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Why an Earnings Beat is Less Likely for SunTrust (STI) in Q3

Zacks Equity Research

SunTrust Banks, Inc. STI is slated to report third-quarter 2017 results on Oct 20, before the opening bell. Its revenues and earnings are expected to grow year over year.

Last quarter, SunTrust’s earnings outpaced the Zacks Consensus Estimate. Results benefitted from an improvement in net interest income, partially offset by higher expenses. Also, lower provision for credit losses was a positive.

Moreover, SunTrust boasts an impressive earnings surprise history. The company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 3.3%.

However, the company’s activities in the third quarter failed to impress analysts to revise earnings estimates. As a result, the Zacks Consensus Estimate for earnings of $1.06 remained stable over the last 30 days. Nevertheless, the figure represents a year-over-year improvement of 16.3%.

Further, the Zacks Consensus Estimate for sales of $2.29 billion reflects an improvement of 4.2% from the prior-year quarter.

The company’s price performance has not been that impressive. Its shares have gained 7.9% year to date, underperforming the industry’s growth of 9.6%.

SunTrust Banks, Inc. Price and EPS Surprise

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

Will the price performance improve post Q3 earnings? To a great extent, it depends on whether the company manages to beat earnings estimates this time around. Let’s check what our quantitative model predicts.

According to our quantitative model, chances of SunTrust beating the Zacks Consensus Estimate in the to-be-reported quarter are bleak. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better, which is required to be confident of an earnings beat.

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

Zacks ESP: The Earnings ESP for SunTrust is -0.18%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3, which increases the predictive power of ESP. But we also need a positive ESP to be confident of an earnings beat.

Factors to Influence Q3 Results

Net Interest Income (NII) to Improve: The third quarter witnessed a moderate improvement in lending, particularly in the areas of commercial and industrial as well as consumer. Thus, loan growth combined with a rise in interest rates should boost the company’s NII in the quarter.

Moreover, the company expects net interest margin in the quarter to range from 3.14-3.16%, up from 2.96% in the prior-year quarter. Thus, higher NIM should further boost the company’s NII.

Relatively Stable Non-Interest Income: Expectations of a higher rate environment might have encouraged refinancing activities during the quarter. However, with the refinance boom nearing its end, no major help is expected from this segment and hence mortgage revenue is not expected to witness much improvement.

Nevertheless, given that the overall equity markets witnessed some improvement in the quarter, trust income is expected to rise. Along with this, a rise in investment banking activities in the quarter should provide some support to overall fee income growth.

Expenses to Decline Slightly: The company’s initiatives of consolidating its branch networks should translate into marginal expense reduction.

Stocks That Warrant a Look

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

Invesco Ltd. IVZ is slated to report results on Oct 26. It has an earnings ESP of +0.65% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Bank of New York Mellon Corporation BK has an Earnings ESP of +0.08% and carries a Zacks Rank of 3. It is scheduled to report results on Oct 19.

Associated Banc-Corp ASB has an earnings ESP of +1.70% and a Zacks Rank of 3. It is also slated to report results on Oct 19.

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