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SunTrust Banks, Inc.’s (STI - Analyst Report) fourth-quarter 2013 earnings per share of 77 cents beat the Zacks Consensus Estimate of 70 cents. Significantly lower provision for credit losses and expenses were the primary drivers of this impressive performance. Moreover, this compares favorably with 65 cents earned in the year-ago quarter.

For the full-year 2013, SunTrust recorded adjusted earnings per share of $2.74 versus $2.19 in 2012. Earnings were also well ahead of the Zacks Consensus Estimate of $2.34.

In the pre-trading session, SunTrust’s stock price gained over 2.0%, reflecting a positive response among investors. However, the positive reaction could be part of the overall positive market sentiment prevailing at present. The stock price movement during the trading session will actually indicate as to whether SunTrust has been able to meet expectations.

Higher-than-expected results were driven by decrease in provision for credit losses and operating expenses, partially offset by decline in the top line. Further, credit quality improved in the quarter while capital ratios were a mixed bag.
Net income available to common shareholders was $413.0 million, increasing 18.0% from the prior-year figure of $350 million.

Performance in Detail

Total revenue (excluding net securities gains) came in at $2.06 billion, declining 10.0% from the prior-year quarter figure of $2.29 billion. However, it beat the Zacks Consensus Estimate of $2.02 billion.

For 2013, total revenue was $8.2 billion, down 22.6% from $10.6 billion in 2012. However, total revenue surpassed the Zacks Consensus Estimate of 8.5 billion.

Net interest income declined 2.3% from the prior-year quarter to $1.2 billion. The fall was due to lower yields on interest earning assets, partially offset by a rise in earning assets and reduced interest expense.

Net interest margin fell 16 basis points (bps) from the year-ago quarter to 3.20%. The decline was mainly due to reduced earning asset yields, partially offset by a decline in interest-bearing liabilities rates.

Non-interest income (excluding securities gains) was $814.0 million, falling 19.8% from $1.0 billion in the prior-year quarter. The decline was mainly attributable to a drop in mortgage production income.

Non-interest expense decreased 8.8% to $1.4 billion on a year-over-year basis.

SunTrust’s efficiency ratio increased to 66.82% from 65.93% in the prior-year quarter. An increase in efficiency ratio indicates deterioration in profitability.

Balance Sheet

As of Dec 31, 2013, SunTrust had total assets of $175 billion while shareholders’ equity was $21 billion, representing 12% of the total assets.

Average loans totaled $125.6 billion, up 3.3% year over year. Average consumer and commercial deposits were $127.5 billion almost in line with the year-ago quarter figure.

Credit Quality

Overall credit quality depicted an improvement during the quarter. Nonperforming loans fell 51 bps year over year to 0.76% of total loans. Similarly, net charge-offs fell 90 bps from the year-ago quarter to 0.40% of annualized average loans.

Moreover, provision for credit losses declined 69.2% from the year-ago quarter to $101 million.

Capital Ratios

As of Dec 31, 2013, SunTrust’s capital ratios were a mixed bag. Tangible equity to tangible asset ratio improved 18 bps year over year to 9.00%. However, Tier 1 common equity ratio decreased 24 bps to 9.80% and Tier 1 capital ratio was down 33 bps to 10.80%.

As of Dec 31, 2013, book value per share and tangible book value per share improved compared with the prior-year quarter and were at $38.61 and $27.01, respectively.

Our Viewpoint

We believe that disciplined expense management, strong credit quality and a favorable deposit mix will continue to support SunTrust’s financials. However, we remain concerned about the company’s exposure to risky assets and limited margin improvement. Further, a persistent low interest rate environment and ongoing industry challenges might affect its top-line growth in the near term.

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

Among other major regional banks, Fifth Third Bancorp (FITB - Analyst Report) and KeyCorp. (KEY - Analyst Report) are scheduled to report results on Jan 23 while Northern Trust Corp.’s (NTRS - Analyst Report) will release earnings on Jan 22.

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