SunTrust Outpaces Significantly

SunTrust Banks Inc.’s (STI - Analyst Report) first-quarter earnings came in at 46 cents per share, significantly surpassing the Zacks Consensus Estimate of 32 cents. This is also substantially better than earnings of 13 cents in the prior quarter and 22 cents in the year-ago quarter.

Better-than-expected sequential results were mainly due to improvements in net interest income and fee revenue along with lower operating expenses. Improvement in credit quality was also impressive. Moreover, the company’s capital ratios remained stable.

SunTrust’s net income came in at $245 million compared with $71 million in the prior quarter and $112 million in the prior-year quarter.

Quarter in Detail

SunTrust’s total revenue on a fully taxable-equivalent basis was $2.2 billion, up 5.5% sequentially but down 2.6% year over year. Total revenue beat the Zacks Consensus Estimate of $2.1 billion.

Net interest income (NII) was up 1.4% sequentially and 5.1% year over year to $1.3 billion. The increases were driven by higher loan balances and lower interest expense.

Net interest margin was up 3 basis points (bps) sequentially but down 4 bps year over year at 3.49%. The sequential rise was due to the decline in interest-bearing liability, partly offset by a fall in earning asset yields. However, decline in interest-bearing liabilities more than upset the growth in earning assets, which led to a year-over-year dip.

Non-interest income was $876 million, up 21.2% from the prior quarter but down 0.8% marginally from the prior-year quarter. Sequential surge was driven by higher mortgage-related revenue, partially countered by lower revenue from investment banking, trading income and service charges on deposits accounts. Lower securities gains and card fees were primarily offset by higher mortgage-related revenue for a slight year-over-year drop.

Non-interest expense for the quarter came in at $1.5 billion, down 7.6% from the prior quarter but up 5.2% compared with the year-ago quarter. On a sequential basis, decreases in most other expense categories were largely mitigated by higher employee compensation and benefits expense. Higher employee compensation and benefits expenses along with operating losses predominately led to increased expenses as against the prior-year quarter.

SunTrust’s efficiency ratio improved to 69.50% from 81.45% in the prior quarter but deteriorated from 67.83% in the prior-year quarter. The decline in efficiency ratio indicates an increase in profitability.

Credit Quality

Credit quality continued to improve during the quarter, with 3.1% sequential and 29.1% year-over-year declines in provision for credit losses, taking it to $317 million.

Nonperforming loans dropped 21 bps sequentially and 130 bps year over year to 2.16% of total loans. Likewise, net charge-offs fell 19 bps from the prior quarter and 63 bps from the year-ago quarter to 1.38% of annualized average loans.

Capital Ratios

SunTrust’s capital ratios remained stable during the reported quarter, with Tier 1 capital ratio of 10.95% (up 5 bps from the prior quarter but down 5 bps from the prior-year quarter) and tangible equity to tangible asset ratio of 8.14% (up 4 bps sequentially and 27 bps year over year). Moreover, capital ratios remained well above the current regulatory requirements as well as the Basel III proposed level.

Performance of Peers

Among SunTrust’s close peers, State Street Corporation’s (STT - Analyst Report) first-quarter 2012 operating earnings were marginally below the Zacks Consensus Estimate. The year-over-year results were negatively impacted by lower fee income and a rise in expenses. However, these were partly offset by higher NII. Moreover, capital ratios were stable during the quarter.

However another peer, KeyCorp's (KEY - Analyst Report) first-quarter 2012 net income from continuing operations surpassed the Zacks Consensus Estimate. Stable non-interest expenses and higher non-interest income boosted the results. However, dwindling NII slightly subdued the results. Additionally, continued improvement in credit quality and robust capital ratios were the primary highlighters for the quarter.

Conclusion

Better average client deposits, robust credit quality and favorable deposit mix are amongst SunTrust’s key strengths. Moreover, its recent acquisitions and cost-cutting programs are encouraging despite the persistently existing low interest rate environment and industry challenges.

However, in spite of SunTrust’s stable capital position, it failed the stress test and thereby missed the opportunity to deploy additional capital to its shareholders. Though the company has been announcing stable results since many quarters, the stress test failure signifies that it still has a long way to go in order to reclaim the same profitability and capital position it sustained prior to the 2008 crisis.

SunTrust currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.