The super-regional bank Truist Financial Group (TFC -2.31%) has widely underperformed its peers this year, with its stock down more than 30%, compared to the SPDR S&P Regional Banking ETF only down about 16.8% this year.
Truist is a result of the large merger of equals between SunTrust and BB&T, which created a bank with more than $548 billion of assets.
I feel like Truist gets a lot less attention in the media than some of the other large banks out there, which could be due to the complexity of analyzing the new bank as it's gone through this big merger in recent years. Still, the bank continues to trade at a very high valuation. Is the stock a buy before 2023? Let's take a look.
Getting through the merger
Integrating two mammoth banks is no easy task because there are a lot of merger-related costs that will throw off earnings results. Truist has now been dealing with these merger-related costs for the last few years, which can be hundreds of millions of dollars per quarter.
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But the merger-related costs do seem to be winding down now. In the third quarter, these costs totaled $152 million, which is down 30% from the prior quarter and 58% year over year. Truist CEO Bill Rogers said the final merger costs will come in the fourth quarter and the completion of the integration will be a "monumental move forward." Management also remains confident in its ability to achieve $1.6 billion of merger-related net cost savings by the end of this year.
Truist has a lot of components that makes it an attractive banking franchise. The bank has an asset-sensitive balance sheet, meaning it benefits from the rising interest rate environment. In the third quarter of the year, core net interest income (NII) -- the money the bank makes on loans and securities after funding those assets -- grew 14% from the sequential quarter. Management also said that as long as interest rates keep rising it expects to be able to keep growing NII, which means NII growth could continue for the next few quarters.
Fee income made up more than 36% of total revenue in the third quarter, driven by Truist's strong insurance division. Truist also has strong deposit market share in lots of states experiencing population growth, such as Florida and South Carolina.
Near-term headwinds
Investors and analysts do, however, seem frustrated with the follow-through now that the integration of the merger is pretty much complete. One of the things bank investors focus on is operating leverage, which means growing revenue faster than expenses.
Truist is expecting to achieve slight positive operating leverage this year but that's nothing special compared to its peers, which are taking advantage of the rising interest rate environment to generate some of the best operating leverage in years. But Truist on its most recent earnings call did not provide guidance for operating leverage in 2023.
Part of the problem seems to be higher-than-expected operational losses for items such as fraud-related refunds, but it's hard to know everything baked into these operating losses. Rogers said these operating losses have made him "cranky" but also that he sees room for improvement in this category.
Additionally, Truist has been investing a lot into its tech capabilities, making bolt-on acquisitions and investing in its investment banking division as well. After several years of dealing with the merger integration and ongoing investment into the business, shareholders are likely starting to get restless and would like to see the payoff.
Is the stock a buy before 2023?
Truist likely has some more work to do to get the bank to where it needs to be, but management is finally transitioning to more of an offensive position.
Management is also still confident that it can create a bank with leading financial performance including an efficiency ratio (expenses/revenue) in the low 50s percentile as well as a return on average tangible common equity in the low 20s percentile. If it can achieve these numbers that should bode well for the stock.
In the near term, there are likely some other banks out there that can rebound more quickly but I do think Truist will be a good long-term stock to own, given its strong franchise, revenue diversity, and geographic location. Timing the market can be difficult, so purchasing it before the end of the year and holding it long term is certainly a reasonable move.
