1 bank to own in this low rate and low loan growth environment


Truist Financial (NYSE: TFC), the $ 522 billion asset byproduct of the BB&T and SunTrust merger, is still in the process of integrating the two banks into one. The deal, which was first announced in 2019, is the largest banking deal in a decade. Truist delivered strong overall earnings in the second quarter, which showed both positive and negative sides as loan growth continued to prove elusive and fee income was strong. While there is still a lot of work to be done before the Truist merger is complete and the bank can really go on the offensive, I like this banking action in this current low interest rate environment. loan growth. Here’s why.

Unboxing second quarter results

Truist generated $ 1.16 in diluted earnings per share (EPS) in the second quarter, which translated into a return of 1.28% on average assets (ROAA, a measure of how management uses assets to generate profit) and a return of almost 19% on average tangible assets. ordinary equity (ROATCE, the technical rate of return that the company has achieved on its physical capital). Both are good results.

However, the numbers were significantly inflated by a release of $ 576 million of reserve capital previously set aside for loan losses that did not materialize. The $ 576 million version equates to roughly $ 0.43 of BPA, which is pretty significant. But on the other hand, Truist also dealt with one-time and one-time costs during the quarter, such as those related to the merger. In the second quarter, Truist lost approximately $ 0.39 of EPS due to merger and restructuring costs, additional merger-related operating expenses and a $ 200 million contribution to the charity fund of the bank. Remove these costs and the bank generates EPS of $ 1.55 with an ROAA of 1.69% and ROATCE of almost 25%. However, costs are likely to be high until the full cost savings from the merger are realized, which is unlikely to happen until late 2022.

Elsewhere in the neighborhood, there were two big stories. The first was about loan growth, which was disappointing. Loan growth has been a struggle in the industry, but Truist appeared to struggle more disproportionately than other major banks in terms of loan balances and income from its own loan portfolio. But the bank had a good quarter with its commission-based businesses, particularly in its insurance business.

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A diversified income mix

In almost all cases, loan growth disappointed in the quarter. Average loan balances fell 2% from the previous quarter and more than 10% year-on-year, and virtually none of Truist’s loan lines increased from the first quarter. Net interest income, which is primarily profits on loans and securities, also continued to decline from the first quarter, while the bank’s net interest margin, the difference between what the bank made on interest-bearing assets such as loans and paid on interest-bearing liabilities, such as deposits, declined a further 0.13 percentage point in the quarter.

Fee income, however, climbed from over $ 200 million in the second quarter to over $ 2.4 billion, thanks to a record quarter in the bank’s insurance business, which is really the biggest. differentiator from Truist. This business generated record insurance revenue of $ 690 million, up $ 64 million from the previous quarter and nearly $ 110 million from the second quarter of 2020. This resulted in a contribution of $ 156 million in net profit.

Management attributed the success of the insurance business this quarter to strong organic growth and high retention rates, as well as a firm pricing market. Chris Henson, head of banking and insurance at Truist, called the second quarter insurance performance “basically the best quarter I have seen at this company in my career”. He said the bank hired a consultant three years ago to break down the insurance business and look at all the opportunities, and now that process is paying off. Henson also said the bank is embarking on another three-year period of review and improvement as management believes the insurance industry can do more. He said year-to-date new business growth is up 19% from the same period last year, of which nearly 15% is organic once acquisitions are cut.

While insurance may have grabbed the headlines, Truist also reported record revenues in its other fee-based revenue lines, including wealth management, card and payment fees, and income related to commercial real estate, as well as very high income from investment banking.

Commission income compensates for lack of loan growth

Most banks are having trouble servicing loans as loan growth has yet to materialize and customers are repaying their loans at higher than normal rates due to good savings built up during the pandemic. In addition, the low interest rate environment likely squeezed profits from banks’ existing loan portfolios and new loans, resulting in a double whammy.

Truist has struggled on the lending front, but has generated record revenues in several of its fee income lines of business, including its strong insurance business. Not only does Truist have a very diverse fee income business, but it is a business that can do well in a variety of different economic environments, which is useful in a time like this.

And despite the noise during the quarter related to reserve releases and one-time and one-time expenses, Truist continues to deliver strong results, particularly on an adjusted basis. The bank is also still cutting spending on the merger and investing a lot of money in digital banking initiatives. it is now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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