Mike Mayo didn’t write this!
While the dividend is covered by earnings and shares trade at a large discount to BV, the decline in Q3'23 earnings and BV is not convincing.
Truist Financial (NYSE:TFC) reported slightly better than expected earnings for the third quarter last week, but shares nonetheless dropped following the earnings release. While Truist Financial beat expectations with regard to adjusted EPS, I believe the bank's deposit and credit provision trends are not great and investors have better regional banks to choose from. The 7.7% yield is supported by the bank's earnings, but risks are growing, in my opinion. Therefore, despite a large 34% discount to book value, I believe investors may want to continue to stay on the sidelines as the third quarter earnings report was not very convincing!
Truist Financial trades at a very large discount to a book value which, in my opinion, results from the bank's underwhelming performance in deposits and loan quality/credit provisions. The large 34% discount to book value might actually turn out to be a trap if Truist Financial's loan portfolio degrades in quality heading into a recession.
Higher credit provisions have not only resulted in declining earnings, but also in a drop-off in book value in the third quarter. Truist Financial's tangible book value skidded from $20.44 per share to $19.25 per share, showing a total decline of 5.8%. For comparison, Western Alliance's tangible book value per share increased 1.3% to $43.66 per share.
The large discount to book value relative to other regional banking rivals as well as the high yield of 7.7% indicate higher-than-average risks. The large discount also reflects concerns about Truist Financial's credit quality as well as declining book value.
I am actually leaning towards rating Truist Financial a sell, but I am refraining from it because the regional bank's earnings still cover the 7.7% dividend yield and shares trade at a large discount to book value. But cracks are emerging in the investment thesis: the lender is not making a strong case for itself by reporting elevated credit provisions and a steep drop-off in earnings. A recession would make the asset quality situation undoubtedly a lot worse, in my opinion. Although shares of Truist Financial sell at a large discount to book value and thereby reflect problematic loan and asset quality trends, I believe Truist Financial is not a great buy. Western Alliance produced a much better earnings sheet for the third quarter and the regional bank's deposits are growing and the book value is growing!