Moody’s Ratings downgraded Truist Financial’s long-term ratings to Baa1 from A3, saying the sale of the Charlotte-based company’s insurance unit makes it less diversified and more reliant on potentially volatile net interest income.
The rating remains investment grade for Truist, the nation’s seventh-largest banking company with about $530 billion in assets on Dec. 31. Charlotte-based Truist sold its remaining stake in Truist Insurance earlier this year, generating a $10 billion after-tax gain from selling the business, Moody’s said in a release.
The company had gradually expanded the insurance business to become the fifth-largest U.S. brokerage.
“The downgrade of Truist’s ratings reflects Moody’s view that following the sale of TIH, Truist will be less diversified, will have greater reliance on net interest income increasing earnings volatility and that long-term profitability will be lower,” Moody’s said.
The insurance business made up 14% of Truist’s net revenue in 2023, while its total non-interest income was 38% of net revenue, which Moody’s said was comparable with the largest U.S. banks. Without the insurance contribution, non-interest revenue would make up 27% of net revenue, a similar ratio for many smaller, lower-rated U.S. regional banks, the rating agency said.
Banks try to balance their earnings between the traditional spread between interest received on loans and paid on deposits with fee income from ancillary businesses. The latter profit can be more stable in some instances, such as wealth management and insurance services, which many investors appreciate.
“Over the near term the interest income earned on the reinvestment of these proceeds is also expected to largely replace [Truist Insurance] earnings,” Moody’s said. The bank is now better capitalized with more liquidity, the ratings firm said. However, “Moody’s views these improvements do not fully offset the bank’s increased business concentration.”
Truist shares declined 10 cents to $38.75 in early Thursday trading. The stock has traded between $26 and $67 over the past five years.
Bank of America and Wells Fargo have Moody’s long-term issuer ratings of A1, which is three notches higher on the agency’s scale than Baa1.
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.