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Truist (TFC) to Expand POS Business, Acquire Service Finance

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With an aim to further augment its point-of-sale (POS) lending business, Truist Financial (TFC - Free Report) has inked a deal to acquire Service Finance Company, LLC from Canada-based ECN Capital Corp. for $2 billion in cash. Service Finance is one of the leading providers of POS financing solutions for the home improvement industry.

At present, Truist’s POS lending operation includes Sheffield Financial, which is a leading POS lender in the outdoor power equipment, power sports, trailer and other consumer products segments. Following the completion of the deal, Service Finance (a wholly owned subsidiary of ECN Capital) together with Sheffield will serve more than 250 manufacturers, associations and other sponsors.

Service Finance uses proprietary technology to deliver innovative payment solutions to home improvement dealers and contractors. It helps in providing prime and super-prime borrowers with finance for a wide range of home improvement products and projects.

Approximately 80% of Service Finance's loan applications are completed on its mobile application, with originations projected to exceed $2.5 billion this year. In fact, the same has grown almost 30% annually over the past three years. This makes Service Finance one of the top three home improvement POS finance companies.

Hence, the deal will make Truist one of the prominent providers of POS lending solutions. Mike Maguire, head of National Consumer Finance and Payments at Truist, noted that Boca Raton, FL-based Service Finance will expand the scale and capabilities of Truist’s wholesale payments business in lucrative POS industry.

Maguire further added, “We're excited to partner with Mark Berch and the entire Service Finance team.” They will be joining the POS lending unit of Truist's National Consumer Finance and Payments group, and remain based out of Boca Raton.

Steven Hudson, CEO of ECN Capital, said, “Truist has been a long-time partner of SFC and is best positioned to build on the successes we’ve had over the last several years. We believe this transaction maximizes value for ECN shareholders and puts SFC in the best position to succeed in its next phase of growth.”

Financial Benefits & Other Details

Truist already has past business relationship with Service Finance, having purchased more than $2 billion of loans from it since 2018. The company expects the deal, likely to close in the fourth quarter of 2021, to be financially attractive.

The transaction will result in 2% cash accretion to Truist’s earnings per share (EPS) in 2023 in case it is financed through excess cash. However, if the deal replaces the company’s planned share buyback plan, then it will lead to 1% cash EPS dilution in 2023.

Further, Truist expects the deal to help deploy its strong liquidity and result in reduction of approximately 50 basis points in its Common Equity Tier 1 ratio. Over the long term, the company expects the acquisition to be accretive to its profitability metrics including return on assets, return on tangible common equity, efficiency ratio and EPS growth.

The deal is still subject to standard licensing and regulatory approvals, and satisfaction of customary closing conditions.

Our Take

This is the first major deal for Truist Financial since its formation in December 2019 following the merger between BB&T Corp and SunTrust Banks. Legacy BB&T relied heavily on buyouts to grow, and expand footprint and market share. Over the years, these deals have resulted in cost and revenue synergies.

Also, Truist is planning to continue rationalizing branch footprint, with roughly 800 branch consolidations targeted by first-quarter 2022. Such strategic efforts will likely continue to support revenue growth in the upcoming quarters amid lower interest rates and faltering loan demand.

Shares of Truist have rallied 20.9% so far this year, underperforming 28.9% growth of the industry it belongs to.

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Currently, Truist carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Similar Moves by Other Major Banks

Banks across the world are moving toward opportunistic acquisitions to counter increased investment in technology, the current low interest rate environment and other challenges as the coronavirus pandemic has been taking toll on their profitability.

Last week, Fifth Third Bancorp (FITB - Free Report) completed the previously-announced buyout of Provide, a digital platform for healthcare practices. The deal underlines the bank’s continued digital innovation efforts and focus on the healthcare sector. It adds world-class national digital capabilities and will enable the company to address complex lending and banking needs of retail healthcare providers.

In July, as part of efforts to strengthen its asset management arm, U.S. Bancorp’s (USB - Free Report) primary subsidiary U.S. Bank recently inked a deal to acquire PFM Asset Management LLC. The deal is expected to close in fourth-quarter 2021, subject to regulatory approvals and customary closing conditions.

Further, in June, Goldman Sachs (GS - Free Report) announced that its asset management division will acquire Lloyd's Register’s Business Assurance and Inspection Services line. Goldman is also acquiring the seller’s cyber-security business — Nettitude. The deal is anticipated to close in the second half of 2021, subject to regulatory approval.

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