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SunTrust Banks, Inc.’s (STI - Analyst Report) second-quarter 2013 earnings came in at 68 cents per share, beating the Zacks Consensus Estimate by a penny. This was also significantly ahead of the year-ago earnings of 50 cents.

Better-than-expected quarterly results were primarily driven by lower operating expenses, partially offset by a reduction in the top line. Further, a stable asset quality and capital ratios as well as improved deposit balances were the tailwinds for the quarter.

Net income available to common shareholders in the second quarter was $365.0 million, up 35.2% from $270.0 million in the prior-year quarter.

Performance in Detail

Total revenue declined 6.5% year over year to $2.1 billion. The decrease was primarily due to lower net interest income, mortgage-related revenues and trading income, partially offset by a decrease in the mortgage repurchase provision. Revenues also lagged the Zacks Consensus Estimate of $2.2 billion by 4.2%.

Net interest income declined 4.9% from the prior-year quarter to $1.24 billion. The fall was due to lower yields on earning assets, a dip in commercial loan-related swap income and the foregone dividend income as a result of the accelerated termination of the agreements related to The Coca-Cola Company’s (KO - Analyst Report) shares. These were partly offset by lower rates paid on deposits, a reduction in the long-term debt and a favorable deposit mix shift.

Net interest margin came down 14 basis points (bps) from the year-ago quarter to 3.25%. The decrease was attributable to reduced loan yields, partially offset by a decline in rates paid on interest-bearing liabilities.

Non-interest income was $858.0 million, falling 8.7% from $940.0 million in the prior-year quarter. The decline was mainly driven by reduced mortgage-related income, securities gains and trading income, partially offset by a decrease in mortgage repurchase provision.    
Non-interest expense declined 9.6% to $1.39 billion on a year-over-year basis. The fall was attributable to the company’s continued expense reduction initiatives and a dip in the cyclically high costs.    

SunTrust’s efficiency ratio decreased to 66.56% from 68.83% in the prior-year quarter. The decrease in efficiency ratio indicates better profitability.

Balance Sheet

As of Jun 30, 2013, SunTrust had total assets of $171.5 billion, while shareholders’ equity stood at $21.0 billion, representing 12% of the total assets.

Average loans totaled $121.4 billion, down 1.6% year over year. The decline was primarily due to decrease in home equity loans and government guaranteed student and mortgage loans, partially offset by targeted growth in commercial and industrial loans and consumer indirect loans.

Average consumer and commercial deposits inched up 0.6% from the year-ago quarter to $126.6 billion. The rise was primarily due to lower-cost deposit growth, partially offset by a decline in higher-cost time deposits.

Credit Quality

Overall credit quality showed improvement during the quarter. Nonperforming loans dropped 103 bps year over year to 0.94% of total loans. Similarly, net charge-offs fell 55 bps from the year-ago quarter to 0.59% of annualized average loans.

Moreover, provision for credit losses declined 51.3% from the year-ago quarter to $146.0 million.

Capital Ratios

As of Jun 30, 2013, SunTrust’s capital ratios remained strong. Tangible equity to tangible asset ratio improved 64 bps year over year to 8.95%, tier 1 common ratio increased 82 bps to 10.15% and Tier 1 capital ratio was up 105 bps to 11.20%.

Moreover, as of Jun 30, 2013, book value per share and tangible book value per share improved compared with the prior-year quarter and were $37.65 and $26.08, respectively.

Performance of Other Regional Banks

Among other regional banks, BB&T Corporation’s (BBT - Analyst Report) second-quarter 2013 earnings surpassed the Zacks Consensus Estimate. Better-than-expected results were primarily driven by a surge in non-interest income, partially offset by declining net interest income and higher operating expenses.

The Bank of New York Mellon Corporation’s (BK - Analyst Report) second-quarter 2013 adjusted earnings surpassed the Zacks Consensus Estimate. Better-than-expected results were mainly driven by growth in revenues, partially offset by higher operating expenses.

Our Viewpoint

SunTrust’s key strength includes better average client deposits, solid credit quality and favorable deposit mix. Moreover, SunTrust’s recent acquisitions, restructuring initiatives and cost-cutting programs are encouraging.

However, we remain concerned about the company’s exposure to risky assets and limited margin improvement. Further, a persistent low interest-rate environment and industry challenges might affect its top-line growth in the near term.

SunTrust currently carries a Zacks Rank #3 (Hold).

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