Truist (NYSE:TFC) share price has been under pressure for much of year, down 35% at last count. And yet when we look at revenue growth over the past five years, the numbers appear to be nothing short of spectacular.
In 2018, Truist reported top line revenues of $10.9 billion, a figure that was dwarfed by its most recent fiscal year report of $22.2 billion.
Over that time span, the annual growth rates were 2.1%, 8.7%, 70.4%, 13.4% and -3.7%. It’s that final number which reveals revenues went backwards in the most recent fiscal year that provides a clue as to why Truist shares have been on the decline.
We dive deeper to figure out what has precipitated the pullback and whether Truist, after underperforming the market in 2023 by 48%, is now a bargain?
Will Interest Rate Hikes Hurt Truist?
Truist was formed when mega-banks, BB&T and SunTrust, joined forces as part of a merger agreement in 2019, and that explains why revenues soared in 2020 – the sum total of both banks top lines were combined.
Under one giant banking umbrella now, Truist is largely a regional banking play and that has some investors seriously concerned. Regional banks, on the whole, have suffered from the fallout of the Silicon Valley Bank fiasco, when SVB’s balance sheet struggled under the weight of rising interest rates to create liquidity issues.
So will rising rates hurt Truist too? To answer that we first need to get a handle on interest rates affect banks more generally.
When the Federal Reserve lowers rates, banks have less margin to earn a spread on loans they issue when compared to the interest they earn on deposits, but higher interest rates are no saving grace, either. As the Fed increases the Federal Funds Rate, borrowers face higher financial stress, which can hurt loan quality.
Either way interest rates move, Truist and other banks face challenges, but Truist is particularly sensitive to these rate hikes as a regional lender.
So, if you’re wondering why is Truist stock dropping? As a regional bank with exposure to borrowers who may increasingly struggle to pay back loans as interest rates rise, Truist is under pressure from shareholders.
As credit quality concerns have surfaced, investors have offloaded shares of Truist. These shareholders have grown skeptical of the quality of the bank’s assets and perhaps with good reason. But it’s important to highlight that Truist is highly diversified with its loan issuances that span the gamut from retail to commercial loans.
Reasons to Be Optimistic
While there are certainly reasons to worry, Truist offers a host of reasons to be optimistic too. For one, the backward slide in revenues is not leading to a significant pullback in operating income.
Last year, operating income was reported at $7.9 billion while this year it came in at $7.6 billion.
And the share price pullback has resulted in the dividend yield popping to 7.47%, which in turn should attract income-investors. As they come back into the fold, demand increases for Truist shares, creating a stabilizing force on the stock price.
Analysts are generally bullish on the Truist too. Among 18 analysts, the consensus share price estimate is $36.36 per share, suggesting as much as 28.5% potential upside.
3 Challenges for Truist
With that said, Truist faces three primary headwinds beyond interest rate hikes. The first is merger integration hurdles blending corporate cultures and technology systems that have the potential to delay cost savings forecasts when the deal was initially struck.
Another challenge emanates from the bank’s geographical focus on the Southeastern regions of the US, which results in potential concentration risk to the economic plight of the specific region. Bulls would counter that point by arguing that Truist, a specialist in the region, has local market knowledge and community ties to help it weather such storms.
A further hurdle facing the bank comes from the fiercely competitive nature of the financial sector. Online-only banks, by nature of having fewer overhead expenses in the form of brick-and-mortar locations, can offer savers higher yields than Truist and other more traditional banks.
As a result, deposit flows from Truist to CIT Bank, and others pose a threat to the all-important deposit base of the bank.
Is Truist a Buy Now?
As a regional bank with a concentrated focus on the South Easterly region of the United States, Truist faces a number of challenges, the greatest of which stems from rising interest rates.
Investors have fled the stock over the past year over concerns that the company’s balance sheet may not be able to withstand higher default rates from borrowers than were originally forecast.
At some point, however, the headwinds it faces from interest rate risk to geographical focus, and from merger integration to competitive pressures will be discounted and factored into the share price.
That time might well be now, and for income-seeking investors who want to pocket a really enticing annual yield from a top tier bank, it doesn’t get much better than the 7.47% that Truist is offering at this time.
The payout ratio sits at about 50%, meaning the threat of the dividend being slashed or becoming unsustainable does not appear to be a realistic one at this time.
In addition, the company’s upside potential according to analysts is significant. The consensus estimate forecasts upside of over 28%.
Combine the attractive dividend yield with a compelling valuation play plus a diversified revenue stream and you’ve got a bank that is inviting a purchase at this time.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.