Truist: Better Placed Than Many Banks For Growth In 2023 (NYSE:TFC)

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.

Better Than Expected Results In What Is Looking Like A Soft Quarter

I was more cautious on banks going into this quarter due to the ongoing impact of rising deposit betas – I’ve been beating the drum for a while on the notion that analysts (and bank managements) were underestimating the impact that rates would have on their deposit costs, and that sticky, low-cost deposit bases and operating leverage drivers would be even more important in 2023. To that end, Truist closed the quarter on a strong note, helped by its deposit cost base.

Revenue rose almost 12% year over year and more than 6% quarter over quarter, beating by close to 2% (or around $0.05/share). Net interest income was up more than 23% yoy and close to 7% qoq, beating by around $0.035/share; net interest income was driven by comparatively strong earning asset growth (AEA up 5% yoy and 2% qoq), as well as margin leverage (net interest margin up 13bp qoq to 3.25%).

Fee income fell 4% and rose 6% qoq, adding almost $0.02/share relative to expectations. While insurance came up slightly short of sell-side targets (about a penny off), the business did grow more than 5% yoy in organic terms, keeping pace with the larger space.

Operating expenses rose almost 9% yoy and 3% qoq, coming in higher than expected and taking away almost $0.03/share of upside, though the efficiency ratio was a bit better than expected (meaning the higher opex can be explained as tied to the revenue outperformance). The efficiency ratio improved almost two points from the year-ago period and sequentially (to 56.8%), and perhaps Truist is finally delivering that long hoped-for post-deal cost leverage.

Pre-provision profits rose almost 17% yoy and close to 12% qoq, beating by around $0.03/share versus a reported core EPS beat of $0.02 (or $0.07 excluding reserving actions). Provisioning expense was higher than expected (by around $0.05), while taxes were lower (by about $0.03/share).

Truist’s quarter also compares favorably to other banks that have reported so far, and it’s worth noting that some results here aren’t truly comparable – Bank of America (BAC) got a nice boost from its trading business, and Wells Fargo (WFC) came in well below expected costs.

	Net Int Inc	PPOP			Net Int Inc	PPOP			Net Int Inc	PPOP
BAC	0.4% miss	7.0% beat		BBT	1.5% beat	1.7% beat		KEY	3.0% miss	6.0% miss
C	NA	4.0% miss		CBSH	2.0% beat	4.5% beat		MTB	inline	3.5% beat
JPM	6.0% beat	9.0% beat		CFG	1.0% miss	2.0% miss		PNC	1.0% miss	2.0% miss
				CMA	inline	1.0% miss		SNV	2.0% beat	1.7% beat
				FITB	1.0% beat	1.5% beat		WFC	3.6% beat	69% beat

Click to enlarge

Good Core Trends

Truist also stood out with its core lending and funding performance.

Loan growth of 3.6% qoq (sequential, average balance) was more than 150bp better than the average large bank for the quarter and slightly better than the overall growth in bank lending in the fourth quarter. Growth was strong in C&I lending (up almost 5%, outperforming by almost 250bp) and mortgage lending (up almost 6%, outperforming by more than 350bp), and Truist also outperformed in categories like CRE (up more than 1%, outperforming by about 200bp).

Truist is also seeing strong yield leverage given its positioning as a commercial “Main Street” bank, with overall yield up 78bp qoq to 5.14% (core), with C&I yield up 115bp and CRE yield up 119bp. Credit quality remains benign, with 1% sequential growth in non-performing loans and stable NPL and NPA ratios, though with a slight uptick in charge-offs (0.34% vs. 0.27%).

On the deposit side, total deposits declined almost 2% on an average balance basis, which was still on the better side of average, as was the 3% decline in average non-interest-bearing deposits. The cycle-to-date cumulative beta of 15% (and 22% for interest-bearing deposits) compares well to its peer group, though with non-interest-bearing deposits down 6% on an end-of-period basis, expect Truist to have to rely more on higher-cost funding to support loan growth.

Opportunities To Grow And Add Value

I do still see opportunities for Truist to outperform from here, but whether Truist management executes on those opportunities will determine if the company performs like a Corvette (Wells Fargo analyst Mike Mayo’s preferred analogy with Truist) or more like a Trans-Am.

Core Main Street lending is likely to be more challenging in 2023 given weaker business confidence, but Truist is leveraged to faster-growing Southeastern markets, and with the merger integration work largely done, the company is now more actively going after growth opportunities in commercial lending. Truist is already strong in areas like dealer floorplan finance and equipment finance, but I’d like to see the company step up in areas like CRE lending and specialty verticals, as well as in corporate services (treasury and payments).

On the retail side, I like the company’s efforts in asset management, digital, and deposits (rolling out new products). I do think an expanded credit card business is an opportunity worth pursuing, though.

Last and by no means least is the possibility of monetizing the company’s large insurance brokerage business. There has always been speculation around whether Truist would consider a partial sale or listing of the business, and The Insurer recently reported that the company was exploring a potential sale of 20% to 30% of the business and/or a possible partial listing (an IPO). I do see such potential moves as possibly unlocking some value (brokers trade at over 2x the P/E of banks), but this business has been a great all-weather source of high-margin revenue, and I’d hate to see a full disposal of the asset.

The Outlook

In a quarter where many banks have been talking down expectations for 2023, Truist’s guidance was relatively better. Management guided to meaningfully strong net interest income growth (possibly double-digit for the year) on good loan growth and earning asset leverage, as well as well-controlled deposit costs. Fee income growth isn’t looking as strong, but 7% to 9% revenue growth would still be good. Likewise, expense growth guidance of 5% to 6% (much of this driven by unavoidable items like FDIC insurance) suggests around 200bp of potential operating leverage – a key differentiator, I believe, for 2023.

I’m still expecting long-term core earnings growth in the neighborhood of 4% and a long-term ROE in the low double-digits. That’s enough to support a near-term fair value in the mid-$50’s, as is my estimate of near-term ROTCE (supporting a 3.1x P/TBV), and an 11x multiple on my FY’23 EPS estimate ($4.91, down from $5.19 previously) gives me a $54 fair value.

The Bottom Line

The operating outlook for banks is still quite challenging, and I don’t think these stocks are going to really work as a group until there’s visibility on Fed easing. While many expect that before year-end, I believe it could stretch into 2024, so I’m still somewhat cautious on the sector. That said, I think Truist will prove that it can execute well through more challenging times and I think these shares still offer worthwhile upside from here.