September 28, 2020 BARRON’S 15
on technology spread across a much
broader customer base.” He has an
Outperform rating on Truist stock.
Truist—which is well capitalized,
trades at about 80% of book value,
and has a loan portfolio that’s in
good shape—should have the capa-
bility to improve its return on tangi-
ble common equity, or ROTCE, and
lift its stock valuation. That’s likely
to occur when the cost savings kick
in even more, Covid-19 fades, and
interest rates move back toward
more normal levels, several people
who follow the company tell Bar-
ron’s. Its second-quarter adjusted
ROTCE was 14.17%.
“The banking industry on average
will only be able to generate...11% or
12% [ROTCE] in a zero-interest rate
environment,” says Ryan Nash, a
banking analyst at Goldman Sachs.
“These guys are already putting up
14% to 15%, and they have a lot of cost
savings coming.”
The stock—whose return is about
minus 33% this year—yields about 5%,
and the company remains committed
to the dividend. The shares recently
traded around $35 and change.
The merger “creates a leading fi-
nancial institution that is going to
have top-decile efficiency and re-
turns,” says Nash, who has a Buy rat-
ing on the stock, with a 12-month
price target of $45.
A bank’s efficiency ratio measures
noninterest expenses as a percentage
of its revenue. As of June 30, Truist’s
was at 55.8%, excluding special items
such as merger expenses, but the com-
pany aims to get it into the low 50s
with the help of cost savings.
In the meantime, Truist isn’t
skimping on technology. Last year,
before the merger took effect, the out-
lay totaled about $2.3 billion, accord-
ing to Truist CFO Daryl Bible. In 2021
it’s expected to be around $3 billion,
up from $2.7 billion this year.
Digital-commerce revenue, includ-
ing auto loans and other consumer
products, grew 19% in the first seven
months of 2020 compared with a year
earlier, and active mobile-app users
climbed 12% to 3.7 million.
Though both banks were based in
the South, BB&T and SunTrust had
different, complementary profiles.
BB&T, based in Winston-Salem, N.C.,
had more of a smaller-town and
smaller-company focus than SunTrust
did. BB&T also brought a large insur-
ance brokerage to the merger. Based in
Atlanta, SunTrust had a strong retail
franchise and an investment bank,
Robinson Humphrey, that catered to
larger companies.
In an attempt to meld the cultures,
the merged company was named
Truist—a move that drew brand-rec-
ognition concerns for being bland
when it was announced in June
2019—and it’s now based in Char-
lotte. Truist’s CEO, Kelly King, hails
from BB&T, but his anointed succes-
sor, Bill Rogers, currently the chief
operating officer and former CEO of
SunTrust, is set to assume the top job
a year from now.
One thing the two legacy companies
share is a fairly conservative lending
approach. As of June 30, net charge-
offs totaled 0.39% of average loans and
leases, about where they were three
months earlier and below the average
of 0.53% for the top 20 banks, accord-
ing to Cassidy.
Like many banks, though, Truist
hasn’t escaped the impact of Covid-19.
The company reported second-quarter
earnings of 67 cents a share, down from
$1.09 a year earlier. Analysts polled by
FactSet expect the company to earn
$2.86 this year, versus $3.76 in 2019.
What’s more, Truist and other
banks have had to set aside more capi-
tal for loan losses, in part because of a
new accounting rule that took effect in
January as well as the anticipated eco-
nomic fallout of the pandemic.
In the second quarter, Truist’s loan-
loss provision was a hefty $844 mil-
lion. Cassidy wrote in a note last
month, though, that “for the most part
the heavy lifting has been completed”
for Truist adding to its reserves.
However, Truist does have an ad-
vantage versus most of its peers when
it comes to absorbing credit losses.
Because of purchase accounting rules,
Deal Synergies
Should Lift This
Southern Bank
Truist Financial looks well-positioned to benefit from
strong financials and presence in fast-growing cities
Stress Management
Truist Financial would acquit itself fairly well under an adverse economic scenario.
Projected Loan Losses Loan
Recent in Severely Adverse Loss YTD Dividend
Bank / Ticker Price Fed Scenario (bil) Rate Return Yield
Bank of America/ BAC $23.26 $47.2 4.7% -32.6% 3.0%
Wells Fargo/ WFC 22.83 47.4 4.9 -56.1 1.
Truist Financial/ TFC 35.43 15.3 5.1 -34.9 5.
PNC Financial Services/ PNC 102.48 12.1 5.1 -33.8 4.
KeyCorp/ KEY 11.54 5.1 5.3 -40.6 6.
M&T Bank/ MTB 90.86 5.0 5.5 -44.9 4.
Citizens Financial Group/ CFG 23.95 6.7 5.6 -38.4 6.
U.S. Bancorp/ USB 34.50 17.1 5.8 -40.5 4.
Note: Loan-loss rate reflects the percentage of average balances. Market data through September 23.
Sources: Federal Reserve; BloombergMerger Math
Truist Financial,
by the numbers
$500 B
Assets for the
No. 6 commercial
bank in the U.S.
$2.
Analysts’ per-
share earnings
estimate for 2020,
hurt by Covid-
$844 M
Second-quarter
loan-loss provision
Truist Park, home of the Atlanta Braves. The name aims to suggest “true financial partner.”
O
ne plus one equals two—
usually.
With the merger late
last year of large South-
east regional banks BB&T
and SunTrust, the sum of
their parts could add up
to a lot more than two.
The combined bank, which became
Truist Financial (ticker: TFC) last
December, is now the sixth-largest
commercial bank in the country by
assets, at about $500 billion.
Stretching across 17 states and the
District of Columbia, the bank is well
positioned, with a footprint in attrac-
tive and growing markets across the
South such as Atlanta, Charlotte, N.C.,
Tampa, Fla., and Miami.
“When you look at Truist versus
bank peers, they should have a better
earnings growth outlook, and they do
because they get expense cuts with
the merger,” says David Chalupnik,
lead portfolio manager of the Nuveen
Dividend Value fund, which holds
the stock.
“There are a lot of costs to be wrung
out,” adds David Lieberman, a portfo-
lio manager at Advisors Capital Man-
agement and a holder of the stock.
Truist is targeting $1.6 billion of
annualized net cost savings by the end
of 2022, a goal that seems realistic
given the overlap of the two banks’
footprints. Ways to cut costs include
closing about 800 branches, slashing
third-party vendor outlays, and trim-
ming staff.
Longer term, says RBC Capital
Markets analyst Gerard Cassidy, there
is “the bigger impact per dollar spent
By LAWRENCE C. STRAUSS
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