Morningstar DBRS Confirms Truist Financial Corporation's Long-Term Issuer Rating at AA (low), Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Truist Financial Corporation (Truist or the Company), including the Company's Long-Term Issuer Rating of AA (low). Additionally, Morningstar DBRS confirmed the credit ratings of its primary banking subsidiary, Truist Bank (the Bank). The credit ratings of three trust preferred securities subsidiaries were also upgraded to align these instruments with our typical notching. The trend for all credit 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 credit ratings and Stable trend 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. Additionally, we view the Company as maintaining a conservative risk profile, sound liquidity management and improved capital levels.

The ratings also consider the still challenging operating environment, including a more costly and competitive funding environment, and the expectation that asset quality metrics could worsen from their current levels, as the economy slows and if interest rates remain elevated. While Morningstar DBRS expects some credit deterioration, credit metrics are expected to remain in a manageable range.

CREDIT RATING DRIVERS

Given Truist's current credit rating levels, further credit ratings upgrades are unlikely. If Truist's revenue generation capacity falters, leading to a prolonged period of negative operating leverage, or if the level of net income weakens relative to its highly rated peer group, the credit ratings would be downgraded. Additionally, an outsized deterioration in asset quality would lead to a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Very Strong / Strong

The Company's strong and diversified banking franchise is underpinned by a deeply entrenched deposit base, covering 17 states primarily in the South and Mid-Atlantic regions. Truist is the seventh largest U.S. bank, with approximately $520 billion in total assets at the end of 2Q24, with leading deposit market shares across its footprint. The Company recently sold its remaining stake in Truist Insurance Holdings (TIH), which led to an improvement in balance sheet strength, but reduced diversification by eliminating a revenue stream. Morningstar DBRS viewed the sale as ratings neutral since it enhanced financial flexibility by significantly boosting CET1 capital and liquidity levels. However, Truist is losing fee-based insurance revenues that bolstered diversification and was unique to the company.

Earnings Combined Building Block (BB) Assessment: Strong / Good

Truist's earnings are solid, with diversified non-interest income sources, even without TIH. Like the industry, Truist has not been immune from the impact of higher interest rates and the pace of revenue growth has slowed. However, the Company utilized the gain from the sale of TIH to reposition its investment securities portfolio, which boosted net interest margin, providing some revenue tailwinds for 2H24.

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. Additionally, the Company's exposure to commercial real estate loans and office loans is highly manageable at 9.7% and 1.6% of loans held for investment, respectively. The Company continues to report strong asset quality metrics, as non-performing assets and net charge-offs (NCOs) remain at highly manageable levels. Specifically, at June 30, 2024, non-performing loans and leases were 0.46% of loans and leases held for investment and NCOs were 0.58% for the quarter. The Company has built reserve levels to 1.57% of loans, which provides a sound buffer given current asset quality metrics.

Funding and Liquidity Combined Building Block (BB) Assessment: Very Strong / Strong

The Company's funding and liquidity remains favorable, with an average LCR of 110% for 2Q24 and strong levels of deposit funding. As of June 30, 2024, the loan to deposit ratio remains solid at 79%. In addition, the sale of TIH boosted on balance sheet liquidity and the Company has ready access to additional liquidity sources.

Capitalization Combined Building Block (BB) Assessment: Strong / Good

Truist's capitalization has vastly improved and the Company typically has strong levels of capital generation. Truist reported a CET1 ratio of 11.6% at June 30, 2024, a 200 basis points improvement versus last year, primarily due to the sale of TIH. In anticipation of higher regulatory capital requirements, Truist has been building capital levels through both organic capital generation and managing risk-weighted asset growth. Additionally, the Company performed well in recent Federal Reserve stress tests, with a below median capital erosion in the tests. Its preliminary stress capital buffer decreased modestly to 2.8% from 2.9%.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/437710.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in US Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (04 June 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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.

Morningstar DBRS had 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. Morningstar DBRS's outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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