SunTrust Banks Inc.’s (STI) first quarter earnings came in at 22 cents per share, way ahead of the Zacks Consensus Estimate of 13 cents. This represents SunTrust’s third straight quarter of profit after incurring significant losses since mid-2008. Earnings were also substantially better than the loss of 46 cents in the year-ago quarter.
Results for the reported quarter leave out 14 cents per share non-cash charge related to the redemption of the TARP preferred shares. Considering this one-time charge, earnings came in at 8 cents.
Despite the adverse impact of seasonal and cyclical factors, results for the reported quarter benefited from improved top line along with a decline in provision for credit losses and better credit quality. However, higher non-interest expenses were the downside.
During the third quarter of 2010, the company bounced back to profitability on strong mortgage banking performance and improvement in credit quality. Though mortgage banking did not match expectations during the last two quarters, steady trading income and strong credit quality backed the quarter’s solid results.
SunTrust’s net income came in at $180 million compared with an income of $185 million in the prior quarter and a loss of $161 million in the prior-year quarter.
Quarter Details
SunTrust’s total revenue on a fully taxable-equivalent basis decreased 7% sequentially but improved 14% year over year to $2.2 billion. However, revenue was almost flat with the Zacks Consensus Estimate. The year-over-year increase can be traced back to reduced interest expense, primarily attributable to strong low-cost deposit growth along with broad-based increases in consumer and commercial fee categories.
Net interest income (NII) was down 1% sequentially but up 6% year over year at $1.3 billion. The year-over-year increase was attributable to lower deposit rates, continued deposit growth and the shift in deposit mix toward low-cost deposits. Net interest margin (NIM) improved 9 basis points (bps) sequentially and 21 bps year over year to 3.53%. The year-over-year increase was primarily driven by a 31 basis point decline in rates paid on interest-bearing liabilities, which more than offset a 6 basis point decline in earning asset yields.
Non-interest income was $883 million, down 14% from the prior quarter but up 27% from the prior-year quarter. The year-over-year increase was primarily attributable to broad-based growth in consumer and commercial fee-based categories as well as higher net gains on the sale of investment securities, partially offset by lower service charges on deposit accounts.
Non-interest expense for the quarter came in at $1.5 billion, down 5% from the prior quarter but up 8% from the prior-year quarter. The year-over-year increase was primarily driven by a $62 million rise in employee compensation and benefits attributable to a 3% growth in full-time equivalent employees and higher incentive compensation related to improved business performance. Also, as a result of higher other real estate expenses, credit-related expenses increased 8%.
SunTrust’s efficiency ratio increased to 67.83% from 66.57% in the prior quarter, but declined from 71.60% 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, with SunTrust reporting a 13% sequential and 48% year-over-year decline in provision for credit losses to $447 million.
Nonperforming loans dropped 8 bps sequentially and 109 bps year over year to 3.46% of total loans. Also, net charge-offs fell 13 bps from the prior quarter and 90 bps from the year-ago quarter to 2.01% of annualized average loans.
Capital Ratios
SunTrust’s capital ratios remained weak during the reported quarter, with Tier 1 capital ratio of 11.00% (down 267 bps from the prior quarter) and tangible equity to tangible asset ratio of 7.87% (down 225 bps sequentially).
Relief from TARP
In the last week of March, SunTrust repaid the entire $4.85 billion in bailout money it had received from the government for its participation in the Troubled Asset Relief Program (TARP).
SunTrust financed its TARP repayment primarily through proceeds from a $1.04 billion stock offering and $1 billion debt offering. The company funded the remaining dues from its available cash.
Following the release of the Federal Reserve’s stress test results earlier in March, SunTrust received the authorization to raise capital.
Performance of Competitor
SunTrust’s close competitor –– The Bank of New York Mellon Corporation’s (BK) first-quarter earnings from continuing operations came in way below the Zacks Consensus Estimate. Increased fee revenue, wiped out provision for credit losses and rapidly growing capital were also among the positives. However, lower net interest revenue and higher non-interest expenses were the downside.
Our Viewpoint
We are concerned about the interest rate sensitive nature of the company’s mortgage and investment banking revenues. Besides, deposit pricing pressure is expected to restrict earnings growth. However, underlying revenue trends, ongoing positive operating leverage and TARP repayment raise our hopes for improved results going forward.
SunTrust currently retains a Zacks #2 Rank, which translates into a short-term ‘Buy’ rating. However, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the shares.
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