Truist (TFC) Faces Ratings Actions on TIH Divestiture Plan
Truist Financial’s TFC recent decision to divest its remaining 80% stake in Truist Insurance Holdings (“TIH”) has triggered reactions from two major credit rating agencies – Fitch Ratings and Moody's Investors Service. Earlier this week, the company announced stake sale to Stone Point Capital and Clayton Dubilier & Rice. Mubadala Investment Company and co-investors are also participating in the investment.
Fitch Ratings took action by downgrading TFC's Long-Term Issuer Default Rating (IDR) to 'A' from 'A+' alongside lowering the Viability Rating (VR) to 'a' from 'a+'. The rating agency viewed this transaction as a near-term credit positive but acknowledged the constraints this narrower business mix places on Truist's business and earnings prospects.
Meanwhile, Moody's placed Truist’s long-term ratings on review for downgrade. The firm cited concerns over TFC's reduced diversification post-sale, increased reliance on net interest income (NII) and heightened earnings volatility. Similar to Fitch Ratings, Moody's conceded the short-term credit positive of improved capitalization resulting from the TIH sale. However, it questioned whether the bank’s targeted capitalization in the longer term will suffice to mitigate increased risks and sustain its existing creditworthiness.
Both rating agencies highlighted the significance of TIH as a revenue source for Truist, with the insurance business accounting for a substantial portion of the company’s fee income. In 2023, the TIH division accounted for 14.6% of TFC’s total revenues, with almost 98% being fee income.
In response to the divestiture, management intends to evaluate a balance sheet repositioning, focusing on its investment portfolio to replace lost earnings from TIH. This strategy includes the sale of low-coupon securities and reinvestment in higher-current-coupon investments. The rating agencies stressed the importance of careful asset-liability and interest rate risk management in this repositioning process.
Looking ahead, Fitch Ratings emphasizes that Truist's capital levels will remain elevated in the near term, with CET1 expected to migrate towards management's guidance of 10% on a transitional basis in the medium term. Moody's review will assess the impact of the TIH sale on Truist's profitability, its capital deployment plans, progress in strengthening asset-liability management and interest rate risk management and implications for the bank's liquidity profile.
While Fitch Ratings views the sale of TIH as a credit positive in the short term, Moody's concerns about Truist's reduced diversification and increased earnings volatility post-sale underscore the importance of prudent risk management and strategic decision-making in navigating this transition period.
Our Take
Truist has been restructuring its business to focus on its core operations. In sync with this, the company announced the divestiture of its asset-management subsidiary, Sterling Capital Management LLC, to Guardian Capital Group Limited in a $70-million deal earlier this month.
Truist’s decision to sell Sterling Capital is part of a comprehensive restructuring initiative to create a more efficient and profitable organization. The bank has been implementing various measures, including a $750-million cost-cutting program, a 4% reduction in workforce, the consolidation of business lines and the creation of an enterprise-wide payments group.
Over the past six months, shares of Truist have jumped 25.6%, outperforming the industry’s 21.7% growth.
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Currently, TFC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similar Move by Another Finance Firm
Ally Financial Inc. ALLY announced a definitive agreement to sell Ally Lending (its point-of-sale or POS financing business), including $2.2 billion of loan receivables, to Synchrony SYF. This move reflects Ally Financial's commitment to optimizing its capital allocation and prioritizing resources toward high-growth areas.
The portfolio being acquired by SYF is a strategic fit, reinforcing its position in the industry by offering both revolving credit and installment loans at the point-of-sale in the home improvement vertical. For ALLY, the transaction is part of a broader initiative to invest resources in growing scale businesses and strengthen relationships with dealer customers and consumers.
Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.
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