Truist Financial Corporation (TFC) Up 6.6% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Truist Financial Corporation (TFC). Shares have added about 6.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Truist Financial Corporation due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Truist Financial Q2 Earnings Beat Estimates as Loans & Rates Rise

Truist Financial’s second-quarter 2022 adjusted earnings of $1.20 per share surpassed the Zacks Consensus Estimate of $1.17. However, the bottom line declined 22.6% from the prior-year quarter.

Results were aided by average loan growth and higher rates, which drove net income interest. However, lower non-interest income and a rise in provisions were the major headwinds.

The reported quarter’s results excluded restructuring and BB&T-SunTrust Banks merger-related charges, incremental operating expenses related to the merger and gain on early extinguishment of debt. After considering these, net income available to common shareholders was $1.45 billion or $1.09 per share, down from $1.56 billion or $1.16 per share in the prior-year quarter.

NII Rises, Expenses Down

Total revenues were $5.66 billion, relatively stable year over year. The top line beat the Zacks Consensus Estimate of $5.64 billion.

Tax-equivalent NII increased 4.9% to $3.44 billion. The rise was driven by higher interest rates, growth in the securities portfolio and lower premium amortization. These were partly offset by a fall in purchase accounting accretion and a decrease in fees on Payroll Protection Program (PPP) loans.

Net interest margin inched up 1 basis point (bp) year over year to 2.89%.

Non-interest income decreased 6.5% to $2.25 billion. This was mainly due to lower investment banking and trading income and residential mortgage income, partially offset by an increase in insurance income.

Non-interest expenses were $3.58 billion, down 10.7% from the prior-year quarter. Adjusted expenses increased 1.8% to $3.24 billion.

The adjusted efficiency ratio was 57%, up from 56.1% in second-quarter 2021. A rise in efficiency ratio indicates deterioration in profitability.

As of Jun 30, 2022, total average deposits were $423.8 billion, up 2% sequentially. Average total loans and leases of $296.7 billion grew 2.8%.

Credit Quality: Mixed Bag

As of Jun 30, 2022, total non-performing assets (NPAs) were $1.17 billion, down 1.6% year over year. As a percentage of total assets, NPAs were 0.22%, decreasing 1 bp.

Allowance for loan and lease losses was 1.38% of total loans and leases held for investment, which decreased 41 bps.

Provision for credit losses was $171 million against a benefit of $434 in the prior-year quarter. Net charge-offs were 0.22% of average loans and leases, up 2 bps from the year-ago quarter.

Profitability & Capital Ratios Robust

At the end of the reported quarter, return on average assets was 1.14%, down from 1.28% in the prior-year quarter. Return on average common equity was 10.3%, up from 10.1% in the second quarter of 2021.

As of Jun 30, 2022, Tier 1 risk-based capital ratio was 10.8% compared with 12% recorded in the prior-year quarter. Common equity Tier 1 ratio was 9.2% as of Jun 30, 2022, down from 10.2% as of Jun 30, 2021.

Share Repurchases

During the quarter, Truist Financial repurchased shares worth $250 million.

Outlook

Total merger-related and restructuring costs and incremental operating expenses related to the merger were anticipated to be approximately $800 million in 2022. Consistent with previous guidance, merger-related costs totaled $238 million in the second quarter of 2022, roughly half of what they were in the first quarter. Now, the company expects merger costs to decrease significantly in the back half of 2022 before going away entirely in 2023.

By 2022-end, net cost savings worth $1.6 billion are anticipated.

In 2022, adjusted revenues are expected to grow 3.5-4.5% from 2021, up from the previously mentioned 3-4%. The mix of revenue continues to tilt more towards net interest income given the outlook for higher short-term interest rates, partially offset by lower fees, primarily in market-sensitive businesses such as investment banking, mortgage, and wealth.

Adjusted non-interest expenses in 2022 are expected to increase 2-3% year over year, up from prior guidance of 1-2%. The rise in the expense outlook largely reflects higher operating losses and intentional investments to support the company’s shift from integrating to operating, including increasing its minimum wage, hiring teammates to support client experience and growth, and ongoing investments in technology.

The company expects positive operating leverage for 2022.

Given the elimination of overdraft-related fees and the introduction of Truist One Banking, the company expects a mid-single-digit decline in service charges for 2022. Also, because of Truist One, there will be a $300-million or 60% reduction in overdraft-related revenues by 2024.

In the third quarter of 2022, the company expects adjusted PPNR to grow in the high single-digits from the second quarter level, primarily as a result of higher net interest income, partially offset by higher non-interest expense.

In the third quarter, the company expects a mid-20 bps increase in its core NIM due to the benefits of recent rate hikes. It also expects a low-20 bps increase in GAAP NIM as a result of core NIM expansion, offset by continued declines in purchase accounting accretion.

The company expects the net charge-off ratio to be 25-35 bps for 2022.

In the near term, the company expects to be below its 9.75% CET1 target.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, Truist Financial Corporation has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Truist Financial Corporation has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Truist Financial Corporation is part of the Zacks Banks - Major Regional industry. Over the past month, Citigroup (C), a stock from the same industry, has gained 2.5%. The company reported its results for the quarter ended June 2022 more than a month ago.

Citigroup reported revenues of $19.64 billion in the last reported quarter, representing a year-over-year change of +12.4%. EPS of $2.30 for the same period compares with $2.84 a year ago.

Citigroup is expected to post earnings of $1.59 per share for the current quarter, representing a year-over-year change of -26.1%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.2%.

Citigroup has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of F.

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