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Muted Lending, Low Rates to Hurt SunTrust's (STI) Q2 Earnings

Zacks Equity Research

SunTrust Banks STI is scheduled to report second-quarter 2019 results on Jul 18, before the opening bell. While its revenues for the to-be-reported quarter are projected to grow year over year, earnings are likely to decline.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from rise in net interest income (NII) and decent loan growth. However, fall in non-interest income and higher expenses were the undermining factors.

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 6.9%.

SunTrust Banks, Inc. Price and EPS Surprise

SunTrust Banks, Inc. Price and EPS Surprise

SunTrust Banks, Inc. price-eps-surprise | SunTrust Banks, Inc. Quote

Notably, in a major development during the first quarter, SunTrust and BB&T Corp. BBT announced a merger deal, which will lead to the creation of the sixth-largest commercial bank in the United States (in terms of assets and deposits). The all-stock deal, termed as “mergers of equals,” is valued at $66 billion.

SunTrust’s activities in the second quarter were not able to impress analysts. As a result, the Zacks Consensus Estimate for earnings of $1.46 has moved nearly 2% lower over the past 30 days. Moreover, the figure indicates a 2% decline from the prior-year quarter’s reported number.

The consensus estimate for the company’s revenues of $2.39 billion for the to-be-reported quarter indicates 2.9% rise from the figure reported in the prior-year quarter.

Factors to Influence Q2 Results

NII to not offer much support: The Zacks Consensus Estimate for SunTrust’s average earning assets for the to-be-reported quarter is pegged at $196.1 billion, which suggests marginal growth from the prior quarter’s reported figure. However, the overall lending scenario has not been great during the second quarter. A dismal lending picture — mainly in the areas of commercial and industrial, in which SunTrust has significant exposure, will likely hurt NII.

Further, the central bank’s accommodative stance along with flattening of the yield curve and steadily rising deposit betas will likely hurt the company’s interest income growth.

Notably, management expects net interest margin (NIM) in the second quarter to decline by 2-3 bps on a sequential basis.

Relatively stable non-interest income: As mortgage rates declined in the second quarter, there is a chance of slight improvement in refinancing activities. Thus, mortgage servicing fees and production income are expected to offer some support to SunTrust’s overall mortgage revenues.

The company’s trading income growth is expected to be hurt, given the lower volatility in the second quarter and decline in client activity.

Coming to investment banking activities, while dealmakers across the globe were active during the second quarter, M&A deal value and volume witnessed a decline, owing to rise in borrowing costs and several geopolitical concerns. This will likely hurt the company’s advisory income.

Further, decent equity market performance and the central banks’ dovish stance seem to have supported equity issuance across the globe. However, relatively higher rates and several geopolitical concerns adversely impacted debt issuances in the to-be-reported quarter. So, overall underwriting fee is expected to improve only marginally.

Operating expenses to remain manageable: Due to the branch consolidation initiatives, SunTrust’s expenses have been declining over the past few quarters. This is expected to have continued in the to-be-reported quarter as well.

Management expects merger-related costs on a stand-alone basis of approximately $10 million in the second quarter.

Asset quality to offer some support: SunTrust expects loan loss provision to slightly exceed net charge-offs in addition to providing for loan growth.

Further, the consensus estimate for the company’s non-performing assets of $639 million for the to-be-reported quarter suggests a 1.4% decline from the previous quarter’s reported figure. However, estimates for non-performing loans of $538 million indicate an increase of 3.1% from the previous 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 high. This is because it has 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 +0.93%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3. This, when combined with a positive Earnings ESP, increases the predictive power of ESP.

Other Stocks That Warrant a Look

Here are a few other stocks that you may want to consider, as our model shows that they also have the right combination of elements to post an earnings beat in their upcoming releases.

T. Rowe Price Group, Inc. TROW has an Earnings ESP of +0.39% and sports a Zacks Rank #1 (Strong Buy) at present. The company is expected to release results on Jul 24.

Ares Capital Corporation ARCC is expected to release results on Jul 30. It presently has an Earnings ESP of +1.02% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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