We recently compiled a list of the 10 Best Local Bank Stocks To Invest In Now. In this article, we are going to take a look at where Truist Financial Corporation (NYSE:TFC) stands against the other local bank stocks.
As investors shift their focus from artificial intelligence to the labor market and its impact on potential interest rate cuts, the banking industry of 2024 is quite different from the one in 2021. Interest rates are at a 24 year high in America as of early September, which means that not only do the costs of borrowing money increase for consumers but banks also have to carefully monitor their loan portfolios to ensure liquidity and manage insolvency risks.
One consequence of this has been a growth in private capital, which covers loans made to firms by non banking entities. According to data from the International Monetary Fund (IMF), the private credit market crossed a whipping $2.1 trillion in 2023 through its assets and capital commitments. 75% of this was in the US as investors such as pension funds and others drove to funds that offered higher returns while corporate borrowers flocked to private lenders due to the relatively simpler process of acquiring capital and relaxed risk requirements when compared to banks.
In fact, private credit is one of the best performing investment vehicles when it comes to returns according to the IMF. The fund uses December 2000 as a base value of 100 to show that as of June 2023, private credit was up to almost 800 points. In comparison, the flagship S&P index, which was also assigned an index value of 100 for December 2000, was up to roughly 460 points by June 2023, while global stocks delivered the least returns as they sat at 400 points.
The IMF believes that while the risks from this shift from local banks to private capital are not immediate, they are still important particularly due to the opacity of private capital. Private borrowers are riskier than those who borrow from banks. For instance, while the debt to operating income ratio of private borrowers is roughly 4.75, the median firm size is roughly $500 million. On the other hand, firms that rely on investment grade bonds have a median value of $16 billion and a debt to operating income ratio ranging between 2.8 to 3.6.
Shifting gears, the growth in private capital isn’t the only disruption that banks are facing. While high interest rates create the opportunity for banks to earn more through interest income, they also increase interest expenses. In fact, according to research from S&P Global, the banking sector will see some benefits from the higher rates this year as the aggregate efficiency ratio (non interest expenses/revenue) can sit at 60.30 this year for a three point gain over 2023’s 57.25. However, this might be the only good news in store. This is because the sector’s net interest margin, return on average assets (ROAA), and return on average equity (ROAE) are all expected to drop in 2024. In 2023, the three respective metrics were 3.22, 1.09, and 11.52, while in 2024, they are expected to sit at 3.18, 0.97, and 11.52.
Additionally, two other ways in which the banking industry has evolved in today’s era of high interest rates are through growth in competition for deposits and the corresponding high deposit costs. Not only did the high rates start to fully make their mark in Q4 2023 as deposits grew by 1.4% after six consecutive quarterly declines, but the difference between the Fed funds rate and the rate paid to depositors also dropped in Q4. This was because banks enticed customers by increasing their deposit costs, and the difference between the two rates had sat at roughly 3.2% in Q2 2023 and dropped to roughly 2.9% in the fourth quarter. The S&P believes that by 2026, this should sit at roughly 1% as the Fed funds rate drops to a little above 2%.
The increasing competition for deposits in banks that spurred the smaller gap has also caused large drops in the banking industry’s non interest deposits. As of 2023 end, non interest deposits accounted for 21.8% of the US banking industry’s total deposits a sizeable drop over the 28.9% figure for 2021. This fall came when non interest bearing deposits dropped by 28% over the past two years while interest bearing deposits grew by 5%. Keep in mind that the growth figure for the interest bearing deposits is lower due to their larger volume. Looking at the future, the banking industry’s net interest margin is expected to grow to 3.26 and 3.35 in 2025 and 2026 when the deposit beta falls to at least 27%.
Finally, the boon in internet usage and the accompanying growth in consumer electronics and personal computing is also impacting the banking industry. As per McKinsey, 60% of US banking consumers under the age of 70 are using digital channels for their wealth management. At the same time, some of the richest banking consumers, i.e. those aged above 70 are also increasing their use of digital banking products. This usage has grown by 5% within this age group, with the broader trend allowing banks the ability to bring their cost to income ratios below 25% and cost to asset ratios below 50%. In short, digital banking is offering banks the ability to become quite light operationally.
Our Methodology
To make our list of the best local bank stocks to buy according to hedge funds, we ranked the 40 most valuable regional US banks in America in terms of market capitalization by the number of hedge funds that had bought their shares in Q2 2024 and picked out the top stocks.
For these stocks, we have also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A closeup view of a hand inserting a credit card into an ATM machine.
Truist Financial Corporation (NYSE:TFC)
Number of Hedge Fund Holders In Q2 2024: 42
Truist Financial Corporation (NYSE:TFC) is a diversified bank that provides commercial, consumer, as well as wealth management services. This provides it with revenue streams that can end up countering each other in different economic climates. For instance, while Truist Financial Corporation (NYSE:TFC)’s general consumer customers might not fare too well when the economy is slow and inflation is rising, its wealthy customers can increase the demand for the bank’s services. This was also the case during Q2 2024, when Truist Financial Corporation (NYSE:TFC)’s non interest income (a key aspect of any bank’s hypothesis given today’s environment and expected future trends) took a massive $6.7 billion hit due to securities losses. However, Truist Financial Corporation (NYSE:TFC)’s wealth management, investment banking, deposit service charges, and other income streams helped stem the bleeding to a negative $5.2 billion for Q2 and $3.7 billion for H1 2024. Looking ahead, investors should be on the watch out for Truist Financial Corporation (NYSE:TFC)’s net interest income to gauge the direction of its stock.
Ariel Investments mentioned Truist Financial Corporation (NYSE:TFC) in its Q4 2023 investor letter. Here is what the fund said:
“After the merger of BB&T and SunTrust formed Truist in 2019, management has prioritized simplifying the organization and reducing expenses to optimize profitability. After successfully selling a portion of the insurance business, TFC is now considering selling the remaining stake. While we take no definitive view on the likelihood of a sale, we believe this would be a positive catalyst for the company. TFC could leverage the deal to strengthen its adjusted capital profile, improve margins as well as accelerate its investment in technology. Meanwhile, the company is trading at a significant discount relative to our estimate of its intrinsic value.”
Overall TFC ranks 6th on our list of the best local bank stocks to invest in. While we acknowledge the potential of TFC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TFC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.