Truist Financial (TFC) faces a tough road ahead amid a leadership change and higher interest rates, BofA Securities said, joining other brokerages that recently downgraded their ratings on the regional bank.
BofA lowered Truist's rating to neutral from buy, with a price target at $56. The downgrade follows recent rating cuts by Morgan Stanley, UBS Securities and Raymond James.
Last month, Truist said Michael Lyons will become its chief executive, effective Sept. 1, replacing Bill Rogers, who will assume the executive chair role.
"Combined with a tougher rate backdrop, we see the stock struggling to outperform until investors gain confidence that Lyons can close the profitability gap relative to peers," BofA analysts wrote in a Wednesday note to clients.
The prospects of a tighter monetary policy at the Federal Reserve have increased as the Iran war drove up inflation.
BofA views Truist's return on tangible common equity as among the lowest within super-regional banks. Truist's 15% ROTCE target by 2027 and a longer-term goal of 16% to 18% "still leaves Truist playing catch-up versus peers," the analysts wrote.
"Financial engineering has largely been pulled forward with the sale of the insurance business, bond book restructuring, and aggressive buybacks," the brokerage said, discussion strategic options for the bank under new CEO. "(Merger and acquisition) has failed, and we do not think investors have much appetite for another deal unless it is an outright sale of Truist -- which is difficult given the bank's size."
Truist, created as a result of the BB&T and SunTrust merger in December 2019, is still working to unlock the full benefits of that deal, according to the BofA report.
That means Lyons may have to give the bank's strategy a shot for a few years, according to the analysts, who pointed out a "fiercely competitive" banking landscape in the Southeast.
"Given the challenges shareholders have endured, we see limited appetite for another multi-year turnaround before evidence of tangible progress emerges," the analysts said.
Shares of Truist were down 3.6% intraday Wednesday.
Price: $49.54, Change: $-1.82, Percent Change: -3.54%