On Jun 3, 2013, we reiterated our long-term recommendation on SunTrust Banks, Inc. (STI) at Neutral based on its capital deployment activities, acquisitions and cost cutting initiatives as well as better-than-expected first-quarter results. However, we remain concerned about the company’s exposure to risky assets, limited margin growth and continued regulatory pressures.
Why the Neutral Stance?
SunTrust’s first-quarter 2013 earnings came in at 63 cents per share, marginally surpassing the Zacks Consensus Estimate of 61 cents. Better-than-expected earnings were primarily driven by lower operating expenses, partially offset by a reduction in the top line. Moreover, stable asset quality and capital ratios along with an improved deposit balance were the tailwinds for the quarter.
The Zacks Consensus Estimate for 2013 remained stable at $2.71 over the last 30 days. However, for 2014, the Zacks Consensus Estimate went down by 0.7% to $2.93 per share over the same time frame. Hence, the company currently has a Zacks Rank #3 (Hold).
With the approval of SunTrust’s capital plan by the Federal Reserve, the company authorized a new share repurchase program under which it plans to buyback $200 million shares between second-quarter 2013 and first-quarter 2014. Further, SunTrust announced a dividend hike of 100% to 10 cents per share.
Moreover, SunTrust’s restructuring initiatives to fortify its balance sheet, improve credit quality and enhance revenue generating capacity through several small acquisitions have been the driving forces for its growth.
On the other hand, continuous deposit pricing pressure, rising costs and fee restrictions are expected to hinder SunTrust’s profitability in the near term. Moreover, a sluggish economic recovery along with a persistent low-interest rate environment and overall industry challenges might prove to be impediments for SunTrust to considerably improve its financials going forward.
Other Banks to consider
Some better performing banks include Enterprise Financial Services Corp. (EFSC), Old Second Bancorp Inc. (OSBC) and First Interstate Bancsystem Inc. (FIBK). All these carry a Zacks Rank #1 (Strong Buy).
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