Truist Financial (NYSE: TFC), a spin-off of BB&T and SunTrust’s $ 522 billion merger, is still in the process of integrating the two banks into one. The deal, which was first announced in 2019, is the largest banking deal in a decade. Truist posted strong overall profits in the second quarter, which showed some positive and negative aspects as credit growth continued to be elusive and fee and commission income was high. While there is still a lot of work to be done before the merger is complete, and the bank may indeed go on the offensive, I love the bank’s stock in the current low interest rate and low credit growth environment. That’s why.
Unpacking Q2 Results
Truist generated $ 1.16 in diluted earnings per share (EPS) in the second quarter, resulting in 1.28% return on average assets (ROAA, a measure of how well management is using assets to generate profit) and almost 19% profit. on the average material ordinary capital (ROATCE, the technical rate of return received by the company on its physical capital). Both are good results.
However, the figures were significantly overestimated due to the release of the $ 576 million capital reserve previously set aside to cover loan losses that did not materialize. The $ 576 million issue is equivalent to about $ 0.43 per share, which is quite a lot. But on the other hand, Truist has also dealt with one-time one-off expenses this quarter, such as those related to a merger. In the second quarter, Truist lost about $ 0.39 a share due to costs associated with the merger and restructuring, additional operating costs associated with the merger, and a $ 200 million contribution to the bank’s endowment fund. Take these costs away and the bank gets $ 1.55 per share with a ROAA of 1.69% and almost 25% ROATCE. However, costs are likely to increase until full cost savings from the merger are achieved, which will most likely not occur until late 2022.
Elsewhere in the block, there were two big storylines. The first was related to credit growth, which was disappointing. Loan growth has been a problem in the industry, but Truist appears to be facing more serious problems than other major banks in terms of loan balances and income from its own loan portfolio. But bank he had a good neighborhood with his paid lines of business, especially in the insurance business.
Diversified income structure
In almost all respects, credit growth this quarter was disappointing. Average loan balances fell 2% quarter-on-quarter and more than 10% year-on-year, and virtually none of Truist’s credit lines have grown since the first quarter. Net interest income, which essentially represents gains on loans and securities, has also continued to decline since the first quarter, while the bank’s net interest margin, the difference between what the bank makes on interest-bearing assets such as loans, and payments on them. interest-bearing liabilities such as deposits fell another 0.13 percentage points in the quarter.
However, in the second quarter, fee and commission income rose more than $ 200 million to over $ 2.4 billion, a record quarter for the bank’s insurance business, which is truly Truist’s main differentiator. The business generated a record $ 690 million in insurance revenue, up $ 64 million from the previous quarter and nearly $ 110 million over the second quarter of 2020. This resulted in a net income contribution of $ 156 million.
Management attributed the success of the insurance business this quarter to strong organic growth and resilience, as well as stable market prices. Chris Henson, head of banking and insurance at Truist, called the insurance results for the second quarter “essentially the best quarter I’ve seen in this business in my career.” He said that three years ago the bank brought in a consultant to break the insurance business and consider all the possibilities, and now this process is paying off. Henson also said the bank is embarking on another three-year review and improvement period as management believes the insurance business can do more. He said business growth in the new year has increased 19% to date from the same period last year, almost 15% of which is organic if acquisitions are excluded.
While insurance may have caught headlines, Truist also reported record earnings for other fee-based income items, including wealth management, card and payment related fees, and commercial real estate related income, and very high investment banking income.
Offset of commission income without credit growth
Most banks are struggling with the lending department as loans have not yet hit and clients are paying off their loans at higher rates than usual, thanks to the good savings they accumulated during the pandemic. In addition, the low interest rate environment is likely to have led to a decline in profits on banks’ existing loan portfolios and new loans, resulting in a double whammy.
Truist has struggled with the credit front, but has generated record profits across multiple fee and commission businesses, including a strong insurance business. Truist has not only a very well diversified business with royalty income, but also a business that can thrive in a variety of economic conditions, which is beneficial at a time like this.
And despite the buzz in the quarter, related to the release of reserves and one-time one-off expenses, Truist continues to perform well, especially on an adjusted basis. The bank is also still in the process of cutting costs as part of the merger and also investing a lot of money in digital banking initiatives, so once the noise dies down, I think there is a very good chance that Truist will be even stronger than it is now.
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