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Loan Growth, Higher Rates to Aid SunTrust (STI) Q4 Earnings

Zacks Equity Research

SunTrust STI is scheduled to report fourth quarter and 2018 results on Jan 18, before the opening bell. Its revenues and earnings for the to-be-reported quarter are projected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from rise in net interest income, decline in expenses and lower provisions. However, decline in non-interest income was the undermining factor.

SunTrust has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 9.4%.

SunTrust Banks, Inc. Price and EPS Surprise


SunTrust Banks, Inc. Price and EPS Surprise | SunTrust Banks, Inc. Quote

Notably, the company’s activities in the fourth quarter were able to impressive the analysts. As a result, the Zacks Consensus Estimate for earnings of $1.40 moved nearly 1% upward over the past seven days. The figure represents year-over-year growth of 28.4%.

Moreover, the consensus estimate for revenues of $2.35 billion reflects a rise of 3.6% from the prior-year quarter.

Now, let’s check out the factors that are expected to influence SunTrust’s fourth-quarter results.

Factors at Play

Net interest income to rise: The quarter witnessed a decent improvement in lending activity, mainly in the areas of commercial and industrial, to which SunTrust has significant exposure. Further, increase in loans is expected to lead to a rise in earning assets. The Zacks Consensus Estimate for average earning assets of $188.3 billion for the to-be-reported quarter reflects 1.1% rise on a sequential basis.

Thus, given the loan growth and higher interest rates, SunTrust is likely to record a rise in net interest income in the fourth quarter. Further, management expects net interest margin to remain stable or increase 2 basis points (bps) sequentially, driven by the September rate hike.

Relatively stable non-interest income: While overall mortgage servicing fees remained decent in the fourth quarter, production volumes slowed down. Thus, mortgage production income will likely be subdued. Also, rising interest rates have hampered activity and thus this segment is not going to be much of a help either. So, SunTrust’s overall mortgage revenues are not expected to witness much improvement.

Coming to investment banking activities, equity issuances globally have been hurt due to fears of global economic slowdown and increased volatility. Also, rise in interest rates is likely to have lowered companies’ involvement in debt issuance activities. So, growth in both equity and debt underwriting fees is expected to be hurt in the to-be-reported quarter. Further, growth in SunTrust’s advisory income will likely be hampered owing to decline in global M&A deal volume. Thus, performance of investment banking is expected to be weak.

Nonetheless, given the substantial volatility in the fourth quarter, there will be a rise in trading activities. This is expected to support SunTrust’s trading income.

Decline in operating expenses to lend some support: Due to the branch consolidation initiatives, SunTrust’s expenses have been declining over the past few quarters. This is expected to continue in the to-be-reported quarter as well.

Asset quality to offer some support: SunTrust expects net charge-offs (NCOs) ratio to be 25-30 bps in the fourth quarter. Also, loan loss provision is expected to slightly exceed NCOs in addition to providing for loan growth.

Further, the consensus estimate for non-performing assets of $755 million for the to-be-reported quarter shows a marginal rise on a sequential basis. On the other hand, estimates for non-performing loans of $696 million reflect a decrease of 7.7% from the prior quarter.

Now, let’s check what our quantitative model predicts.

Chances of SunTrust beating the Zacks Consensus Estimate in the to-be-reported quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for SunTrust is -0.73%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3. This increases the predictive power of Earnings ESP. But we need to have a positive Earnings ESP to be sure of the positive surprise.

Stocks That Warrant a Look

Here are a few bank stocks you may want to consider, as according to our model, these have the right combination of elements to post an earnings beat in the to-be-reported quarter.

The Earnings ESP for M&T Bank MTB is +0.80% and the stock holds a Zacks Rank of 3. The company is scheduled to release results on Jan 17.

BB&T Corporation BBT has an Earnings ESP of +0.53% and carries a Zacks Rank of 3. It is slated to report its quarterly numbers on Jan 17.

Huntington Bancshares Incorporated HBAN is set to report earnings on Jan 24. The company has an Earnings ESP of +0.32% and carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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