What happened
Shares of the super-regional bank Truist Financial (TFC 0.13%) fell close to 30% through the first six months of 2023, according to data compiled by S&P Global Market Intelligence. The main reason for the decline largely has to do with the fallout from the banking crisis earlier this year.
So what
Starting in March, several banks in the U.S. were placed into receivership with the Federal Deposit Insurance Corporation after investors became concerned that banks would need to sell bonds that were underwater to cover deposit outflows.
Since then, investors have been keeping a close eye on banks with unrealized bond losses as the industry grapples with higher deposit costs and outflows of cheaper, stickier deposits. Super-regional bank stocks have been sold off, and Truist has not been spared.
At the end of the first quarter, Truist had close to $20 billion of unrealized bond losses, although keep in mind that more than $11 billion of that has already been factored into its equity calculation.
At an industry conference at the end of May, CEO Bill Rogers also said deposits were down roughly 2% in the quarter but largely attributed that to quantitative tightening, where the Federal Reserve is reducing its balance sheet and therefore draining deposits from the system. Rogers also said the deposit pressure is likely to impact revenue.
Investors have also been concerned that banks could be facing much higher loan losses from commercial real estate, and that tougher regulatory capital requirements could be coming as well, especially for the super-regional banks
Now what
Make no mistake, banks face a tough second quarter of earnings ahead, a challenging near-term outlook for earnings, and tougher regulatory requirements.
But I do believe that Truist can navigate these more-difficult waters and rebound on the other side. While the bank does have a lot of unrealized bond losses, those are just paper losses, and the bank can recoup them as long as they can hold the bonds until maturity. Given that Truist has a diverse consumer and commercial deposit base, I don't expect the bank to have to sell bonds.
Lastly, the bank should be able to build capital through earnings as the year progresses and continue to pay what is now close to a 6.5% annual dividend yield. Now trading below eight times forward earnings, I like the stock at these levels.