Truist Financial Corp. (NYSE: TFC) following 3Q20 earnings, which fell from the prior year due to a higher loss provision.
While BBT was based in Winston-Salem and SunTrust in Atlanta, the combined company has established a new headquarters in Charlotte. Under the terms of the transaction, STI shareholders received 1.295 shares of BBT for each STI share, with BBT owning 57% of the combined entity. The combined company is managed by executives drawn from both banks, with BB&T’s former Chairman and CEO Kelly King expected to serve in similar roles at Truist through September 2021, and SunTrust’s former Chairman and CEO William Rogers expected to serve as president and COO through that date.
Medium-term financial targets include a low 20s return on tangible common equity, a low 50s efficiency ratio, and a common equity tier 1 ratio of 10%.
Large regional bank mergers have been absent from the landscape in recent years, with banks focusing more on expense efficiency, growth in fee-based business lines, and strong capital returns through dividend increases and share buybacks. However, as Fed interest rate hikes turn into reductions, banks may look to mergers for growth and synergies.
Banks can also use mergers to leverage spending on technology, which has become an increasingly large component of overall spending. BB&T and SunTrust management cited technology cost synergies as a significant reason for the merger. Based on management’s presentation, the combined entity will have a post-merger efficiency ratio (expenses divided by revenues) of 51%, the best ratio in a group of 10 peer banks.
Given prospects for above-peer-average ROE and efficiency measures, we expect the premium to be maintained.
Net interest income jumped 98% due to the acquisition of BB&T Corp., while noninterest income climbed 70%. The provision for loan losses surged to $421 million from $117 million in 3Q19, but fell 50% sequentially due to substantial provisions taken in the first half for expected defaults related to the pandemic.
EARNINGS & GROWTH ANALYSIS
Revenues for the combined company are divided into three segments: Retail, Wealth and National Consumer Finance (50%); Corporate and Commercial Banking (40%), and Insurance (10%).
Management previously provided 2020 guidance calling for a core net interest margin of 3.01%-3.07%, net charge-offs of 0.35%-0.50% of average assets, and a loss provision of $1.3-$1.45 billion, but has withdrawn this guidance due to pandemic-related uncertainty.
We look for revenues of $22.5 billion in 2020, which would be up 79% from 2019 due to the merger, though lower interest rates have had a negative impact. We expect fee-based income to benefit from cross-selling BB&T insurance products to SunTrust customers, and SunTrust capital markets products to BB&T customers.
We now look for a loss provision of $2.5 billion in 2020, reflecting credit exposure to industries at risk from the pandemic and the impact of high unemployment. Industries seen most at risk, including hotels and cruise lines, restaurants and economically sensitive retail, senior and acute care, and oil and gas had outstanding loans of $28 billion, or 9.1% total loans held for investment, at September 30.
The company is targeting net cost savings of $1.6 billion by 4Q22 from the expense bases of the merged companies (a figure that management reiterated on the 3Q earnings call), with areas of focus that include personnel, back-office integration, branch consolidations, third-party spending, and corporate facilities.
FINANCIAL STRENGTH & DIVIDEND
At September 30, 2020, Truist had a tier 1 capital equity ratio of 10.0%, well above the regulatory 5% minimum needed to be considered well capitalized.
The quarterly dividend was last raised by 11% in 3Q19, to $0.45 per share.
MANAGEMENT & RISKS
Former BB&T chairman and CEO Kelly King will serve as chairman and CEO of Truist until September 2021. Former SunTrust Banks chairman and CEO William Rogers will serve as President & COO until September 2021, when he will become CEO. Daryl Bible is the CFO.
The company also has a growing insurance operation that subjects it to property/casualty underwriting risks. In addition, it may be unable to achieve the expected merger cost savings in the expected time frame.
Truist Financial was formed through the December 2019 merger of equals between BB&T Corp. and SunTrust Banks. The combined company has about $504 billion in assets and ranks as the sixth-largest bank, for both assets and deposits, in the U.S.
TFC trades at 12-times our revised 2020 EPS estimate, a valuation that reflects weak EPS due to the pandemic. We believe that an above-peer-average multiple is warranted based on the company’s favorable long-term growth prospects, good revenue diversification, better-than-peer credit quality, and attractive dividend yield of about 4.3%. With merger synergies offering prospects for above-peer-average ROE and efficiency measures, we expect a premium to emerge.
On October 15, BUY-rated TFC closed at $42.11, down $0.12.