Regional bank Truist Financial (NYSE:TFC) is set to sell off the remaining 80% stake of its insurance brokerage unit to free up capital. Private equity firm Stone Point, which already owns 20% of Truist Insurance Holdings, is working out a deal to buy the remaining business for a whopping $10 billion. As per Semafor, Truist is undertaking the sale to deleverage its balance sheet ahead of the disclosure of the new regulatory capital requirements for banks.
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In February, Truist sold the minority stake of the brokerage unit to Stone Point, which was then valued at $14.75 billion. The investment also included funding from Emirati Sovereign fund Mubadala. The current purchase depends on Stone Point’s ability to raise debt in an already subdued capital market environment. The discussions are ongoing and neither party has posted an official statement yet.
Regulatory Overhaul for Banks is Coming
The regulatory overhaul is expected to increase a bank’s capital requirement against risk-weighted assets (RWA). Every dollar of additional capital acts as a buffer against unforeseen financial crises. Banks can use this capital to absorb losses in times of need. In a similar move, Universal banking giant JPMorgan Chase (NYSE:JPM) announced that it is securitizing more of its loans so as to reduce the need for additional capital reserves as a buffer.
The bank’s Stress Test results following March’s banking crisis showed that Truist Financial was just marginally above the minimum threshold. Selling out its profitable insurance business seems like the only viable option to free up capital. Its insurance business reportedly earns 25% margins for the bank. Following the sale, Truist will end up more like a bank with only two businesses, namely consumer banking and commercial banking.
Is TFC a Buy or Sell?
Following the news of the sale, Wells Fargo analyst Mike Mayo reiterated his Buy rating on the stock with a price target of $37 (34.9% upside). The analyst is optimistic about the insurance business sale to Stone Point, which could unlock potential “unrecognized equity value.” Plus, the substantial restructuring plans, including the Board changes, mean that the management is ready to lift the company’s performance. Mayo had initially believed that Truist could become a target for a potential activist investor takeover.
Of the 13 Top Analysts who recently rated Truist Financial stock, five have given it a Buy rating while eight have given it a Sell rating. Top Wall Street analysts are those awarded higher stars by the TipRanks Star Ranking System. This is based on an analyst’s success rate, average return per rating, and statistical significance (number of ratings).
Based on these views, TFC stock has a Moderate Buy consensus rating on TipRanks. Also, the average Truist Financial price target of $35.92 implies 30.9% upside potential from current levels. Meanwhile, TFC stock has lost 34.2% so far this year.
