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Will Loan Growth, Fee Income Aid SunTrust (STI) Q2 Earnings?

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SunTrust Banks is scheduled to report second-quarter 2018 results on Jul 20, before the opening bell. Its revenues and earnings are projected to grow year over year.

In the last reported quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from rise in net interest income as well as lower expenses and provisions. However, a decline in non-interest income was the undermining factor.

SunTrust has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three and matched in one, over the trailing four quarters, the average beat being 6.3%.

SunTrust Banks, Inc. Price and EPS Surprise


SunTrust Banks, Inc. Price and EPS Surprise | SunTrust Banks, Inc. Quote

Also, the company’s activities in the second quarter impressed analysts. As a result, the Zacks Consensus Estimate for earnings of $1.30 moved nearly 1% upward over the past 30 days. Further, the figure represents year-over-year growth of 26.2%.

Moreover, the Zacks Consensus Estimate for revenues of $2.30 billion for the to-be-reported quarter reflects a rise of 3.3% from the prior-year quarter.

Now let’s check out the factors are expected to impact SunTrust’s second-quarter earnings.

Factors at Play

Net interest income to improve: The quarter witnessed a modest rise in lending activity, mainly in the areas of commercial and industrial, to which SunTrust has significant exposure. Further, increase in loans is expected to have led to a rise in earning assets. The Zacks Consensus Estimate for average earning assets of $183 billion for the to-be-reported quarter reflects a slight rise on a sequential basis.

Thus, given the loan growth and higher interest rates, SunTrust is likely to record a rise in net interest income in the second quarter. Further, management expects net interest margin to increase 1-3 basis points sequentially, driven by the March rate hike.

Relatively stable non-interest income: While overall mortgage servicing fees remained decent in the second quarter, production volumes slowed down. Thus, mortgage production income will likely be subdued. Also, rising interest rates have hampered activity and thus this segment is not going to be much of a help either. So, SunTrust’s overall mortgage revenues are not expected to witness much improvement.

Coming to investment banking activities, equity issuances globally might get a boost from IPOs and follow-on offerings, thereby having a positive impact on the related fees. However, the trend of pocketing solid advisory and underwriting fees for debt issuance may reverse to some extent in the to-be-reported quarter, as rising rates are likely to have slowed down corporates’ involvement in these activities. Thus, investment banking income is expected to remain relatively stable.

Nonetheless, given the slight volatility experienced in the second quarter, particularly in the month of June, trading activities returned to normalized level following the impressive first quarter. This is expected to result in a modest improvement in trading income for the company.

Decline in operating expenses to lend some support: Driven by branch consolidation efforts, SunTrust’s expenses have been declining for the past few quarters. This is expected to continue in the to-be-reported quarter as well.

Now, let’s check what our quantitative model predicts.

According to our quantitative model, chances of SunTrust beating the Zacks Consensus Estimate in the to-be-reported quarter are high. This is because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which are required to be confident of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for SunTrust is +0.31%.

Zacks Rank: SunTrust currently carries a Zacks Rank #2 (Buy). This further increases the predictive power of Earnings ESP.

Other Stocks That Warrant a Look

Here are some other finance stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around.

KeyCorp (KEY - Free Report) is slated to report results on Jul 19. It has an Earnings ESP of +0.40% and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

E*TRADE Financial (ETFC - Free Report) has an Earnings ESP of +0.24% and presently carries a Zacks Rank of 3. The company is also slated to release results on Jul 19.

State Street (STT - Free Report) has an Earnings ESP of +0.28% and a Zacks Rank #3. It is scheduled to release results on Jul 20.

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