Banks have had a tough 2023, and
Truist Financial
has suffered more than most. The company, though, is making big changes that could turn its stock into a winner.
The banking mini-crisis in March hit Truist (ticker: TFC)—and hit it hard. The stock has fallen 43% since its early February 2023 high, more than the 34% decline in the
SPDR S&P Regional Banking
exchange-traded fund (KRE) over that time. That’s a reflection not just of the problems that are facing all banks—slowing loan demand, margin pressures from higher rates, and fleeing deposits—but Truist’s own issues as well. The Charlotte, N.C.-based company, a combination of BB&T and SunTrust Banks, has never really lived up to the promise of its merger in late 2019.
The good news: Truist has finally acknowledged that it needs to do a better job. It’s cutting costs by selling or closing underperforming businesses and reducing the number of workers. At the same time, its sales, margins, and earnings growth are likely to hold up better than its peers partly because many of its fee-based businesses, such as insurance, are growing this year. All this for a valuation that resides near the bottom of the banking sector and with a dividend that is substantial enough to pay investors to wait for a turnaround.
The stock is “attractive,” says Gary Hurlbut, a senior portfolio manager at Ziegler Capital Management, who owns shares of Truist. “If I could see improvement in expenses, I’d probably add a little bit.”
For a bank whose name implies trust, there has certainly been a lack of it. The merger of BB&T and SunTrust happened with much fanfare, as management promised the full integration of all systems would be done by 2021. It hasn’t delivered.
The two banks were never integrated properly, causing costs to eat into sales and dent profits. What’s more, the company has missed earnings estimates 11 times during the past 20 quarters, when more than 70% of other banks beat. And while Wall Street expects the typical regional bank to report earnings in 2024 that are 2% higher than they were in 2019, Truist is expected to earn $3.66 a share, still below 2019’s $3.76.
Before you can fix a problem, you have to acknowledge it, and that is what Truist has finally done. At an industry conference earlier this month, CEO William Rogers announced steps the company would take to turn around what he admitted has been a disappointing financial performance.
The first step? Eliminating $750 million in operating expenses over the next 12 to 18 months, with $300 million coming from layoffs, $250 million from business realignment, and $200 million from technology that supports lending and wealth management.
Those cuts won’t cause expenses to drop, but it will mean they grow by just 0% to 1% in 2024, according to UBS analyst Erika Najarian, down from 2023’s estimated 7% expense growth. “[We] expect the greater visibility to remove a significant overhang for the stock,” she writes.
Cutting costs isn’t the only change Truist is making. The company simplified its management structure, and it has been eliminating underperforming businesses, including indirect auto loans and other single-product ventures, and some unprofitable bond trading. It offloaded its $5 billion student loan portfolio and sold a minority stake in Truist Insurance Holdings earlier this year, which boosted its Tier 1 capital ratio. It was all designed to make Truist a more focused—and more profitable—financial institution.
“We expect management’s refocused efficiency improvement efforts will begin to yield greater progress into 2024,” writes Raymond James analyst Michael Rose, who forecasts roughly flat earnings per share year over year at $3.65 in 2024.
Change will take time, though. Revenue this year is expected at about $23.6 billion, up about 1.5% from 2022, but could slip 2.6% to $23 billion in 2024. And margins are expected to decline by 1.2 percentage points next year.
Everything starts to look up in 2025, however, as the changes start to take hold. Analysts expect net interest income to rise about $500 million to just over $14 billion in 2025 from next year, pushing total revenue to about $23.9 billion, a record. Margins could rise if the Federal Reserve stops hiking rates, stabilizing short-term borrowing costs. With costs in check, EPS would rise to about $4.10 in 2025, up 15% from 2024.
Overall, “this expense program helps provide a credible path to hold costs relatively flat,” writes Goldman Sachs analyst Ryan Nash, who forecasts EPS to grow to $3.80 in 2025 from $3.70 in 2024.
All this will require patience, but keep in mind that Truist currently pays a quarterly dividend of $0.52, good for a yield of 7.3% at Wednesday’s closing price of $28.37. The dividend looks safe too. The payout totals just under $2.8 billion a year, which is easily covered by next year’s net income of $4.8 billion. Even an earnings disappointment should still leave plenty of cash to return to shareholders.
And if business goes well, the total return could be even better. Truist trades at just 8.2 times 12-month forward earnings right now, below the SPDR S&P Regional Banking ETF’s 9.1 times. A 9.1 multiple on earnings of $3.66 would put Truist stock at $33.31, up 17%. Add the annualized dividend payment of $2.08, and the total return would be about 25%. A 9.1 multiple on 2025 earnings would put the stock up 32%.
“I’m willing to say, ‘OK, we’ll give them a chance to execute,’” says David Ellison, a portfolio manager at Hennessy Funds. “We’re getting a dividend while we wait.”
Given Truist’s earnings potential, you won’t have to wait too long.
Write to Jacob Sonenshine at [email protected]
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