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SunTrust Banks, Inc.’s (STI - Analyst Report) third-quarter 2013 adjusted earnings per share came in at 66 cents, missing the Zacks Consensus Estimate of 68 cents. However this compares favorably with 58 cents earned in the year-ago quarter.

Results were adversely impacted by a fall in net interest income, partially offset by higher non-interest income. However, disciplined expense management and improvement in both credit quality and capital ratios were the positives for the quarter.

Considering the negative impact of the charges which SunTrust had to bear as part of its settlement with Freddie Mac (FMCC), net income available to common shareholders was $179.0 million. This lagged the prior-year quarter figure of $1.1 billion, which included certain non-recurring gains.

Performance in Detail

Total revenue (excluding net securities gains) of $1.9 billion was almost in line with the comparable quarter in 2012. However, it lagged the Zacks Consensus Estimate of $2.0 billion by 5.0%.

Net interest income declined 4.7% from the prior-year quarter to $1.2 billion. The fall was due to lower yields on earning assets and a dip in commercial loan-related swap income.

Net interest margin fell 19 basis points (bps) from the year-ago quarter to 3.19%. The decline was mainly due to reduced earning asset yields, a still low interest rate environment, partially offset by a decline in interest-bearing liabilities rates.

Non-interest income (excluding securities gains) was $680.0 million, rising 13.1% from $601 million in the prior-year quarter. The rise was mainly driven by increase in mortgage repurchase provision, fee income, lower valuation losses on held for sale student and mortgage loans and the company's fair value debt. These factors were partially offset by decline in both core mortgage production income and mortgage servicing income.

Non-interest expense was stable at $1.74 billion on a year-over-year basis.

SunTrust’s efficiency ratio increased to 90.77% from 44.90% in the prior-year quarter. Increase in efficiency ratio indicates deterioration in profitability.

Balance Sheet

As of Sep 30, 2013, SunTrust had total assets of $172 billion, while shareholders’ equity was $21 billion, representing 12% of the total assets.

Average loans totaled $122.7 billion, down 1.1% year over year. Average consumer and commercial deposits rose 1.0% from the year-ago quarter to $126.6 billion.

Credit Quality

Overall credit quality showed improvement during the quarter. Nonperforming loans fell 59 bps year over year to 0.83% of total loans. Similarly, net charge-offs fell 117 bps from the year-ago quarter to 0.47% of annualized average loans.

Moreover, provision for credit losses declined 78.9% from the year-ago quarter to $95 million.

Capital Ratios

As of Sep 30, 2013, SunTrust’s capital ratios remained strong. Tangible equity to tangible asset ratio improved 50 bps year over year to 8.98%, Tier 1 common equity ratio increased 10 bps to 9.92% and Tier 1 capital ratio was up 38 bps to 10.95%.

Moreover, as of Sep 30, 2013, book value per share and tangible book value per share improved compared with the prior-year quarter and were at $37.85 and $26.27, respectively.

Performance of Other Regional Banks

Among other regional banks, BB&T Corporation’s (BBT - Analyst Report) earnings missed the Zacks Consensus Estimate by a penny. Lower-than-expected results were mainly due to decline in the top line, partly offset by lower operating expenses.

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

Our Viewpoint

SunTrust’s key strengths include 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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