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Article Summary:
- Truist Financial is set to announce its third-quarter earnings pre-market on Thursday, October 17. Analysts anticipate relatively stable EPS.
- After divesting its remaining stake in Truist Insurance Holdings, Truist has transitioned into a bank heavily reliant on NII, with increased long-term sensitivity to interest rate changes.
- On the bright side, Truist’s current balance sheet structure positions it to achieve solid net interest margin growth during the upcoming easing cycle.
- Trading at approximately 11.6x projected 2024 EPS, the stock appears to be fairly valued, assuming a ~10% required rate of return.
Truist Financial (NYSE:TFC) reported its third-quarter earnings on October 17, 2024.
Following the divestiture of its remaining stake in Truist Insurance Holdings, the company has become more reliant on net interest income (NII), increasing its sensitivity to interest rate fluctuations. This shift emphasizes the importance of trends in Truist's core banking operations.
On the positive side, Truist's current balance sheet structure positions it to benefit from potential net interest margin (NIM) expansion during the anticipated easing cycle. Additionally, the company's improved regulatory capital standing provides greater flexibility to pursue growth opportunities, which could mitigate some challenges associated with this transition.
At approximately 11.6 times the consensus 2024 earnings per share (EPS) and a 1.2 times multiple of tangible book value (excluding accumulated other comprehensive income), the stock appears to be fairly valued. This valuation aligns with the roughly 10% annualized returns that many investors seek.
A Quick Look Back at Q2
On the other hand, management undertook a strategic restructuring of the balance sheet, selling approximately $27 billion of lower-yielding securities at a post-tax loss of $5.1 billion. The proceeds, totaling around $39 billion, were reinvested at an average yield of slightly over 5.2%, boosting net interest margin (NIM) by 14 basis points sequentially to 3.03%. This yield improvement effectively offset the earnings impact from the TIH divestiture.
For the quarter, Truist reported an adjusted EPS of $0.90, staying relatively stable compared to the same period last year.
Q3 and Beyond: A Focus on Asset Quality
Truist followers are likely to focus closely on asset quality in the forthcoming Q3 report. In the prior quarter, the bank's net charge-off (NCO) rate improved, dropping 6 basis points sequentially to 0.58%. For the first half of the year, the NCO rate averaged about 0.61%, with management projecting it to reach around 65 basis points for the full year. Notably, Truist's NCO rate has remained relatively stable for some time. This positions the bank favorably, as many peers experienced increasing NCO rates during Q2.
That said, NCO ratios can be misleading when viewed in isolation. Essentially, these ratios reflect the cost of risk, and high or low figures may simply indicate the types of loans being originated. For a more comprehensive analysis, NCO ratios should be assessed alongside loan yields. While Truist's NCO ratio is currently lower than the industry average, its loan yield also falls below average, suggesting it may not necessarily enjoy a cost advantage in underwriting.
Even so, the stabilization of Truist's NCO ratio ahead of potential rate cuts is an encouraging sign. Given that lower interest rates typically benefit credit quality—albeit with some lag—if Truist's NCO ratio does peak at approximately 65 basis points, it will have navigated this cycle effectively.
In Summary
Truist is set to announce its earnings before the market opens on Thursday, October 17. Following the sale of its remaining stake in Truist Insurance Holdings during the last period, the company is now more exposed to long-term macroeconomic trends within its core banking operations.
On a positive note, Truist appears to have solid net interest margin (NIM) prospects, assuming a normalized effective Fed funds rate of 2.5–3%. Additionally, the bank is showing relatively strong performance in terms of asset quality, making these areas critical to monitor in the upcoming periods.
At current levels, the stock seems to be positioned for approximately 10% annualized returns.
So, What Is Truist?
Truist is a purpose-driven financial services company, formed by the historic merger of equals of BB&T and SunTrust. We serve clients in a number of high-growth markets in the country, offering a wide range of financial services. At Truist, our purpose is to inspire and build better lives and communities. That happens through real care to make things better. To meet client needs, to empower teammates, and to lift up communities. Learn more about Truist on truist com.
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Analyst’s Disclosure: I do not hold any stock, options, or similar derivatives in the companies mentioned in this article, nor do I intend to initiate any such positions within the next 72 hours. The views expressed here are solely my own and based on my independent analysis. I am not receiving any compensation for this article apart from payment by Seeking Alpha. Additionally, I have no business affiliations with the companies discussed.
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