STI SunTrust Banks Inc

SunTrust Banks Inc.’s (STI) fourth quarter earnings came in at 28 cents per share, surpassing the Zacks Consensus Estimate by a penny. This represents SunTrust’s sixth straight quarter of profit after incurring significant losses since mid 2008. This was also substantially better than earnings of 23 cents in the year-ago quarter.

Despite the weakness in the wider economy and pressures on the sector, results for the reported quarter benefited from a substantial decline in provision for credit losses, higher interest income and stable non-interest expenses. Improvement in credit quality was also impressive. However, a substantially lower non-interest income and sluggish loan growth were the headwinds.

SunTrust’s net income came in at $155 million, compared with $215 million in the prior quarter and $185 million in the prior-year quarter.

For the full year 2011, the company reported earnings of $1.09 per share, in line with the Zacks Consensus Estimate. However, this compares favorably with the loss of 18 cents in the previous year.

Quarter in Detail

SunTrust’s total revenue on a fully taxable-equivalent basis was $2.0 billion, down 7% sequentially but down 12% year over year. This compares with the Zacks Consensus Estimate of $2.1 billion. The sequential decrease can be traced back to a higher mortgage repurchase provision, a mortgage servicing rights valuation adjustment and lower card fee income, partially offset by higher net interest income.

Fully taxable-equivalent revenue for the full year was $8.6 billion, down 1% from $8.7 billion in the previous year. The Zacks Consensus Estimate for the full year was $8.5 billion.

Net interest income (NII) was up 2% both sequentially as well as year over year at $1.3 billion. The increase was driven by lower deposit costs as a result of the continued favorable shift in the deposit mix toward low-cost accounts.

Net interest margin (NIM) was down 3 basis points (bps) sequentially but up 2 bps year over year at 3.46%. The sequential decline was due to lower earning asset yields, partially offset by lower rates on interest-bearing liabilities. 

Non-interest income was $723 million, down 20% from the prior quarter and 30% from the prior-year quarter. Both sequential and year-over-year decline was due to an increase in the mortgage repurchase provision, as well as a mortgage servicing rights valuation adjustment.

Non-interest expense for the quarter came in at $1.5 billion, down 1% from the prior quarter but flat compared with the prior-year quarter. On a sequential basis, lower employee compensation and benefits expense was offset by increases in credit-related expenses, legal accruals and severance expense.   

SunTrust’s efficiency ratio increased to 75.59% from 71.05% in the prior quarter and 66.57% in the prior-year quarter.

Credit Quality

Credit quality continued to improve during the quarter, with 6% sequential and 36% year-over-year declines in provision for credit losses to $327 million.

Nonperforming loans dropped 39 bps sequentially and 117 bps year over year to 2.37% of total loans. Also, net charge-offs fell 12 bps from the prior quarter and 57 bps from the year-ago quarter to 1.57% of annualized average loans.

Capital Ratios

SunTrust’s capital ratios remained weak during the reported quarter, with Tier 1 capital ratio of 10.95% (down 15 bps from the prior quarter and 272 bps from the prior-year quarter) and tangible equity to tangible asset ratio of 8.14% (down 24 bps sequentially and 198 bps year over year). However, capital ratios remained well above the current regulatory requirements as well as the Basel III proposed level.

Performance of Competitor

SunTrust’s close competitor, The Bank of New York Mellon Corporation’s (BK) fourth-quarter 2011 earnings substantially missed the Zacks Consensus Estimate. Although results for the quarter benefited from higher interest income and lower operating expenses, these positives were more than offset by reduction in fee revenue and decline in net interest margin. However, the company’s asset quality showed improvement and capital ratios remained strong.

Our Viewpoint

We remain concerned about SunTrust’s significant exposure to risky assets, a slow economic recovery and new regulatory headwinds. Moreover, a limited margin improvement would keep its top-line under pressure. However, improved average client deposits, strong credit quality and favorable deposit mix continue to raise our hopes for improved results.

SunTrust currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

 
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