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On Mar 18, 2013, we reiterated our long-term recommendation on SunTrust Banks, Inc. (STI - Analyst Report) at Neutral based on its successful expense reduction strategies and restructuring initiatives as well as better-than-expected fourth-quarter earnings. However, increased mortgage repurchase demand and deposit pricing pressure along with stringent regulatory restrictions remain the causes of concern.

Why Neutral?

SunTrust’s fourth-quarter 2012 earnings came in at 65 cents, surpassing the Zacks Consensus Estimate of 61 cents. Better-than-expected results were primarily driven by growth in top line and reduced operating expenses. Further, stable asset quality, capital ratios as well as improvement in loan and deposit balances were the tailwinds.

Following its fourth-quarter results, the Zacks Consensus Estimate for 2013 slipped 0.7% to $2.72 per share over the last 60 days. The Zacks Consensus Estimate for 2014 also fell 1.65% to $2.98 per share over the same time frame. Hence, SunTrust currently has a Zacks Rank #3 (Hold).

With the approval of SunTrust’s capital plan by the Federal Reserve, the company authorized a new share repurchase program under which it plans to buyback $200 million shares between second-quarter 2013 and first-quarter 2014. Further, SunTrust plans to hike its dividend by 100% to 10 cents per share.

Moreover, SunTrust’s restructuring initiatives to fortify its balance sheet, improve credit quality and enhance revenue generating capacity through several small acquisitions have been the driving forces for its growth.

On the other hand, SunTrust’s exposure to risky assets, limited margin growth and continued regulatory pressures remain looming concerns. Moreover, a sluggish economic recovery along with a persistent low-interest rate environment and overall industry challenges might prove to be impediments for SunTrust to considerably improve its financials going forward.

Other Major Banks to Consider

While we prefer SunTrust, other major banks worth a look include BankUnited, Inc. (BKU - Analyst Report), State Street Corporation (STT - Analyst Report) and Fifth Third Bancorp (FITB - Analyst Report), all of which carry a Zacks Rank #2 (Buy).

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