SunTrust Outpaces Significantly - Analyst Blog
April 23 2012 - 5:30AM
Zacks
SunTrust Banks
Inc.’s (STI) 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) 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) 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.
KEYCORP NEW (KEY): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
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