Truist Financial

Truist announced that the firm has agreed to sell an auto portfolio of $5.5 billion under Regional Acceptance Corporation, in a deal expected to close in the late third quarter or early fourth quarter. Shares traded up by low single digits following the announcement.

Why it matters: The exit from RAC loans marks the first official move under Truist's new CEO, Mike Lyons, who assumed the position on Sept. 1. This is a natural next step after Truist's decision to exit its marine and RV portfolio and right-size its auto portfolio in July. RAC loans are noncore auto loans originated indirectly, and thus we surmise the return is well below the bank's required rate of return. The bank's disclosure shows that the $5.5 billion RAC loan portfolio's pretax earnings were approximately break-even in the first half of 2026. Truist indicates that a broader strategic review is still ongoing, suggesting further exits of noncore businesses could follow.

The bottom line: As we incorporate the bank's decision to sell the $5.5 billion RAC auto portfolio, we will maintain our $54 fair value estimate for no-moat-rated Truist. We view shares as fairly valued.

Coming up: The bank expects to deploy the $5.2 billion of net proceeds to repay wholesale borrowing and reposition its securities portfolio to offset the $945 million capital created from the sale of the auto portfolio, equivalent to 22 basis points of common equity Tier 1 ratio. The transaction is also expected to reduce the bank's nonperforming loan ratio by more than 10 basis points as of the end of June, and its net charge-off ratio by 10 basis points annually. Truist maintained its prior 2026 outlook and $5 billion share buyback plan and expects to create modest earnings and return on tangible common equity accretion in 2027.

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We are increasing our fair value estimate for Truist to $55.40 from $54. Around 71% of the increase comes from the time value of money, and the remaining 29% from the interest rate update. Our base case scenario now includes a 0.25% increase in the federal-funds rate in December 2026 as well as the 0.25% hike in September 2026, and we expect the Federal Reserve to start cutting short-term interest rates in the second half of 2027. More importantly, our long-term rate assumptions remain unchanged. We note Truist is not as rate sensitive as some of the smaller regional banks under our coverage. We still expect the bank to grow its net interest income at a CAGR of 2.9% from 2025-30. Our fair value estimate is 1.7 times tangible book value at the end of the second quarter of 2026, or 1.4 times excluding the effects of accumulated other comprehensive income.

Consistent with other banks, growth in net interest income (driven by changes in net interest margin and balance-sheet growth), fee-based income, and operating expenses are the key valuation drivers.

We project 0.8% growth in Truist's net interest income in 2026, as the exit of its marine and RV portfolio and rightsizing its auto lending book weigh on its balance-sheet growth. We expect around 3.8% growth in average loan balances in 2026 and a 3-basis-point contraction in NIM to 3.00%. Longer-term, we project Truist’s net interest margin to normalize to around 2.99%, down 6 basis points from our prior assumption. Our NIM forecasts reflect our expectation of an upward-sloping yield curve and a midcycle federal-funds rate around 2.5%. We think the bank’s expansion plan in the US Southeast will be a major driver of loan growth in commercial lending, while overall loan growth will be partially offset by lower consumer lending growth. We forecast its total loan balances to grow at a 3.1% compound annual growth rate from 2025 to 2035. Taken together, our forecasts indicate 3.0% growth in net interest income for Truist over the next decade.

On the fee side, we forecast around 9.8% adjusted fee income growth in 2026, excluding the losses from selling lower-yielding securities. This is a significant acceleration from the 1.3% adjusted fee income growth in 2025, as we expect a strong recovery in investment banking and trading fees, as well as broad-based growth in wealth, card, and treasury management and other fee income categories. We expect normalized fee income growth of around 3.3% for the bank in the long run.

Turning to expenses, we have seen solid expense control at the bank, with adjusted expenses growing only 1% in 2025 and declining 4.4% in 2024, excluding the goodwill impairment and core deposit intangible amortization. We forecast total reported expenses to grow by 1.9% in 2026, or 2.3% on an adjusted basis. Over the long term, we think the bank's operating efficiency ratio should normalize to around 57.3%, as we still like its scale as a super-regional bank. This is much better than its historical low-to mid-60s operating efficiency range.

Finally, considering credit costs, we forecast Truist’s 2025 net charge-off ratio at 0.54%, in line with 0.54% in 2026. We expect the bank’s net charge-off ratio to normalize at 0.52% through the cycle. Overall, we expect the bank to earn a normalized return on tangible common equity of 12.4%, missing its 16%-18% medium-term target.

We assign Truist a Morningstar Economic Moat Rating of none, as we don't think that the bank has durable cost advantages or switching costs that align with our moat framework for banks, following the disappointing merger execution between BB&T and SunTrust. We now expect the bank to earn a normalized return on tangible common equity (excluding accumulated other comprehensive income or losses, or AOCI) in the low teens, missing its current target of 16%-18% ROTCE. While our forecast returns remain above our assigned 8.9% cost of equity for the bank, the spread is thin, and we’re not confident the firm can reliably outearn its cost of equity over the 10-year horizon required to warrant a narrow moat rating.

Evaluating Truist’s performance against our bank moat framework, we believe bank moats are derived primarily from two sources: cost advantage and switching costs. We see cost advantages coming from three primary factors: a low-cost deposit base, conservative underwriting, and excellent operating efficiency. Regulatory costs must also be considered. For Truist, we no longer believe the bank has a cost advantage or switching costs that are consistent with our bank moat framework.

Considering these factors in sequence, we assess that the bank’s funding costs are slightly higher than those of its US regional peers in the current rate cycle, and we don’t anticipate lower funding costs in the future. Before the merger, we appreciated BB&T’s deposit funding base from its core operational banking relationships with clients, but we didn’t consider SunTrust as having funding cost advantages. We also think that deposit competition in its Southeast markets is intensifying, as more banks enter the region in search of higher growth prospects, which is weighing on Truist’s deposit funding costs. FDIC data show that Truist lost market share in core markets such as North Carolina, Georgia, and Florida (together comprising over 60% of its deposit base), while gaining share only in Virginia (around 12% of its deposits). While some of it might be related to the required branch divestiture from the regulators regarding the merger, we thought the bank had lost some clients post-merger, either from intensifying deposit competition or from less-than-optimal integration.

Turning to operating efficiency, we still like the scale of Truist as one of the superregionals, and we forecast the bank to achieve an operating efficiency ratio of around 57.3% on a normalized basis, better than some of its US peers (if behind its original merger target of 51%). To be fair, we attribute part of Truist’s improved operating efficiency to the 2024 sale of its insurance brokerage business (Truist Insurance Holdings), which had high personnel-related expenses and an operating efficiency ratio above 80%. However, we view this as a pyrrhic victory, as we preferred the capital-light insurance brokerage fee income stream, which accounted for more than one-quarter of the bank’s total fee income.

Switching gears to credit costs, we think Truist’s credit costs should remain solid from BB&T’s historically good underwriting culture. However, we note that US banks have generally improved their underwriting following the global financial crisis, and we think that Truist’s edge over its peers might be smaller in future credit cycles. During the global financial crisis, BB&T’s credit costs were lower than those of its US peers, with its provisioning-to-net interest income ratio averaging around 36% from 2008 to 2012, below the peer average of 40% and better than SunTrust’s 51%. When it came to the more recent covid-related recession, Truist’s provisioning/NII of 5% on average from 2020 to 2021 was also lower than the peer average at 10%. Looking ahead, it’s feasible that the firm’s strong underwriting culture provides a modest edge, but not likely sufficient to warrant a cost-advantage moat on a stand-alone basis.

Regulatory costs matter both at the industry level and for Truist specifically. The US banking system has improved over the last decade, with capital levels at all-time highs and stronger postcrisis regulation. Despite intense competition, the largest banks by assets have earned higher returns on equity for decades and continue to do so. Our long-run outlook is positive, given the US' stable democracy, steady GDP growth, and reserve-currency status. Truist is not large enough to be a global systemically important bank, avoiding the most burdensome rules, but as a Category III bank still faces the Fed's annual stress tests, liquidity coverage rules, and supplementary leverage ratio, giving it one of the best relative regulatory cost positions among regionals we cover. We view the March 2026 Basel III endgame proposal and 2025 stress test changes as mostly positive. The key change for banks between $250 billion and $700 billion in assets is including AOCI in common equity Tier 1 ratio capital, which Truist should handle well. The bank already has an adjusted common equity Tier 1 ratio of 9.4% as of the end of June 2026, adjusting for AOCI, comfortably above its regulatory minimum of 7.0% (effective from Oct. 1, 2025).

When it comes to switching costs, we acknowledge that banking businesses all have some level of stickiness, as banking customers rarely switch because of inertia. Still, not all banks can monetize switching costs equally. However, we don’t believe that Truist has superior capability to monetize customer switching costs from these franchises, as evidenced by its lower fee-generating capabilities compared with its peers. To be more specific, Truist estimated in 2024 that its peer median’s treasury management penetration among commercial loan clients was roughly 1.5 times its own penetration rate, and that top peers' penetration was two times Truist’s level.

Truist’s Southeast footprint has attractive growth potential, and the bank is building 100 new branches. If the bank is successful in taking more deposit share, it can improve its funding profile and returns.

Truist’s plan to increase wealth penetration in retail clients and Treasury management penetration into commercial clients could significantly improve its return profile if executed well.

The sale of the insurance brokerage business leaves Truist with excess capital to reinvest in its business, and the bank could be more aggressive in attracting top talent and adding verticals.

The US economy has some pockets of softness. If the economy went into a recession, Truist would face lower balance-sheet growth and higher credit costs.

Fintech and other nonbank lenders are growing at a much faster rate than US commercial banks. Commercial banks like Truist could cede a significant lending share.

Truist wants to increase investment banking fee penetration with its middle market clients, which might lead to lower returns given intense competition from private credit.