SunTrust Banks Inc.’s (STI) second quarter earnings came in at 33 cents per share, slightly ahead of the Zacks Consensus Estimate of 31 cents. This represents SunTrust’s fourth straight quarter of profit after incurring significant losses since mid 2008. Earnings were also substantially better than the loss of 11 cents in the year-ago quarter.
Despite the adverse impact of seasonal and economic factors, results for the reported quarter benefited from a substantial decline in provision for credit losses, a slight improvement in revenue and better credit quality. However, lower non-interest income and higher non-interest expenses were the downsides.
SunTrust’s net income came in at $178 millioncompared with $180 million in the prior quarter and $12 million in the prior-year quarter.
Quarter Details
SunTrust’s total revenue on a fully taxable-equivalent basis increased 2% both sequentially as well as year over year to $2.2 billion. Revenue was also ahead of the Zacks Consensus Estimate of $2.1 billion. The year-over-year increase can be traced back to higher net interest income, partially offset by lower deposit service charges.
Net interest income (NII) was up 1% sequentially and 6% year over year at $1.3 billion. The year-over-year increase was primarily attributable to lower rates paid on deposits, a continued shift in deposit mix toward lower-cost deposits and a reduction in higher-cost funding.
Net interest margin (NIM) was flat sequentially but improved 20 basis points (bps) year over year to 3.53%. The year-over-year increase was primarily driven by the favorable shift in the deposit mix, lower rates paid and a decline in interest-bearing liabilities.
Non-interest income was $912 million, up 3% from the prior quarter but down 4% from the prior-year quarter. The year-over-year decrease was mostly due to lower net gains on the sale of investment securities and lower service charges on deposit accounts, partially compensated by growth in certain consumer and commercial fee categories, including investment banking, retail investment services and card fees.
Non-interest expense for the quarter came in at $1.5 billion, up 5% from the prior quarter and 3% from the prior-year quarter. The year-over-year increase was primarily driven by a $66 million increase in employee compensation. Also, FDIC insurance premiums increased $16 million due to the change in the assessment methodology.
SunTrust’s efficiency ratio increased to 70.17% from 67.83% in the prior quarter and 69.57% in the prior-year quarter.
Credit Quality
Credit quality continued to improve during the quarter, with SunTrust reporting 12% sequential and 41% year-over-year declines in provision for credit losses to $392 million.
Nonperforming loans dropped 32 bps sequentially and 102 bps year over year to 3.14% of total loans. Also, net charge-offs fell 25 bps from the prior quarter and 81 bps from the year-ago quarter to 1.76% of annualized average loans.
Capital Ratios
SunTrust’s capital ratios remained weak during the reported quarter, with Tier 1 capital ratio of 11.10% (down 241 bps from the prior-year quarter) and tangible equity to tangible asset ratio of 8.07% (down 211 bps year over year). However, capital ratios remained well above the current regulatory requirements as well as the Basel III proposed level.
Performance of Competitor
SunTrust’s close competitor, The Bank of New York Mellon Corporation’s (BK) second-quarter earnings from continuing operations came in 3 cents ahead of the Zacks Consensus Estimate. Increased fee revenue, wiped out provision for credit losses and improved capital ratios despite a dividend increase and stock repurchases in the previous quarter were among the positives. However, higher non-interest expenses were the downside.
Our Viewpoint
The ongoing positive operating leverage, improved average client deposits and the favorable trend in the deposit mix toward lower-cost accounts continued to raise our hopes for improved results going forward. Yet, the company’s significant exposure to risky assets, a tardy economic recovery, regulatory headwinds and limited margin improvement would keep bottom-line under pressure.
SunTrust currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
