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Truist Financial Corporation TFC, formed following the BB&T-SunTrust merger in December 2019, will benefit from decent revenue growth and adequate available liquidity. However, mounting expenses and a low rate environment are major near-term concerns.
Truist Financial has been witnessing a steady rise in net interest income (NII) despite lower rates. The company’s NII increased in 2019 and first-half 2020, mainly on the elevated loan demand. Though there has been a fall in demand for consumer loans amid the pandemic-related economic slowdown, commercial lending activities continue to improve. Despite the uncertainty related to COVID-19, demand for loans is expected to be decent in the days to come. Thus, this is likely to support NII in the upcoming quarters.
Moreover, the company is focused on growth of non-interest revenue sources. Fee income grew in 2019 and the first six months of 2020. With near-zero interest rates and lower mortgage rates, a rise in origination volume and higher refinancing activities are being witnessed. Further, strength in investment banking and insurance income will support non-interest income growth in the upcoming period.
Truist Financial also has a decent capital-deployment plan. The company cleared the 2020 stress test and announced that it will maintain dividend at the prior level. Besides, the bank has suspended share repurchases until a sustained economic recovery is seen. Given a solid liquidity position and debt/equity ratio lower than the industry, it will be able to sustain dividend payments.
Also, shares of this Zacks Rank #3 (Hold) company have gained 19.4% over the past six months as against the 3.2% decline recorded by the industry. Furthermore, analysts seem to be bullish on the stock. The Zacks Consensus Estimate for earnings has been revised 4.2% and marginally upward for 2020 and 2021, respectively in the past seven days.
Nevertheless, the prevailing low rate environment and the Federal Reserve’s accommodative monetary policy stance are likely to keep Truist Financial’s margins under pressure. After recording an improving trend over the last several years, net interest margin contracted to 3.42% in 2019 from 3.46% in 2018. The trend persisted in the first six months of 2020 as well. This fall was mainly due to flattening/inversion of the yield curve and lower interest rates.
Also, the company’s escalating operating expenses is a cause of concern. Truist Financial witnessed a CAGR of 6.1% over the last five years (2015-2019). This upswing was primarily due to a rise in personnel expenses and the bank’s efforts to improve digitization. The uptrend continued in first-half 2020, largely due to the merger deal. Expenses are likely to remain elevated, chiefly due to costs related to technology upgrades and merger integration.
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T. Rowe Price Group, Inc. TROW has witnessed 1% upward earnings estimate revision for the ongoing year in the past 30 days. Its shares have appreciated 30.7% over the past year. It currently carries a Zacks Rank of 2.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.