SunTrust Misses Marginally

Zacks

SunTrust Banks Inc.’s (STI) third quarter 2012 earnings were $1.98 per share, marginally lagging the Zacks Consensus Estimate by 2 cents. This includes the impact of various initiatives announced to improve the company's risk profile and strengthen its balance sheet.

Excluding the impact of the actions undertaken by SunTrust, net income was $313 million or 58 cents per share compared with $211 million or 39 cents per share in the prior-year quarter.

Though benefiting from actions embarked upon during the reported quarter, overall results were not up to the mark. Total revenue (excluding certain non-recurring items) decline while operating expenses increased. Yet, stable asset quality and capital ratios as well as a slight improvement in loan and deposit balances were the tailwinds.

Performance in Detail

Total revenue jumped 75% year-over-year to $3.84 billion. However, excluding net gains from the sale of The Coca-Cola Company (KO) shares, total revenue declined 13.3% to $1.90 billion. Total revenue also missed the Zacks Consensus Estimate of $2.07 billion.

Net interest income inched up 0.6% from the prior-year quarter to $1.30 billion. The increase was driven by higher average loan balances and positive changes in deposit mix.

However, net interest margin came down 11 basis points (bps) from the year-ago quarter to 3.38%. The decrease was attributable to reduced loan yields, which were partially offset by a decline in rates paid on interest bearing liabilities and a fall in long-term debts.

Non-interest income was $2.54 billion, surging significantly from $903 million in the prior-year quarter. The drastic improvement was primarily due to $1.9 billion in securities gains, partly offset by higher mortgage repurchase provision and losses.

Non-interest expense rose 10.6% to $1.73 billion on a year-over-year basis. The increase was attributable to expenses related to the restructuring actions undertaken to improve balance sheet along with higher personnel costs, partially mitigated by lower Federal Deposit Insurance Corporation (:FDIC) assessment premiums.
 
SunTrust’s efficiency ratio improved to 44.90% from 71.05% in the prior-year quarter. The decline in efficiency ratio indicates an increase in profitability

Credit Quality

Credit quality showed mixed improvement during the quarter. Nonperforming loans dropped 134 bps year-over-year to 1.42% of total loans. Similarly, net charge-offs fell 5 bps from the year-ago quarter to 1.64% of annualized average loans.

Yet, provision for credit losses increased 29.6% from the year-ago quarter to $450 million. The rise was largely driven by incremental charge-offs related to the sales of nonperforming loans and the junior lien credit policy change.

Capital Ratios

As of September 30, 2012, SunTrust’s capital ratios witnessed mixed movement during the quarter. While tangible equity to tangible asset ratio improved 10 bps year-over-year to 8.48% and tier 1 common ratio increased 49 bps to 9.80%, Tier 1 capital ratio was down 50 bps from the prior-year quarter to 10.60%.

Moreover, as of September 30, 2012, book value per share and tangible book value per share marginally improved compared with the prior-year quarter and were $37.35 and $25.72, respectively.

Peer Performances

The third quarter earnings of State Street Corp. (STT) were marginally ahead of the Zacks Consensus Estimate. Better-than-expected results benefited from improvement in net interest revenue and fall in operating expenses. Moreover, capital ratios and asset position remained robust during the quarter. However, decline in fee revenue was the primary dampener.

Moreover, another peer BB&T Corp.’s (BBT) third quarter 2012 earnings were in line with the Zacks Consensus Estimate. Results benefited primarily from growth in revenue and almost stable provision for credit losses. Alongside, the quarter witnessed improved credit quality and enhanced capital as well as profitability ratios. Moreover, accelerating growth in loans and low-cost deposits were impressive. Nevertheless, higher operating expense was the primary dampener.

Conclusion

Better average client deposits, robust credit quality and favorable deposit mix are amongst SunTrust’s key strengths. Moreover, its recent acquisitions, restructuring initiatives taken in the third quarter and cost-cutting programs are quite encouraging despite the persistent low interest rate environment and industry challenges. However, we remain concerned about the company’s exposure to risky assets, limited margin improvement and continued regulatory pressures.

SunTrust currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we also maintain a long-term ‘Neutral’ recommendation on the shares.
 

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