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Truist Financial: A New Bank for a New Era

Motley Fool - Fri Jul 21, 5:45AM CDT

When BB&T and SunTrust merged at the end of 2019, it created a top 10 U.S. bank called Truist Financial(NYSE: TFC) that many analysts thought had considerable commercial real estate (CRE) exposure. The collapse of Silicon Valley Bank and Signature Bank in early March aggravated concerns on Wall Street about the health of the CRE market, which has struggled in the aftermath of the pandemic. Investor concerns prompted a sell-off in bank stocks with significant exposure to CRE loans, including Truist Financial, which has yet to recover from the setback and is down more than 20% this year.

Another regional bank, First Republic, failed at the beginning of May, and many investors still are watching for the next shoe to drop. Wall Street has yet to sound the all-clear, so many investors are reluctant to invest in regional banks.

However, despite concerns about regional banks, investors seeking to diversify their portfolio away from potentially overvalued technology stocks should consider putting some of their cash into Truist shares. Here's why.

The bank sells at an excellent valuation

Wall Street's wariness toward banking stocks has reduced the valuation of Truist to enticing levels. It now sells at a price-to-earnings (P/E) ratio of 7.4, well below its median P/E ratio for the last 10 years.

TFC PE Ratio Chart

Data source: YCharts

As the chart below shows, its price-to-book (P/B) ratio is 0.79, well below those of its peers in the industry and less than the stated value of its assets. Many value investors consider a P/B ratio below 1 as a sign of an undervalued banking stock.

TFC Price to Book Value Chart

Data source: YCharts

When researching Truist, remember that not all banks are the same. Truist hasn't experienced the issues that caused some banks to fail earlier this year, such as volatile and mostly uninsured deposit bases.

S&P Global Market Intelligence reported that 93.8% of Silicon Valley Bank's and 89.3% of Signature Bank's deposits were uninsured at the end of 2022, which made both highly vulnerable to deposit runs. When word got out that these banks' assets had lost significant value, depositors knew they could lose their funds without Federal Deposit Insurance Corp. protection, and they quickly rushed to withdraw their money. As more and more depositors withdrew their cash, each bank's liquidity position deteriorated further. Eventually, neither bank could meet their financial obligations, and regulators shut them down. In contrast, as seen on the chart below, 63% of Truist's deposits insured, leaving only 37% uninsured.

A chart shows Truist has 63% of its deposits insured.

Image source: Truist Financial.

As of March 31, Truist had total deposits of $408 billion. Its strong brand, substantial market share of deposits in many of the fastest-growing markets in the U.S., diverse customer base, range of products and services, and robust financial performance give the bank a solid foundation to withstand most liquidity shocks.

During the first-quarter earnings call, the company's chief financial officer also took the time to address investor concerns regarding Truist's CRE portfolio. Management decided to slow CRE expansion after the merger of SunTrust and BB&T to maintain diversification benefits. Truist now focuses on larger CRE with strong institutional sponsorship, and has reduced its exposure to smaller CRE. As a result, the company has achieved lower CRE concentration and risk levels compared to its peers.

The image shows statistics about Truist's CRE exposure.

Image source: Truist Financial.

Although all banks bear some risk of failure, Truist is much more solid than the regional banks that collapsed this year. Additionally, with inflation abating and the Federal Reserve slowing or pausing interest rate hikes, the likelihood that Truist will encounter similar stress is rapidly declining. So why is its valuation still lingering near historic lows?

What's holding its stock back

Truist shares have fallen by about 30% since the BB&T and SunTrust merger closed. Several factors are to blame, including slower loan growth within the banking industry, increased competition from digital-only banks, and investor disappointment regarding its failure to quickly achieve integration, cost-saving, and profitability goals from the merger. When the company missed analysts' expectations for earnings in the first quarter, many investors sold the stock. Don't expect the stock to consistently outperform the market until it achieves better efficiency and profitability numbers.

However, investors have reasons to be optimistic about this company's future. First, the heavy lifting behind the merger is over; management completed the integration of BB&T and Suntrust in the fourth quarter of 2022. The company can now focus on execution, streamlining the business to boost profitability.

The company focuses heavily on technology

The bank aims to become a fintech leader. It opened a state-of-the-art innovation center in its home base of Charlotte, North Carolina, in 2021 to develop new products and services, improve existing ones, and better understand customer needs. The Truist Innovation and Technology Center (ITC) will also house a new emerging technologies program, a collaboration between its technology experts, Amazon's (NASDAQ: AMZN) AWS, Verizon(NYSE: VZ), and Unqork's Codeless as a Service platform.

Some of the innovative solutions ITC has developed or is improving include Truist Invest Pro, an investment service offering a combination of automated investing using algorithms and access to a team of financial advisors; Truist Assist, a chatbot powered by advanced artificial intelligence technology; Truist Digital Wallet, a mobile app that stores debit and credit cards, loyalty cards, and gift cards; and a mobile banking app and online banking platform.

Management hopes its technology initiatives can increase competitiveness, improve efficiency, reduce costs, and increase profitability.

Leading banking into a new era

As the economy strengthens and loan growth picks up, Truist's profitability should improve. Additionally, its focus on technology puts it in a solid position to lead the way into the future of banking. Buying at the current prices could be a sound move for those looking for value.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Rob Starks Jr has positions in The Motley Fool has positions in and recommends and PNC Financial Services. The Motley Fool recommends Truist Financial, U.S. Bancorp, and Verizon Communications. The Motley Fool has a disclosure policy.

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