SunTrust Banks Inc.’s (STI) third quarter earnings came in at 39 cents per share, 4 cents ahead of the Zacks Consensus Estimate. This represents SunTrust’s fifth straight quarter of profit after incurring significant losses since mid-2008. This was also substantially better than earnings of 17 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 improved credit quality. However, lower non-interest income and higher non-interest expenses were the headwinds.
SunTrust’s net income came in at $215 million compared with $178 million in the prior quarter and $153 million in the prior-year quarter.
Quarter Details
SunTrust’s total revenue on a fully taxable-equivalent basis was $2.2 billion, flat sequentially but down 5% year over year. Revenue was also in line with the Zacks Consensus Estimate. The year-over-year decrease can be traced back to lower mortgage-related revenue.
Net interest income (NII) was up 1% sequentially and 2% year over year at $1.3 billion. The year-over-year increase was primarily attributable to lower rates on deposits, a continued shift in deposit mix toward lower-cost deposits, and a reduction in higher-cost funding.
Net interest margin (NIM) was down 4 basis points (bps) sequentially but up 8 bps year over year at 3.49%. The year-over-year increase was primarily driven by the favorable shift in the deposit mix, lower rates paid and a decline in interest-bearing liabilities.
Non-interest income was $903 million, down 1% from the prior quarter and 14% from the prior-year quarter. The year-over-year decrease was due to lower net gains on the sale of investment securities, a decline in investment banking income and lower mortgage-related income, partially offset by growth in trust income, retail investment services and card fees.
Non-interest expense for the quarter came in at $1.6 billion, up 1% from the prior quarter and 4% from the prior-year quarter. The year-over-year increase was primarily due to a $45 million increase in operating losses related to mortgage servicing, a $41 million increase in employee compensation and a $13 million increase in FDIC insurance premiums due to the change in assessment methodology.
SunTrust’s efficiency ratio increased to 71.05% from 70.17% in the prior quarter and 64.80% in the prior-year quarter.
Credit Quality
Credit quality continued to improve during the quarter, with 11% sequential and 44% year-over-year declines in provision for credit losses to $347 million.
Nonperforming loans dropped 38 bps sequentially and 104 bps year over year to 2.76% of total loans. Also, net charge-offs fell 7 bps from the prior quarter and 73 bps from the year-ago quarter to 1.69% of annualizedaverage loans.
Capital Ratios
SunTrust’s capital ratios remained weak during the reported quarter, with Tier 1 capital ratio of 11.05% (down 253 bps from the prior-year quarter) and tangible equity to tangible asset ratio of 8.38% (down 181 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) third-quarter earnings of 53 cents per share were in line with the Zacks Consensus Estimate. Results reflected improved interest income, lower operating expenses and strong capital ratios. However, reduction in fee revenue and lower net interest margin were the negatives.
Our Viewpoint
We remain concerned about SunTrust’s significant exposure to risky assets, a slow economic recovery and regulatory headwinds. Moreover, a limited margin improvement would keep its top-line under pressure. However, improved average client deposits and the favorable deposit mix trend toward lower-cost accounts 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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