Truist Financial Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Truist Financial Corporation is a purpose-driven financial services company committed to inspiring and building better lives and communities. The company provides banking, insurance, and wealth management services to both consumers and commercial clients. The company has a large network of branches and operates in different states.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Truist is primarily a regional bank, which means it operates banking services in specific geographic areas. It offers a complete suite of financial products and services, including banking, brokerage, wealth management, and insurance services.

Revenue Distribution:

Truist’s revenue streams are diverse, but mainly comprised of Net Interest Income (NII), Non-Interest Income, and Net Interest Margin (NIM). NII is the income from interest-earning assets like loans, less the interest paid on liabilities like deposits. Non-Interest Income comprises of non-lending income, such as service charges, card fees, and wealth management fees. NIM, on the other hand, captures the difference between what banks earn on loans and what it pays on deposits and is used to measure the profitability of the core lending business. NII is the most significant revenue driver for the company.

Competitive Landscape:

Truist operates in a highly competitive landscape which include large, established national banks, other regional banks and many fintech competitors. Competitors such as Bank of America and Wells Fargo have scale advantages, while regional banks may have a more focused relationship approach and better expertise in local economies. Fintech companies are rapidly grabbing market share in certain areas, especially in digital payments and online banking and providing fierce competition. Truist also competes with other players in the insurance, brokerage, and wealth management industries. What makes the company different is its focus on a client-centric and streamlined process to provide superior service, and a mix of regional and local expertise. They believe they can compete with larger firms by understanding the dynamics of the areas they operate in as well as provide customer focused experiences. They also try to combine data and digital expertise with a personal touch and relationships to serve their customers better.

The company is aiming to grow its revenue through more organic growth than acquisitions, especially in high-growth markets. They are enhancing the customer experience through personalized services and digital enhancements. They also continue to emphasize efficiency in their operations and focus on risk mitigation.

They are trying to move away from the heavy reliance on lending income and diversify their revenue stream by expanding non-interest revenue streams, such as wealth management and payments. In the latest earnings call, management has said they were on track to reduce their reliance on net interest revenue and grow other sources of revenue.

Industry Trends:

The banking industry is undergoing a lot of change due to tech advancements and shifting consumer behavior, for example, mobile and digital-first banking as well as a shift towards cashless payments. The interest rate environment has a significant impact on the earnings and profitability of banks. Also, stricter regulatory requirements and increased cybersecurity threats are increasing operational costs of the industry.

Margins:

Truist’s margins are a bit lower than desired, partly due to the increased competition and the challenging economic environment. However, their margins have shown improvement in the last several quarters as the bank is trying to manage costs and increase profitability.

Financials:

Truist has a big portfolio of loans including residential, commercial, and credit cards. These loans are what generate interest income for the bank, and the interest rate on them is tied to the performance of the economy. The bank also holds a considerable amount of investment securities, mostly U.S. treasuries and other securities, which generate interest income as well. On the liability side, the company has lots of deposits from its customers, which it pays interest to. These deposits fund the company’s loan operations.

Key Financial Highlights (From 10-Q filings for period ending September 30, 2024):

Total Assets: Approximately $525.1 billion as of September 30, 2024.
Total Liabilities: Approximately $460.6 billion as of September 30, 2024.
Total Shareholders’ Equity: Approximately $64.5 billion as of September 30, 2024.
Net Income: $1.034 billion for the three months ended September 30, 2024
Total Revenue: $6.478 billion (6.3% compared to 3Q 2023)

Key Financial Highlights (From 10-K filings for the year ending December 31, 2023)

Total Assets: $519.3B
Net Interest Income $14.3B
Non-Interest Income $8.5B
Net Income: $3.1B
Average Yield on Deposits: 2.04%
Average Yield on Loans: 5.20%

From the 2024 financial reports, its net income has increased from $1.01 billion from previous quarter to $1.034 billion, but also an increase in credit losses. The increase in revenue over the prior year reflects, in part, a 21.7 percent increase in investment banking and trading income. The company also reduced their reliance on net interest income, increasing other sources of revenue. The efficiency ratio in 2024 also improved compared to the prior year. Net interest income was also negatively affected by lower deposit balances and higher borrowing costs due to the federal rate hikes.

For the most recent quarter ended September 2024, Truist’s average earning assets were $477.9 billion, average interest-bearing deposits were $313.9 billion and total average deposits were $366.2 billion.

Moat Analysis

Truist has a couple of factors that provide a narrow moat, but it is not a strong or durable moat.

Scale Advantage: Truist is a large bank, and operates in different states and through its many branches it has built a strong brand in those markets. The larger size allows them to acquire lower cost of funding and also more operating efficiency. The geographic aspect also adds an advantage because being big in the local economy means that they have more customers and can better address their needs.
Switching Costs: Truist has developed customer loyalty through a wide array of banking products and relationships. A lot of its revenue comes from retail customers as well as small business owners. These customers are sometimes reluctant to switch to another bank, even when the competition offers lower prices, because of existing relationships, time constraints, and the need to make a change in all their account related information, and as a result of this inertia, Truist can retain many loyal customers.

Based on all of these factors, a moat rating of 2/5 is appropriate. The moat is narrow because it is not impossible for competitors to provide similar products or compete in similar geographic regions.

Risks

Economic Downturns: The bank’s earnings are strongly affected by the performance of the economy, for example, higher interest rates and lower credit quality may impact its financials and overall performance.
Regulations: Being a financial institution means that they are subject to stringent regulations and regulators such as Federal Reserve, SEC, FINRA, CFPB have a high oversight on its operations. Changes in regulation, and government intervention can have a significant impact on the company. The CFPB is one of the regulators with more authority over the banking industry.
Interest Rate Risk: Banks profits are dependent on the difference between the interest it earns on loans and the interest it pays on deposits. A period of rapid and unexpected increase in interest rate environment could seriously affect the company’s profitability.
Credit Risk: A major risk the company has is the ability of its borrowers to repay the loans and that can be affected due to changing economic conditions, and as seen in the present state of the economy, loan losses are rising.
Competition: As discussed before, the financial sector has become very competitive and many competitors in various industries are competing with Truist for its clients. Also, many new fintech competitors are providing innovative solutions that might erode the competitive position of Truist.
Cybersecurity: Cyberattacks and threats are also on the rise these days, and if the company fails to protect its digital platform or customers information, this would have significant reputational and financial implications.
Integration Challenges: The company has been actively acquiring other businesses to grow, but combining systems, people, and culture can create some unforeseen issues.
Customer Preference: A trend toward online banking, and preference of new-age customers for more convenient and mobile banking options is increasing at an amazing pace. A company’s inability to adapt to these preferences, and satisfy customer desires could result in a decline.

Business Resilience:

Truist’s core business of banking is relatively stable, as banks provide essential services that are generally recession proof. Its customer base is also fairly diversified and it has a decent track record for weathering economic shocks. The company has proven its resilience through multiple economic cycles over the decades and made necessary adjustments to its business plan. Also it has been quick to adapt to technology and customer needs.

Understandability: 3 / 5

While the basic business of banking is not difficult to understand, the complexities associated with a bank like Truist make it somewhat harder for most investors to properly value and analyze. The various regulations, economic conditions that affect the banks, and the different moving parts associated with financials make its understandability a 3/5.

Balance Sheet Health: 4 / 5

Truist’s balance sheet is good but has some areas that could improve.

Debt-to-equity ratios are within a comfortable range, with the company targeting a level of 15 percent debt. - The liquidity ratio is good. - They have a strong capital base with good capital ratios. - The bank continues to take measures to improve its financial position and risk management. While the financial health is robust, some challenges such as increased loan provisions and uncertainties may pose challenges. Also, the balance sheet is complex and requires proper understanding to analyze well.

Recent Concerns and Controversies:

There are some concerns regarding the elevated risk levels on commercial real estate loans with the company. This could affect its profitability. Management, however, stated that they are adequately managing these risks.
In the latest earnings call, management acknowledged headwinds due to interest rates and the possibility of an economic slowdown.
There were some discussions in the earnings calls regarding the higher levels of non-performing loans. However, management stated that it is normal given the changing market environment and credit quality remains strong. They also stated that they are seeing improvements in other loan categories.
The company has also been investing heavily into technology and trying to transform its digital products and services. The outcome from these investments is still to be seen.
The company is undergoing an integration process and many of its operations are still getting accustomed to the new business environment.

Overall: Truist is a company that is navigating through a changing business environment and has some inherent competitive advantages. But they also face a number of risks and are operating in a competitive environment. The financial health is mostly sound, and while there are some operational concerns, they are diligently trying to address these areas.