TFC - Truist Financial Q4 Earnings: What Can We Expect?

2024-01-16 08:45:54 ET

Summary

• Truist Financial is set to report its fourth-quarter earnings results this week.
• Investors can expect insights into TFC's financial performance and outlook.
• Truist Financial is also analyzed as an income and total return investment at its current price.

Article Thesis

Truist Financial Corporation ( TFC ) will report its fourth quarter earnings results this week. In this article, we will take a look at what investors can expect from the Q4 earnings release, and we will also look at Truist Financial as an income and total return investment at the current price.

Past Coverage

I last covered Truist Financial Corporation in July in this article , in which I described the bank as a high-yield income investment that had some considerable risks. I gave the bank a "Hold" rating half a year ago. Since then, Truist Financial has moved up by 9%, while the broad market has gained 5% over the same time frame -- Truist thus outperformed the market, but not to an extreme degree. This article will update my thesis by incorporating recent results, valuation changes, a changing macro picture, and the upcoming earnings results.

Truist Financial Q4 Earnings Expectations

Truist Financial Corporation will report its Q4 earnings results pre-market on Thursday, January 18th. For the upcoming earnings release, Wall Street analysts have the following expectations :

We see that Truist Financial is expected to report a sizeable earnings decline of more than 30%, relative to the previous year's quarter. On a per-share basis, earnings are expected at $0.90, or $3.60 annualized. Over the last three quarters, Truist Financial has earned an average of $0.95, but the trend has been worsening -- Q3 was worse than Q2, which had been worse than Q1. It thus makes sense for analysts to expect that Q4 results will be at least somewhat worse compared to the average over the previous three quarters.

What will the earnings decline be based on? There are several contributing factors, the first one being that revenues will likely be lower compared to the previous year's quarter. For banks, net interest income, which is the difference between the interest they earn and the interest they pay, is a major source of revenue -- for many banks, it's the biggest revenue contributor by far. In the most recent quarter, Truist Financial experienced a decline in its net interest income, although only a minor one, at 2%. With momentum working against the company, another decline in Truist Financial's net interest income during the fourth quarter would not be a surprise. On top of that, non-interest revenues have also not been too strong in the recent past, due to factors such as lower insurance sales.

While lower revenues are one factor for the expected profit decline when it comes to Truist Financial's fourth-quarter earnings results, the company will likely also suffer from higher expenses. Inflation hits many different companies due to salary increases and similar items, but Truist Financial and other banks also have been increasing their provisions for credit losses. As the macro picture is uncertain, due to geopolitical turmoils and wars, on top of a hawkish interest rate environment that might cause a recession, banks are preparing by increasing provisions for credit losses in order to better stomach future (potential) credit losses. Truist Financial's credit loss provisions during the fourth quarter will most likely be significantly higher compared to the previous year's fourth quarter, which will have a major negative impact on reported net profits. The third quarter earnings saw Truist Financial report a 112% increase in its credit loss provisioning expense compared to the previous year's third quarter, for example.

That being said, in case a recession can be avoided and the macro picture clears up again, these provisions could get reversed, which would result in improved profitability down the road.

When we look at Truist Financial's track record when it comes to beating analyst expectations, the picture is somewhat muddy. Over the last three quarters, i.e., during the first nine months of 2023, Truist Financial missed estimates by a combined $0.16 per share, which makes for an average miss of around 5%-6%. On the other hand, the most recent quarter saw Truist Financial marginally outperform expectations. During the pandemic years 2020 to 2022, Truist Financial beat earnings per share estimates for 12 quarters in a row, which was a very strong feat. It would be nice for investors if Truist Financial can get back to being a "serial estimate beater," but due to the not-very-convincing track record during the first three quarters of 2023, I wouldn't bet on that for now.

What Is The Outlook For Truist Financial Stock?

Looking beyond the upcoming Q4 report, Truist Financial is forecasted to experience additional earnings pressure throughout 2024. For the current year, analysts are currently forecasting earnings per share of $3.43, below the consensus estimate of $3.79 for fiscal 2023.

What will cause the earnings decline? Essentially, the same factors that explain the earnings decline in recent quarters will likely persist throughout the current year -- revenues are expected to decline slightly, while higher expenses due to inflation and increased provisioning for credit losses will likely impact the bank's profitability as well.

The good news is that while Truist Financial is expected to generate lower profits during the current fiscal year, things could improve meaningfully going forward: The macro picture should clear up eventually, which is when provisions for credit losses will normalize. This will ease the profitability headwinds, and Truist Financial is also expected to generate some revenue growth in the long run.

For 2025, analysts are quite positive , forecasting an earnings increase of 15% on a per-share basis for the year. In 2026, earnings per share are expected to grow by an even stronger 25%, although one should note that forecasts this far out are not necessarily very precise -- actual results over the next couple of years could deviate from the current forecasts.

Banks are normally not growing very fast, but they are still well-liked by some investors due to the fact that valuations oftentimes are undemanding, while banks also tend to offer above-average dividend yields. While Truist Financial is not attractive for growth investors, value and income investors could like what Truist Financial is offering. At current prices, the Truist dividend yield is 5.7%, based on an annual dividend payout of $2.08 per share and a share price of $36.70. This dividend is well covered, as the payout ratio, based on expected 2023 earnings, is just 55%, which makes it unlikely (although not impossible) that this dividend will get cut in the foreseeable future.

While the dividend yield is lower than it was last summer, the income generation potential of Truist Financial is still way higher compared to the board market -- the S&P 500 (SP500) yields just 1.5% right now, meaning an investment in Truist Financial will generate a cash on cash return that is almost four times as high compared to the broad market.

Truist Financial is currently trading at an earnings multiple of 9.7, which is far from high. This pencils out to an earnings yield of just above 10%, meaning no significant earnings growth would be needed for Truist Financial to be a solid investment -- at least if all the company's profits were distributed to shareholders via either dividends or share repurchases. In reality, Truist Financial has not been returning all of its profits to shareholders -- while the dividend yield is pretty high, the share repurchase pace is pretty low on a net basis, i.e., accounting for new shares being issued to management and employees. Some earnings growth would thus be necessary for Truist Financial to be a good investment, but the hurdle isn't very high. If a company yields well above 5%, even an earnings growth rate in the 3% range, in the long run, would make for very solid total returns.

Does that mean that Truist Financial is a good investment? I believe that, in the long run, shareholders who buy here will do reasonably well. That being said, I don't see a catalyst for meaningful Truist Financial Corporation share price appreciation in the near term. With earnings forecasted to decline in 2024, it could make sense to wait for a better buying opportunity. I thus give Truist Financial a "Hold" rating, and would upgrade to a "Buy" if Truist Financial started to generate meaningful earnings growth again, or if the valuation declined substantially.

For further details see: