SunTrust Misses Marginally - Analyst Blog
October 22 2012 - 4:50AM
Zacks
SunTrust Banks Inc.’s (STI) third quarter 2012
earnings were $1.98 per share, marginally lagging the Zacks
Consensus Estimate by 2 cents. This includes the impact of various
initiatives announced to improve the company's risk profile and
strengthen its balance sheet.
Excluding the impact of the actions undertaken by SunTrust, net
income was $313 million or 58 cents per share compared with $211
million or 39 cents per share in the prior-year quarter.
Though benefiting from actions embarked upon during the reported
quarter, overall results were not up to the mark. Total revenue
(excluding certain non-recurring items) decline while operating
expenses increased. Yet, stable asset quality and capital ratios as
well as a slight improvement in loan and deposit balances were the
tailwinds.
Performance in Detail
Total revenue jumped 75% year-over-year to $3.84 billion. However,
excluding net gains from the sale of The Coca-Cola
Company (KO) shares, total revenue declined 13.3% to $1.90
billion. Total revenue also missed the Zacks Consensus Estimate of
$2.07 billion.
Net interest income inched up 0.6% from the prior-year quarter to
$1.30 billion. The increase was driven by higher average loan
balances and positive changes in deposit mix.
However, net interest margin came down 11 basis points (bps) from
the year-ago quarter to 3.38%. The decrease was attributable to
reduced loan yields, which were partially offset by a decline in
rates paid on interest bearing liabilities and a fall in long-term
debts.
Non-interest income was $2.54 billion, surging significantly from
$903 million in the prior-year quarter. The drastic improvement was
primarily due to $1.9 billion in securities gains, partly offset by
higher mortgage repurchase provision and losses.
Non-interest expense rose 10.6% to $1.73 billion on a
year-over-year basis. The increase was attributable to expenses
related to the restructuring actions undertaken to improve balance
sheet along with higher personnel costs, partially mitigated by
lower Federal Deposit Insurance Corporation (FDIC) assessment
premiums.
SunTrust’s efficiency ratio improved to 44.90% from 71.05% in the
prior-year quarter. The decline in efficiency ratio indicates an
increase in profitability
Credit Quality
Credit quality showed mixed improvement during the quarter.
Nonperforming loans dropped 134 bps year-over-year to 1.42% of
total loans. Similarly, net charge-offs fell 5 bps from the
year-ago quarter to 1.64% of annualized average loans.
Yet, provision for credit losses increased 29.6% from the year-ago
quarter to $450 million. The rise was largely driven by incremental
charge-offs related to the sales of nonperforming loans and the
junior lien credit policy change.
Capital Ratios
As of September 30, 2012, SunTrust’s capital ratios witnessed mixed
movement during the quarter. While tangible equity to tangible
asset ratio improved 10 bps year-over-year to 8.48% and tier 1
common ratio increased 49 bps to 9.80%, Tier 1 capital ratio was
down 50 bps from the prior-year quarter to 10.60%.
Moreover, as of September 30, 2012, book value per share and
tangible book value per share marginally improved compared with the
prior-year quarter and were $37.35 and $25.72, respectively.
Peer Performances
The third quarter earnings of State Street Corp.
(STT) were marginally ahead of the Zacks Consensus Estimate.
Better-than-expected results benefited from improvement in net
interest revenue and fall in operating expenses. Moreover, capital
ratios and asset position remained robust during the quarter.
However, decline in fee revenue was the primary dampener.
Moreover, another peer BB&T Corp.’s (BBT)
third quarter 2012 earnings were in line with the Zacks Consensus
Estimate. Results benefited primarily from growth in revenue and
almost stable provision for credit losses. Alongside, the quarter
witnessed improved credit quality and enhanced capital as well as
profitability ratios. Moreover, accelerating growth in loans and
low-cost deposits were impressive. Nevertheless, higher operating
expense was the primary dampener.
Conclusion
Better average client deposits, robust credit quality and favorable
deposit mix are amongst SunTrust’s key strengths. Moreover, its
recent acquisitions, restructuring initiatives taken in the third
quarter and cost-cutting programs are quite encouraging despite the
persistent low interest rate environment and industry challenges.
However, we remain concerned about the company’s exposure to risky
assets, limited margin improvement and continued regulatory
pressures.
SunTrust currently retains a Zacks #2 Rank, which translates into a
short-term Buy rating. However, considering the fundamentals, we
also maintain a long-term ‘Neutral’ recommendation on the
shares.
BB&T CORP (BBT): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
STATE ST CORP (STT): Free Stock Analysis Report
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