Truist Financial (NYSE:TFC), the $522-billion-asset byproduct of the merger between BB&T and SunTrust, is still deep in the midst of integrating the two banks into one. The deal, which first got announced in 2019, is the largest bank deal in a decade. Truist generated strong overall earnings in the second quarter that showed some positives and some negatives, as loan growth continued to prove elusive and fee income came in strong. While there is still a lot of work to do before the Truist merger is complete and the bank can really go on the offensive, I like this bank stock in this current low-interest-rate and low-loan-growth environment. Here's why.
Unpacking Q2 results
Truist generated $1.16 in diluted earnings per share (EPS) in the second quarter, resulting in a 1.28% return on average assets (ROAA, a measurement of how well management uses assets to generate earnings), and a nearly 19% return on average tangible common equity (ROATCE, the technical rate of return the company made on its physical capital). Both are strong results.
However, the numbers were significantly inflated by a $576 million release of reserve capital previously set aside for loan losses that did not materialize. The $576 million release is equivalent to roughly $0.43 EPS, which is quite significant. But on the other hand, Truist also dealt with one-time, non-recurring costs in the quarter, such as those related to the merger. In the second quarter, Truist lost about $0.39 of EPS due to merger-related and restructuring charges, incremental operating expenses related to the merger, and a $200 million contribution to the bank's charity fund. Strip out those costs and the bank generates $1.55 EPS with a 1.69% ROAA and a nearly 25% ROATCE. However, costs are likely to be elevated until full cost savings from the merger are realized, which will likely not occur until the end of 2022.
Elsewhere in the quarter, there were two big story lines. The first was around loan growth, which was disappointing. Loan growth has been a struggle in the industry, but Truist seemed to struggle in a more outsize way than other large banks in terms of loan balances and income from its own loan portfolio. But the bank had a nice quarter with its fee-based business lines, particularly in its insurance business.
A diversified revenue mix
On almost all accounts, loan growth disappointed in the quarter. Average loan balances dropped 2% from the previous quarter and more than 10% year over year, and virtually none of Truist's lending lines grew from the first quarter. Net interest income, which is essentially the profits made on loans and securities, also continued to fall from the first quarter, while the bank's net interest margin, the difference between what the bank makes on interest-earning assets such as loans and pays out on interest-bearing liabilities such as deposits, fell another 0.13 percentage points in the quarter.
Fee income, however, climbed more than $200 million in the second quarter to more than $2.4 billion, led by a record quarter in the bank's insurance business, which is really Truist's main differentiator. That business brought in a record $690 million in insurance income, up $64 million from the previous quarter and nearly $110 million from the second quarter of 2020. That resulted in $156 million contribution to net income.
Management attributed the success in the insurance business this quarter to strong organic growth and retention rates, as well as a firm pricing market. Chris Henson, head of banking and insurance at Truist, called the second-quarter insurance performance "fundamentally the best quarter I have seen in this business in my career." He said the bank brought in a consultant three years ago to break down the insurance business and look at all the opportunities, and now that process is bearing fruit. Henson also said the bank is embarking on another three-year period of review and improvement because management thinks the insurance business can do more. He said new business growth year to date is up 19% from the same period last year, nearly 15% of which is organic once you strip out acquisitions.
While insurance perhaps grabbed the headlines, Truist also reported record revenue in its other fee-based income lines, including wealth management, card and payment related fees, and commercial real estate related income, as well as very strong investment banking income.
Fee income offsets lacking loan growth
Most banks are struggling in their loan department, as loan growth still has not come to fruition and customers pay off their loans at higher rates than normal due to good savings built up during the pandemic. Additionally, the low-interest-rate environment has likely cut profits from banks' existing loan portfolios and new loans, resulting in a double whammy.
Truist struggled on the loan front, but delivered record revenue in several of its fee income business lines, including its strong insurance business. Not only does Truist have a very well-diversified fee income business, but it's a business that can do well in a variety of different economic environments, which is helpful in a time like this.
And despite the noise in the quarter from reserve releases and one-time, non-recurring expenses, Truist is still generating strong results, especially on an adjusted basis. The bank is also still deep in the process of stripping out expenses as part of the merger as well as investing lots of money in digital banking initiatives, so once the noise clears, I think there is a very good chance Truist will be even stronger than it is now.