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SunTrust Beats on Earnings, Rev Lags

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SunTrust Banks, Inc.’s (STI - Free Report) first-quarter 2013 earnings came in at 63 cents per share, marginally beating the Zacks Consensus Estimate of 61 cents. This also comes significantly ahead of the year-ago earnings of 46 cents.

Results benefited from lower operating expenses, partially offset by a reduction in top line. Further, stable asset quality and capital ratios and improved deposit balances were the other positives for the quarter.

Net income available to common shareholders in the fourth quarter was $340.0 million, up 38.8% from $245.0 million in the prior-year quarter.

Performance in Detail

Total revenue declined 4.7% year over year to $2.1 billion. The decrease was primarily driven by lower net interest income. Revenues also lagged the Zacks Consensus Estimate of $2.3 billion by 6.3%.

Net interest income declined 6.7% from the prior-year quarter to $1.25 billion. The fall was due to lower yields on earning assets, a dip in commercial loan-related swap income and the foregone dividend income as a result of the accelerated termination of the agreements related to The Coca-Cola Company’s (KO - Free Report) shares. These were partly offset by lower rates paid on deposits and a reduction in the long-term debt.

Net interest margin came down 16 basis points (bps) from the year-ago quarter to 3.33%. The decrease was attributable to reduced loan yields, partially offset by a decline in rates paid on interest-bearing liabilities.

Non-interest income was $863.0 million, falling 1.5% from $876.0 million in the prior-year quarter. The decline was mainly driven by reduced mortgage-related income, securities gains and trading income, partially offset by a decrease in mortgage repurchase provision.    
Non-interest expense declined 11.5% to $1.37 billion on a year-over-year basis. The fall was attributable to the company’s continued expense reduction initiatives and a dip in the cyclically high costs.    

SunTrust’s efficiency ratio decreased to 64.46% from 69.50% in the prior-year quarter. The decrease in efficiency ratio indicates better profitability.

Balance Sheet

As of Mar 31, 2013, SunTrust had total assets of $172.0 billion, while shareholders’ equity stood at $21.0 billion, representing 12% of the total assets.

Average loans totaled $120.9 billion, down 1.4% year over year. The decline was primarily due to decrease in residential real estate and government guaranteed student loans, partially offset by targeted growth in commercial and industrial loans.    
Average consumer and commercial deposits inched up 1.5% from the year-ago quarter to $127.7 billion. The rise was primarily due to increases in interest bearing transaction accounts, money market accounts and savings accounts, partially offset by decline in higher-cost time deposits.  

Credit Quality

Overall credit quality showed improvement during the quarter. Nonperforming loans dropped 95 bps year over year to 1.21% of total loans. Similarly, net charge-offs fell 62 bps from the year-ago quarter to 0.76% of annualized average loans.

Moreover, provision for credit losses declined 33.1% from the year-ago quarter to $212.0 million.

Capital Ratios

As of Mar 31, 2013, SunTrust’s capital ratios remained strong. Tangible equity to tangible asset ratio improved 86 bps year over year to 9.00%, tier 1 common ratio increased 77 bps to 10.10% and Tier 1 capital ratio was up 20 bps to 11.20%.

Moreover, as of Mar 31, 2013, book value per share and tangible book value per share improved compared with the prior-year quarter and were $37.89 and $26.33, respectively.

Performance of Other Regional Banks

Among other regional banks, BB&T Corporation’s (BBT - Free Report) first-quarter 2013 earnings came a penny ahead of the Zacks Consensus Estimate. Growth in revenues and a fall in operating expenses, partially offset by slightly higher provision for credit losses, were mainly responsible for the improvement in quarterly results.

The Bank of New York Mellon Corporation’s (BK - Free Report) first-quarter 2013 adjusted earnings marginally lagged the Zacks Consensus Estimate. A rise in operating expenses and lower net interest income were primarily responsible for the lower-than-expected results.

Our Viewpoint

SunTrust’s key strength includes better average client deposits, strong credit quality and favorable deposit mix. Moreover, SunTrust’s recent acquisitions, restructuring initiatives and cost-cutting programs are encouraging.

However, we remain concerned about the company’s exposure to risky assets and limited margin improvement. Further, a persistent low interest-rate environment and industry challenges might affect its top line improvement.

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

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