SunTrust Banks' 'Great Run' Faces Emerging Headwinds, Piper Jaffray Says In Downgrade

From a sell-side perspective, SunTrust Banks, Inc. STI has experienced a great run, but revenue headwinds are emerging, sparking an analyst’s decision to move to the sidelines on the bank holding company.

The Analyst

Piper Jaffray analyst Kevin Barker downgraded SunTrust Banks from Overweight to Neutral and reduced the price target from $76 to $74.

The Thesis

Barker has growing concerns surrounding SunTrust Banks’ consensus estimates and top-line pressure, despite strong results in recent quarters and the company’s ability to generate operating leverage. (See Barker's track record here.) 

SunTrust is the second best performing bank over the past 12 months, and the best in the past six months, the analyst said.

“We attribute this strong run in large part to improving efficiencies, strong NIM expansion and an attractive capital return profile. That being said, we believe these tailwinds are now reflected in estimates and there is a greater risk to downward adjustments, especially on net interest income." 

SunTrust has reported eight consecutive quarters of expansion on the back of higher short-term rates and lagging deposit costs, Barker said. The company has a track record of generating operating leverage in light of measured expense growth, he said. 

“We believe the company will continue to generate operating leverage, but the incremental gains will decline without better top-line growth. We have reduced forward operating expenses to reflect this commitment. We now forecast a core efficiency ratio of 59.3 percent in FY19E vs. 58.9 percent previously and FY18E of 61 percent." 

Price Action

SunTrust shares were down 3.9 percent at $68.59 at the time of publication Thursday afternoon. 

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