SunTrust: Better 4Q, Deeper Trust - Analyst Blog

SunTrust Banks Inc.'s (STI) fourth quarter earnings of 23 cents per share were substantially ahead of the Zacks Consensus Estimate of 10 cents. This represents SunTrust's second straight quarter of profit after incurring significant losses since mid-2008. This also compares favorably with a loss of 64 cents in the year-ago quarter.

Results for the quarter primarily benefited from a rise in top line along with continuous declines in provision for credit losses and a strong capital position. However, higher non-interest expenses were the downside.

During third quarter, the company bounced back to profitability on strong mortgage banking performance and improvement in credit quality. Though mortgage banking did not meet expectations during the reported quarter, higher trading income and strong credit quality helped the company achieve solid results.

For full year 2010, net loss was 18 cents per share, down from $3.98 in 2009. This was also lower than the Zacks Consensus Estimate of a loss of 31 cents. 

SunTrust's net income came in at $185 millioncompared with $153 million in the prior quarter but a net loss of $248 million in the prior-year quarter.

Quarter in Detail

SunTrust's total revenue on a fully taxable-equivalent basis was almost stable sequentially but improved 19.3% year over year to $2.3 billion. Total revenue also exceeded the Zacks Consensus Estimate of $2.2 billion. The year-over-year increase in total revenue was mainly attributable to growth in net interest income and fee-based income.

For the full year, total revenue was $8.7 billion, up 4.8% from $8.3 billion in 2009. This also compares positively with the Zacks Consensus Estimate of $8.5 billion.

Net interest income (NII) was up 2.2% sequentially and 7.2% year over year at $1.3 billion. Both increases were primarily aided by lower rates paid on deposits and borrowed funds, as well as continued shift in the deposit mix toward lower-cost accounts.

Net interest margin (NIM) improved 3 basis points (bps) sequentially and 17 bps year over year to 3.44%. The year-over-year increase was primarily driven by a 38 bps decline in rates paid on interest-bearing liabilities, which more than offset a 17 bps decline in earning asset yields. 

Non-interest income was $1.03 billion, down 1.4% from the prior quarter but up 39.1% from the prior-year quarter. The year-over-year increase was primarily due to higher capital markets and mortgage-related income, as well as higher mark-to-market valuation impacts, partially offset by lower service charges.

Non-interest expense for the quarter came in at $1.5 billion, up 3.3% from the prior quarter and 6.5% from the prior-year quarter. Both the increases were primarily driven by investments that the company counts on for future revenue growth.  

SunTrust's efficiency ratio increased to 66.57% from 64.80% in the prior quarter, but declined from 74.58% in the prior-year quarter. The year-over-year decline in efficiency ratio indicates an improvement in profitability.

Credit Quality

Credit quality continued to improve during the quarter, following the trend from the last couple of quarters, with SunTrust reporting a 16.7% sequential and 47.4% year-over-year decline in provision for credit losses to $512 million. Early-stage delinquencies declined 6 bps to 1.18% from 1.24% in the prior quarter.

Nonperforming loans dropped 26 bps sequentially and 121 bps year over year to 3.54% of total loans. Also, net charge-offs fell 28 bps from the prior quarter and 69 bps from the year-ago quarter to 2.14% of annualized average loans.

Capital Ratios

SunTrust's capital ratios remained strong during the reported quarter, with Tier 1 capital ratio of 13.65% (up 7 bps from the prior quarter) and tangible equity to tangible asset ratio of 10.12% (up 7 bps sequentially).

Performance of Competitor

SunTrust's close competitor, The Bank of New York Mellon Corporation's (BK) fourth-quarter earnings from continuing operationscame in slightly below the Zacks Consensus Estimate. Increased fee revenue, improved provision for credit losses and continued strong asset inflows were also among the positives. However, higher non-interest expenses were the downside.

Our Viewpoint

We are concerned about the interest rate sensitive nature of SunTrust's mortgage and investment banking revenues and issues related to the TARP repayment uncertainty.

However, we are impressed to see the underlying revenue trends and the ongoing operating leverage. We also expect the continued expansion of NIM to support the top line.

SunTrust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

 
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