SunTrust Banks Inc.’s (STI) third quarter 2010 earnings of 17 cents per share were substantially ahead of a loss of 11 cents in the prior quarter and a loss of 76 cents in the year-ago quarter.
Results for the quarter primarily benefited from a rise in non-interest income and fee based revenues, along with a continuing decline in provision for credit losses and a strong capital position. However, increase in non-interest expenses was a downside.
SunTrust’s net income came in at $84 million compared with a net loss of $56 million in the prior quarter and a net loss of $377 million in the prior-year quarter.
Behind the Headlines
SunTrust’s total revenue on a fully taxable-equivalent basis increased 7.1% sequentially and 19.0% year over year to $2.3 billion. Total revenue also exceeded the Zacks Consensus Estimate of 2.1 billion. The increase in total revenue was mainly attributable to growth in net interest income and fee-based income.
Net interest income (NII) was up 4.8% sequentially and 8.4% year over year to $1.3 billion. The increase in NII was primarily aided by an improvement in deposit mix, continued decline in funding costs and growth in earning assets. Net interest margin (NIM) improved 8 basis points (bps) and 31 bps year over year to 3.41%, given a decline in funding costs.
Average earning assets stood at $147.3 billion for the reported quarter. Average earning assets rose 1% from the prior quarter, given higher average securities available for sale and total loans. However, on a year-over-year basis, average earning assets declined 2%, mainly due to declines in loans and loans held for sale, partially offset by an increase in average securities available for sale.
Non-interest income was $1.04 billion, up 10% from the prior quarter and 35% from the prior-year quarter. The increase was due to a rise in mortgage and capital markets-related income, partially offset by lower service charges.
Non-interest expense for the quarter came in at $1.5 billion, down 0.3% from the prior quarter, but up 4.9% from the prior-year quarter. The year-over-year increase was primarily due to a rise in employee compensation-related expenses, Federal Deposit Insurance Corporation (FDIC) insurance premiums, outside processing and software expense, and debt extinguishment costs, which was partly offset by lower credit-related expenses.
The sequential fall was due to lower debt extinguishment costs, offset primarily by higher revenue-related personnel costs and legal-related expenses.
SunTrust’s efficiency ratio declined to 64.80% compared with 69.57% in the prior quarter and 73.53% in the prior-year quarter. The decline in efficiency ratio indicates an improvement in profitability.
Credit Quality
Credit quality continued to improve during the quarter, following the trend from the prior quarter, with SunTrust reporting a 7.1% sequential and 45.8% year-over-year decline in provision for credit losses to $615 million. Early stage delinquencies declined 2 bps to 1.24% from 1.26% in the prior quarter.
Non-accrual loans dropped 87 bps year over year to 3.80% of total loans. Also, net charge-offs slashed 15 bps from the prior quarter and 81 bps from the year-ago quarter to 2.57% of average loans.
Capital Ratios
SunTrust’s capital ratios remained strong during the reported quarter, with Tier 1 capital ratio of 13.60% (up 9 bps from the prior quarter) and tangible equity to tangible asset ratio of 10.19% (up 1 bp sequentially).
Our Take
Cost containment measures have been allowing SunTrust to increase investments and it is experiencing signs of stabilization in its credit quality. We expect the continuation of NIM expansion with the help of low cost funding, which will support the top and bottom line in the upcoming quarters.
However, non-payment of TARP money is expected to remain a headwind for the company over the near term as every quarter it has to pay preferred dividends related to the $4.85 billion in preferred securities issued to the U.S. Treasury.
SunTrust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain our long-term Neutral recommendation on the shares.
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