favor Truist (particularly with respect to health C&I loan demand), the results just haven’t been there. While I do still believe in the bullish case for Truist, there is work to do here and management bears the burden of restoring investor confidence in a differentiated positive outlook.

 

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Truist: Underwhelming Results In What Should Be A Supportive Market

Truist Leveraged To Higher Rates, Improving Loan Demand, And Positive Operating Leverage

 

I’ve written more than once that Truist (NYSE:TFC) tends to be a bank stock that zigs when others zag, and that has been at least partially true again since my last update on the bank. Since then the shares have outperformed the S&P 500 by over 10%, while also outperforming the banking sector by over 5%.

Although I don’t think Truist is remarkably cheap right now, I do think it checks some thematic boxes – at a time when several large banks have spooked the Street with expense guidance, Truist delivered better-than-expected positive leverage in the quarter and the outlook for expense leverage is improving as the SunTrust merger integration proceeds. What’s more, I believe Truist management gets that they need to change with the times – embracing not only digital offerings, but customer-friendly policies that will help them better compete with fintech alternatives.

 

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Truist Leveraged To Higher Rates, Improving Loan Demand, And Positive Operating Leverage

Truist Deploys Even More Capital Toward Growth

 

If nothing else, Truist (TFC) management has made one thing very clear to investors over the last couple of years – this is not the bank for investors who want management to prioritize capital returns to shareholders. Management at Truist clearly believes they’ve identified attractive avenues for long-term growth, and they’re not at all afraid to direct capital towards realizing that growth. Having already spent over $1B year-to-date on M&A, including the large acquisition of the Constellation insurance brokerage, management recently announced that it was spending $2B to acquire Service Finance Company – a fast-growing specialty POS lender. This deal will be dilutive initially, but over the longer term, it looks like a good (or better) way to leverage growth in home improvement, as well as an opportunity to leverage under-used liquidity.

The SFC acquisition is going to reduce Truist’s near-term returns of capital to shareholders, but it should also improve the long-term growth rate, adding a few percentage points to my fair value, and pushing the total expected return up a bit.

 

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Truist Deploys Even More Capital Toward Growth

Truist Seeing Some Short-Term Pressures, But The Long-Term Opportunity Is Attractive

 

This hasn’t been a good year so far for Truist (TFC), with the shares lagging the large bank average and most of its peers. While I don’t think there’s a single issue to point to, I get the sense that analysts and investors are frustrated by the lack of a big near-term “pop” from the SunTrust deal and the reality that there’s not a lot the company can do to drive better results until rates and loan demand recover.

I understand the short-term frustrations with Truist, but I think that overlooks the long-term opportunities from the company’s diversified revenue base (including the large insurance business), its leverage to “Main Street” lending growth, and the above-average growth potential of its geographic footprint. I believe that patience will be rewarded, and that long-term core earnings growth in the mid-single-digits can support a double-digit annualized return from here – making this a relatively attractive option in the large bank sector.

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Truist Seeing Some Short-Term Pressures, But The Long-Term Opportunity Is Attractive

Truist Building Toward Better Growth And Margins

 

Southeastern banking giant Truist (TFC) has continued to lag many of its peers since my last update (and over the last year), as the market has been pretty impatient regarding the expected savings from the SunTrust merger and stabilization in the net interest margin. Still, the shares are up around 25% since that last article, more than doubling the return of the S&P 500.

Although I don’t believe that Truist shares are wildly undervalued (few of the quality banks are), I do believe that there’s still a relative value trade here, and I still believe that Truist isn’t getting its full due. With one of the best operating footprints in the country, surplus capital to accelerate growth, and a potential “goldilocks” operating environment for a few years, I believe Truist has a good chance to deliver beat-and-raise quarters, particularly as I believe that this slower, more deliberate pace of merger integration could ultimately drive better-than-expected long-term benefits.

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Truist Building Toward Better Growth And Margins

Truist Getting Too Little Credit For Future Profitability And Growth

In the years I've followed Truist's (TFC) predecessor company BB&T, I've gotten used to the fact that this is a stock that will zig when others zag and one that many analysts are reluctant to trust as a solid core growth candidate, and the merger of equals with SunTrust doesn't seem to have changed all that much. Although Truist had what I believe was one of the strongest large bank quarters in many respects, it hasn't really changed sentiment all that much.

Truist has been a laggard since my last update, and while the comparisons are a little better over the past 12 months, this hasn't been a top-of-the-stack bank stock in terms of performance. Perhaps not so surprisingly, then, it does stand out to me for relatively better share price appreciation potential from here. With perhaps underestimated reserve release potential and solid longer-term growth opportunities from post-deal synergies (and underlying market growth), I believe Truist is one of the few large banks still priced for double-digit annualized returns without taking on outsized risk.

 

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Truist Getting Too Little Credit For Future Profitability And Growth

Truist Doesn't Exactly Impress, But The Business Is On Track And The Valuation Is Reasonable

With most banks limited in what they can do to generate spread-based growth, the bullish argument for Truist (TFC) over the next few years rests significantly on this bank’s ability to generate better fee-based income and operating synergies from the BB&T-SunTrust combination. Although third quarter results did show okay fee-based revenue, the operating synergy number left a little to be desired, and it looks like the bank may have to pay more upfront to drive longer-term benefits.

I’m still a believer in the long-term benefits of the deal that created Truist, but there is definitely a “show me” element to this story and third quarter results don’t really help. With a fair value in the mid-$40’s, Truist has broadly the same return potential I see from JPMorgan (JPM) and/or PNC Financial (PNC), and those are arguably cleaner stories. I still own these shares myself, but I won’t say they’re inarguably the best pick among the large banks today.

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Truist Doesn't Exactly Impress, But The Business Is On Track And The Valuation Is Reasonable

Truist Posts Underwhelming Results As The Recession Takes Its Toll

While Truist (NYSE:TFC) shares were up some on the day of its earnings release on positive investor sentiment on cost savings and credit costs, I walked away feeling that Truist's performance was actually underwhelming relative to its peers. It wasn't enough of a deviation for me to fundamentally change my view of the company or the stock, but it adds a note of caution going into what was already going to be a challenging second half of the year.

Truist shares have actually done pretty well over the last three months, beating most of its peers in terms of market performance, and the trend over the past year hasn't been bad either. I still believe that Truist can realize significant cost synergies over the next few years and become a leading Southeastern banking franchise with mid-single-digit, long-term core earnings growth, but the shares aren't the biggest bargain in the space and I think there are some arguments for caution given recent performance trends.

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Truist Posts Underwhelming Results As The Recession Takes Its Toll

Truist In A Little Better Shape Than Many Of Its Peers

Painting with a broad brush, all of the super-regional banks are more or less in the same boat now – a tough rate environment, a coming recession, and concerns over reserve levels. I will argue that Truist (TFC) is an incrementally better position, though, with cost savings and accounting options tied to the SunTrust giving the company a little more accounting and capital flexibility than many of its peers.

I believe Truist can generate double-digit earnings growth from what will likely be a very low 2020 base year, and I’m not all that concerned about Truist’s reserve or capital position. Whether the recovery is U-shaped or V-shaped, Truist will have a strong franchise in some of the most attractive U.S. banking markets, as well as a more balanced commercial and consumer operation. Execution risk remains meaningful, though, and Truist’s recent sector performance leaves less upside here than at some peers, including Bank of America (BAC) and U.S. Bancorp (USB).

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Truist In A Little Better Shape Than Many Of Its Peers

Truist Produces The Sound, The Market Provides The Fury

Admittedly, that title is a little overheated, but the market reaction to Truist’s (TFC) first quarter as Truist was not particularly positive, with analysts and investors fretting about a longer timeline to expense synergies and a greater income contribution from non-core amortization. The disappointment moderated somewhat after the call, but the reality is that Truist didn’t offer the sort of positive operating leverage story that investors really want now.

Given the complexity in modeling the merger, I wasn’t going to put much faith in this first quarter, whatever the results. I think this merger still makes a lot of sense from a strategic standpoint, but I also see a lot of execution challenges and management will have to rise to the occasion. With core underlying core earnings growth potential of around 5%, I believe these shares are undervalued below the high $50’s.

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Truist Produces The Sound, The Market Provides The Fury