The Long and Short
Truist strikes a balance between stability and spread
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As investment grade spreads continue to grind tighter, the banking sector continues to show the strongest relative value for corporate bond investors. The disruption at New York Community Bancorp earlier this year repriced risk, which is still evident today even as spreads have recovered much of the initial widening. The initial inclination was to target category IV banks with $100 billion to $250 billion in total assets such as KEY and MTB, in order to take advantage of depressed valuations in the sector. With spreads now tighter overall, relative value has moved to category III banks with more than $250 billion in total assets, which offer more stability than their mid-sized counterparts. Specifically, Truist Financial (TFC: Baa1/A-/A-) offers an attractive balance of relative credit stability with compelling spread valuation relative to the rest of the segment.
With $535 billion in total assets as of first quarter 2024, TFC trades wide to fellow category III banks PNC Financial (PNC: A3/A-/A) with $566 billion in total assets and US Bancorp (USB: A3/A/A) with $684 billion in total assets. Meanwhile, in the intermediate part of the curve, considerably smaller yet stable regional banking peers, such as Huntington Bancshares (HBAN: Baa1/BBB+/A-) with only $193 billion in total assets trade at only a modest discount to the considerably larger TFC.
Exhibit 1: 5-year spread percentile ranks by IG sector: continues to favor overweight in banking with emphasis on US regionals
Source: Santander US Capital Markets LLC, Bloomberg Index spread calculations
“5-yr % Ranks” represent current spread vs 5-year trailing range
Exhibit 2. TFC senior bonds compared to large US regionals
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
TFC made headlines earlier this month when the bank sold off Truist Insurance Holdings (TIH) for after-tax proceeds of $10.1 billion. TIH represented approximately 14% of the bank’s 2023 total revenue. And while the sale would go a long way to improve capital ratios and enable the bank to address an imbalance in its securities holdings, Moody’s was compelled to downgrade TFC by one notch to Baa1 from A3, reflecting reduced operating diversity. Specifically, the rating agency had concerns about the greater reliance on net interest income for profitability. The TIH sale would create an after-tax gain on the business of $4.7 billion and enable TFC to increase its Tier 1 Common (CET1) equity by $9.4 billion, to an unadjusted level of 12.4% from 10.12%, where it sat at the end of the first quarter.
Furthermore, the sale would enable TFC to address one of the bigger credit concerns looming over the name in the form of its unrealized losses in its securities portfolio holdings. As of first quarter 2024, in its Securities RC-B filing in the bank call reports, TFC had a combined unrealized loss of $22.5 billion across its held-to-maturity and available-for-sale securities holdings. That compares with a comparable $18.8 billion at USB and a notably smaller $8.9 billion at PNC. With the help of the proceeds from the TIH sale, TFC is selling $27.7 billion of its lower yielding securities, which will result in a $5.1 billion loss in the current quarter, and reinvesting $18.7 billion in shorter-duration, higher-yielding investments. The remainder of the proceeds of the securities sale and TIH sale will remain in cash investments for the time being, which again help bolster regulatory capital ratios.
TFC renamed itself Truist from BB&T in 2019 following the merger with SunTrust that created one of the largest banks in the US, behind only USB, PNC and the US money center banks. The bank maintains a notable East Coast geographic footprint with over 2,000 branches, stretching from the home Mid-Atlantic states of BB&T to the Southeast once held by STI. The bank held $394 billion in total deposits as of the first quarter or 2024, ranking it seventh in the US among commercial banks. TFC has a very balanced loan book by category, consisting of: commercial & industrial (27%), residential (21%), consumer (17%), commercial real estate (12%) and other non-real estate loans at 17%.
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