The benefits of merging BB&T and SunTrust to create Truist Financial (NYSE:TFC) are still trickling in more 18 months on, but TFC stock has had a pretty good year.
Branches are being closed where the two banking systems overlap. Computer systems are still being combined (as I know, being a SunTrust customer).
A “robo-advisor” for the bank’s investment people won’t be done until year-end.
The two regional banks, one based in Winston-Salem, N.C. and the other in Atlanta, merged in December 2019. Since then, the stock has gone nowhere. Even this year, it’s up 17% against a 28% gain for Bank of America (NYSE:BAC), now a neighbor in Charlotte.
The merger rationale was that 1+1 would equal 2. So far, 1+1 is equaling 1.
A Closer Look at TFC Stock
In 2021 banks aren’t really banks. They’re computer systems with tons of legacy costs. That’s because banks grew up in the age of mainframes, minicomputers, PCs and servers. They’re not cloud-based.
Savings from closing branches, or even large offices, don’t flow into the bottom line, they go to the IT department, which can use them in its ongoing process.
That means the key man at Truist isn’t CEO Kelly King. It’s Scott Case, whose title is chief information officer.
Case was formerly with SunTrust, and previously made his name at Bank of America. He estimated incremental operating expenses relating to the merger at $1.8 billion through next year.
The bank had told reporters before the merger it expected to save $1.6 billion in the process. What the real estate gave, the computers took away.
Fintechs are Cloud
What I like to call technology debt wipes out the deflationary relief banks should be seeing from new technology. Old systems cost money to run and more money to replace.
While Case is deciding which legacy system to maintain, and which to discard, millennials are signing up for Robinhood accounts that let them save, borrow and invest in both fractional shares and Bitcoin.
The advantage fintechs have is that they were born in the cloud. All banks have is money. Fintechs can get money from anywhere, from investors or the vast shadow banking system.
Traditional banks are built on relationships and capital. The Truist merger busted many relationships, and capital is fungible. Banks used to merge for “economies of scale,” but technology debt means they lose that in mergers.
Banking should be a simple, profitable business. You’re selling money for more than it costs.
The assumption is that as interest rates rise, so should the spread between the cost of money and what banks can get. This is also not in Truist’s favor right now.
TFC stock earned $1.5 billion during the June quarter, $1.16 per share, against $902 million, 67 cents per share, a year earlier, but total revenue was down from a year ago, from $5.87 billion to $5.65 billion. Net interest margins were also down, to 2.88% from 3.13%.
Results should improve, according to the report. Voluntary separation and retirement costs should drop. Non-interest expenses, which are still rising, should eventually fall.
The Bottom Line
Bank mergers aren’t what they used to be.
They once were simple. More capital meant more loans made by fewer bankers, and deposits taken from fewer branches.
Today mergers require repaying the technology debt of two banks and dealing with the bureaucracy of two IT departments. They mean breaking up relationships, some of which may not be reestablished as customers consider the ease of using a smartphone.
That’s why the TFC stock dividend, recently raised to 48 cents, now yields about 3.53%. That’s what you’re buying if you buy Truist stock today, income. That’s all you’re likely to get.
On the date of publication, Dana Blankenhorn held long positions in BAC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Living With Moore’s Law: Past, Present and Future available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or tweet him at @danablankenhorn. He writes a Substack newsletter, Facing the Future, which covers technology, markets, and politics.