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Analyst Blog

SunTrust Banks, Inc.’s second-quarter 2014 earnings of 81 cents per share surpassed the Zacks Consensus Estimate by 11.0%, backed by revenue growth. Moreover, the reported figure compared favorably with 68 cents earned in the year-ago quarter.

Shares of SunTrust gained more than 1% in the pre-trading session, indicating positive investors’ response following the earnings release. The movement of the stock price when the trading session opens will give a better idea about whether SunTrust has been able to meet expectations.



Better-than-expected results were driven by growth in top line and fall in provision for credit losses, partially offset by higher operating expenses. Moreover, improvement in credit quality, and rise in loan and deposit balances were the tailwinds, while capital ratios were a mixed bag.
 
After considering certain non-recurring items, net income available to common shareholders was $387 million, increasing 6.0% year over year.

Quarterly Performance

Total revenue came in at $2.20 billion, up 4.8% from the prior-year quarter. Also, the reported figure beat the Zacks Consensus Estimate of $2.07 billion.  

Net interest income of $1.24 billion was almost at par with the year-ago level. However, net interest margin fell 14 basis points (bps) from the year-ago quarter to 3.11% due to lower earning asset yields, partially offset by a decline in interest-bearing liabilities rates.

Non-interest income (excluding securities gains) was $957 million, up 11.5% year over year. The rise was largely driven by higher investment banking and mortgage servicing income, partly offset by lower mortgage production income.

Non-interest expense was $1.51 billion, increasing 9.4% year over year. Higher employee compensation and benefits expense were partially offset by decline in almost all expense categories. Further, operating expenses included charges related to legal settlement.

SunTrust’s efficiency ratio increased to 68.93% from 66.07% in the prior-year quarter. An increase in efficiency ratio indicates decline in profitability.

As of Jun 30, 2014, SunTrust had total assets of $182.6 billion while shareholders’ equity was $22.1 billion, representing 12% of the total assets.

As of Jun 30, 2014, loans totaled $129.7 billion, up 6.3% year over year. Total consumer and commercial deposits were $131.8 billion, up 4.9% from the year-ago quarter figure.

Credit Quality

Credit quality continued to improve during the quarter. Nonperforming loans fell 25 bps year over year to 0.69% of total loans. Similarly, net charge-offs rate decreased 24 bps from the year-ago quarter to 0.35% of annualized average loans.

Moreover, provision for credit losses declined 50.0% from the year-ago quarter to $73 million.

Capital Ratios

As of Jun 30, 2014, SunTrust’s capital ratios were a mixed bag. Tangible equity to tangible asset ratio improved 12 basis point year over year to 9.07%. However, Tier 1 common equity ratio declined 49 bps to 9.70% and Tier 1 capital ratio was down 59 bps to 10.65%.

As of Jun 30, 2014, book value per share and tangible book value per share improved from the prior-year quarter to $40.18 and $28.64, respectively.

Share Repurchase

During the quarter, SunTrust bought back shares worth $83 million. This was part of the company’s 2014 capital plan under which it is authorized to repurchase up to $450 million of its common stock between the second quarter of 2014 and the first quarter of 2015.

Notably, this repurchase authorization has been curtailed due to the reduction in the company’s forecast of share-based issuances. Presently, SunTrust expects to repurchase shares worth $300–$350 million over the next three quarters.

Our Viewpoint

We believe that disciplined expense management, strong credit quality and a favorable deposit mix will continue to support SunTrust’s financials. Moreover, the company’s enhanced capital deployment activities reflect its strong balance sheet position.

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

At present, SunTrust carries a Zacks Rank #3 (Hold).

Performance of Other Major Banks

Comerica Incorporated and KeyCorp. surpassed the Zacks Consensus Estimate. Both Comerica and KeyCorp benefited primarily from lower expenses and a decline in provision for loan and lease losses.

Another major regional bank, BankUnited, Inc. is scheduled to report on Jul 24.

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