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Truist (TFC) Gains From Loan Balance & Fee Income Amid Low Rates

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Truist Financial (TFC - Free Report) , formed following the BB&T-SunTrust merger, will continue to benefit from solid economic recovery, a strong balance sheet position and focus on fee income growth. However, faltering loan demand and a low-rate environment are major near-term concerns.

Truist Financial has been witnessing a steady rise in net interest income (NII) despite lower rates. The company’s NII increased in the last two years, mainly on the decent loan demand and merger deal. Though the lending scenario is weak now, same is likely to gradually pick up once business activities resume full-fledged. Thus, this is likely to aid NII in the upcoming quarters.

The company is also focused on growth of fee income sources. Fee income grew in 2019 and in 2020. With near-zero interest rates and lower mortgage rates, a rise in origination volume and higher refinancing activities are being witnessed. Strength in investment banking and insurance income will keep supporting non-interest income. Also, Truist Financial is open to strategic inorganic expansion initiatives in order to further support fee income.

Amid the coronavirus-induced economic slowdown last year, the Federal Reserve had restricted dividends and share repurchases by major banks like Truist Financial, JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) and Citigroup (C - Free Report) with an aim to conserve liquidity. Nonetheless, following the second round of stress test, these restrictions were removed to some extent.

Thus, Truist Financial, in December 2020, announced a new share buyback plan worth up to $2 billion shares beginning first-quarter 2021, while maintaining quarterly dividend at 45 cents per share. As of Mar 31, 2021, the company had $1.5 billion worth of shares left to be repurchased. Thus, driven by a strong capital position and earnings strength, the company is expected to sustain efficient capital deployments.

Also, shares of this Zacks Rank #3 (Hold) company have gained 24.3% so far this year compared with 30.8% rally recorded by the industry. Further, analysts seem to be bullish on the stock. The Zacks Consensus Estimate for earnings has been revised 2% and 1.5% upward for 2021 and 2022, respectively in the past 30 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, the prevailing low-rate environment and the Fed signaling no change in interest rates anytime soon are likely to keep Truist Financial’s margins under pressure. After recording an improving trend over the last several years, net interest margin contracted to 3.22% in 2020 from 3.42% in 2019 and 3.46% in 2018. This fall was mainly due to flattening/inversion of the yield curve and lower interest rates.

Further, the company’s escalating operating expenses pose a concern. Truist Financial’s costs witnessed a CAGR of 22% over the last five years (2016-2020). This rise was primarily due to a rise in personnel expenses, efforts to improve digitization and merger deal. Expenses are likely to remain elevated, chiefly due to costs related to technology upgrades and merger integration.

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