SunTrust Trims Losses – Analyst Blog

SunTrust’s (STI) second quarter 2010 net loss was $56 million or 11 cents per share compared with a net loss of $229 million or 46 cents in the prior quarter and $164 million or 41 cents in the year-ago quarter. Results also beat the Zacks Consensus Estimate loss of 34 cents per share.

 

Results for the quarter primarily benefited from a rise in non-interest income on a sequential basis, along with a continuing decline in provision for credit losses and a strong capital position. However, results continued to be affected by recessionary pressures as evidenced by soft revenues and a weak loan demand.

 

Revenues on a fully taxable-equivalent basis increased 13.7% sequentially but decreased 1.5% year over year to $2.2 billion. Sequential increase was due to an improvement in non-interest income. Revenues beat the Zacks Consensus Estimate of 2.0 billion.

 

Net interest income (NII) was up 1% sequentially and 8.0% year over year to $1.2 billion. The increase in NII was primarily aided by net interest margin (NIM) that improved 39 basis points (bps) year over year to 3.39%. The NIM primarily improved as a result of a decline in funding costs.

 

However, average earning assets dropped 5% year over year due to a decline in average loans and trading assets, partially offset by an increase in average securities available for sale.

 

Non-interest income was $592 million, up 36% from the prior quarter as all service and fee-based revenues escalated. But it declined 11% year over year, mainly due to a fall in mortgage-related income.

 

Non-interest expense for the reported quarter came in at $1.5 billion, up 10% from the prior quarter, but down 2.0% from the prior-year quarter. Sequential increase was primarily due to a rise in debt extinguishment costs and credit-related expenses. The year over year fall was due to a decrease in personnel expense and lower Federal Deposit Insurance Corporation ( “FDIC”) insurance costs, which was partially offset by increased losses on the extinguishment of debt.

  

 

Credit quality improved during the quarter, with SunTrust reporting a 23.0% sequential and 31% year over year decline in provision for credit losses to $662.1 million. Early stage delinquencies climbed 7 basis points (bps) to 1.26% from 1.19% in the prior quarter.

 

Non-accrual loans declined 39 bps sequentially to 4.16% of total loans. Also, net charge-offs slashed 34 bps sequentially to 2.57% of average loans.

 

 

SunTrust’s capital ratios remained strong during the reported quarter, with Tier 1 capital ratio of 13.40% (up 27 bps from the prior quarter) and tangible equity to tangible asset ratio of 10.18% (up 32 bps sequentially).

 

SunTrust’s competitors — Bank of America Corporation (BAC), BB&T Corporation (BBT) and Wells Fargo & Company (WFC) — have reported impressive results with a positive net income for the second quarter of 2010.

 

Despite operating in attractive demographic markets, top-line growth remained somewhat lackluster at SunTrust during the last several quarters. We do not expect any significant improvement with respect to revenue trends in the near term as the global economy will take some time to rebound to its historical highs. Besides, higher mortgage rates and slow home sales will restrict growth in mortgage income. However, cost containment measures have been allowing SunTrust to increase investments and it is experiencing signs of stabilization in its credit metrics. We expect the continuation of NIM expansion with the help of low cost funding, which will support the bottom line in the upcoming quarters.

 

SunTrust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, we maintain a long-term Neutral recommendation on the stock, pending further development.

 

Since the announcement of results, the share price of SunTrust has increased 7.3%.