Truist Financial (TFC 0.14%), the entity that was created by the merger of bank giants BB&T and SunTrust, has many qualities that make it an attractive bank stock. One of those differentiators is its large insurance division, which is the fifth-largest insurance broker in the U.S. and the sixth-largest in the world.
The insurance business generates a nice stream of fee income that helps diversify the bank's revenue, and many of Truist's peers don't have insurance, so it's a nice differentiator.
But recently there have been rumors swirling that Truist may be looking to either spin off the unit or sell a portion of the unit to realize its full value. Let's take a look at why management is considering this and what route they are likely to take.
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Truist management is trying to unlock value
The main reason a company might consider spinning off a unit is if it believes it would be valued higher on its own, which is often the case, or if it thinks management could focus on its core business better without the unit attached.
Truist's insurance unit is a strong-performing business. In 2022 it generated more than $3 billion of revenue, or about 13% of the bank's total revenue, and about 9% of total profits.
As Wells Fargo analyst Mike Mayo noted on Truist's most recent earnings call, publicly comparable insurance peers are trading at three times the earnings multiple of Truist the bank. When pressed by analysts on how Truist would approach the insurance business, CEO Bill Rogers was tight-lipped, although he did say that the company liked the insurance business and wanted to continue to grow it.
"We have done ... probably 100 acquisitions over time. So, we have got a really good framework in assisting that business to grow. But as I mentioned in my earlier comments, it is a consolidated business. So, we want to make sure that we have got all the flexibility and capability to create capital and support all of our businesses and their growth," Rogers said.
Media reports have suggested that Truist hired investment bankers to potentially sell up to 30% of the insurance business to investors. Interestingly, Mayo wrote in a past research note that selling a part of the unit could free up capital equal to 5% to 8% of the bank's total market cap.
But Truist has a healthy capital buffer right now, and management expects to see its capital levels increase this year.
Which direction should the bank go in?
While a bank's core business is typically its loan and deposit franchise, fee income revenue streams have become a core part of how banks differentiate themselves, and it usually plays a decent role in their valuations. Banking can often be viewed as a commoditized business, so it's rare to see a large bank these days that solely relies on loan revenue.
Truist's insurance business is far and away its largest source of fee income. Gaining the traction and scale that Truist has achieved in its insurance unit definitely plays a big role in setting the bank apart from its peers, and is likely one of the reasons the bank trades toward the top of its peer group on a forward-earnings basis and a price-to-tangible-book-value basis.
Ultimately, even if spinning off the unit realizes more value for the insurance unit and frees up capital, I think it would likely hurt Truist's valuation as a whole. I would prefer the bank to sell a portion of the unit over a spin-off, but that would come with complications of its own that management would need to address.
