Over the last six months, Truist Financial’s shares have sunk to $39.54, producing a disappointing 12.4% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is there a buying opportunity in Truist Financial, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is Truist Financial Not Exciting?

Despite the more favorable entry price, we're cautious about Truist Financial. Here are three reasons why TFC doesn't excite us and a stock we'd rather own.

1. Net Interest Income Points to Soft Demand

While banks generate revenue from multiple sources, investors view net interest income as the cornerstone - its predictable, recurring characteristics stand in sharp contrast to the volatility of non-interest income.

Truist Financial’s net interest income has grown at a 1.4% annualized rate over the last four years, much worse than the broader bank industry. Its growth was driven by an increase in its outstanding loans as its net interest margin, which represents how much a bank earns in relation to its outstanding loan book, was flat throughout that period.

2. EPS Trending Down

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Sadly for Truist Financial, its EPS and revenue declined by 2.6% and 2.8% annually over the last five years. We tend to steer our readers away from companies with falling revenue and EPS, where diminishing earnings could imply changing secular trends and preferences. If the tide turns unexpectedly, Truist Financial’s low margin of safety could leave its stock price susceptible to large downswings.

3. High Interest Expenses Increase Risk

Leverage is core to the bank's business model (loans funded by deposits) and to ensure their stability, regulators require certain levels of capital and liquidity, focusing on a bank’s Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a bank holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all banks must maintain a Tier 1 capital ratio greater than 4.5% On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, banks generally must maintain a 7-10% ratio at minimum.

Over the last two years, Truist Financial has averaged a Tier 1 capital ratio of 12.2%, which is considered unsafe in the event of a black swan or if macro or market conditions suddenly deteriorate. For this reason alone, we will be crossing it off our shopping list.

Final Judgment

Truist Financial isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 0.8× forward P/B (or $39.54 per share). Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at an all-weather company that owns household favorite Taco Bell.

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