Truist Financial Corporation: DBRS Morningstar Confirms Truist Financial Corporation to AA (low), Trend Stable

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Truist Financial Corporation (Truist or the Company), including the Company’s Long-Term Issuer Rating of AA (low). Additionally, DBRS Morningstar confirmed the ratings of its primary banking subsidiary, Truist Bank (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY CREDIT RATING CONSIDERATIONS

Truist’s ratings and Stable trends reflect its highly scaled and diversified regional banking franchise focused on the Southeast and mid-Atlantic regions with leading market shares. Indeed, in our view, Truist, the result of the 2019 merger of equals between BB&T and SunTrust, has one of the top franchises in the industry. Unique to Truist is their large insurance brokerage business, that bolsters non-interest income. Additionally we view the Company as maintaining a conservative risk profile and sound liquidity management and capital levels.
The ratings also consider the more challenging operating environment, including a more costly and competitive funding environment, and the expectation that funding costs and asset quality metrics will likely worsen from their current levels, providing some pressure to earnings. While DBRS Morningstar expects some credit deterioration as the credit cycle normalizes, these are expected to be manageable, and the Company has been building reserve levels.

CREDIT RATING DRIVERS
Given Truist’s high rating levels, further ratings upgrades are unlikely. If Truist’s revenue generation capacity falters, leading to a prolonged period of negative operating leverage, the ratings would be downgraded. Additionally, pronounced deterioration in asset quality or funding challenges would lead to a downgrade of the ratings.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Very Strong / Strong
The Company’s very strong banking franchise is underpinned by a deeply entrenched deposit base, covering the South and Mid-Atlantic regions. Overall, Truist is the seventh largest U.S. bank, with $555 billion in total assets at the end of 2Q23 with leading deposit market shares across its footprint. Additionally, Truist generates a comparatively high amount of non-interest income (around 38% of total revenue) driven by its large insurance brokerage business.

Earnings Combined Building Block (BB) Assessment: Strong / Good
Truist’s earnings are highly diversified with a large percentage from non-interest income sources. However, Truist has not been immune from current market conditions and the pace of revenue growth has slowed as the net interest margin has compressed and expenses remain elevated as the Company focuses on some technology-focused investments. As such, the Company expects to report negative operating leverage in 2023. That said, while earnings were flat year over year, 1H23 results remain sound with a reported return on assets and common equity of 1.02% and 9.5%, respectively. A 14% year over year increase in net interest income and 3% increase in non-interest income was offset by a higher provision for credit losses and higher operating expenses.

Risk Combined Building Block (BB) Assessment: Strong
Truist has strong risk controls and a conservative risk culture with credit fundamentals remaining sound, providing key support to the ratings. Specifically, the Company continues to report strong asset quality metrics, as non-performing assets and net charge-offs remain at highly manageable levels. Specifically, at June 30, 2023, non-performing loans and leases were 0.47% of loans and leases held for investment.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong
The Company’s funding and liquidity remains favorable, with an average LCR of 112% for 2Q23 and strong levels of deposit funding. In addition to on balance sheet liquidity, the Company has access to available liquidity of approximately $178 billion as of June 30, 2023.

Capitalization Combined Building Block (BB) Assessment: Strong / Good
Truist’s capitalization remains sound and the Company has strong levels of capital generation. Truist reported a CET1 ratio of 9.6% at June 30, 2023. In anticipation of higher regulatory capital requirements, Truist has been building capital levels through both organic capital generation and managed risk-weighted asset growth. Additionally, the Company performed well in recent Federal Reserve stress tests with a below median capital erosion in the tests. However, its stress capital buffer increased to 2.9% from 2.5%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at
https://www.dbrsmorningstar.com/research/419132

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (June 22, 2023). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

The following methodology have also been applied, DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support: https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support (March 28, 2023).
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar did have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.
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