Lower Provisions Drive SunTrust Q1 Earnings - Analyst Blog

SunTrust Banks, Inc.'s STI first-quarter 2014 earnings per share of 73 cents outpaced the Zacks Consensus Estimate of 67 cents on the back of lower provisions and prudent expense management. Moreover, the reported figure compared favorably with 63 cents earned in the year-ago quarter.

Better-than-expected results were driven by fall in both provision for credit losses and operating expenses, partially offset by a decline in the top line. Further, improvement in credit quality and rise in average loan and deposit balances were the other tailwinds. However, capital ratios were a mixed bag.
 
Net income available to common shareholders was $393 million, increasing 15.6% year over year.

Quarterly Performance

Total revenue (excluding net securities gains) came in at $2.03 billion, declining 3.8% from the prior-year quarter. The fall was due to decrease in mortgage production income and net interest income, partially offset by rise in investment banking, mortgage servicing and wealth management related income. However, the reported figure beat the Zacks Consensus Estimate of $2.01 billion.  

Net interest income declined 1.4% from the prior-year quarter to $1.20 billion. Net interest margin NIM fell 14 basis points (bps) from the year-ago quarter to 3.19%. The decline in NIM was mainly due to lower earning asset yields, partially offset by a decline in interest-bearing liabilities rates.

Non-interest income (excluding securities gains) was $792 million, down 8.0% year over year. The decline was mainly due to a drop in mortgage production income, which was partially offset by increase in investment banking, mortgage servicing and wealth management related income.

Non-interest expense was $1.4 billion, in line with the prior-year quarter level. Seasonally higher employee compensation and benefits expense was largely offset by decline in almost all expense categories.

SunTrust's efficiency ratio increased to 66.83% from 63.97% in the prior-year quarter. An increase in efficiency ratio indicates decline in profitability.

As of Mar 31, 2014, SunTrust had total assets of $179.5 billion while shareholders' equity was $21.8 billion, which represented 12% of the total assets.

Average loans totaled $128.5 billion, up 6.3% year over year. Average consumer and commercial deposits were $128.4 billion, up 0.6% from the year-ago quarter figure.

Credit Quality

Credit quality continued to improve during the quarter. Nonperforming loans fell 49 bps year over year to 0.72% of total loans. Similarly, net charge-offs rate decreased 41 bps from the year-ago quarter to 0.35% of annualized average loans.

Moreover, provision for credit losses declined 51.9% from the year-ago quarter to $102 million.

Capital Ratios

As of Mar 31, 2014, SunTrust's capital ratios were a mixed bag. Tangible equity to tangible asset ratio improved 1 basis point year over year to 9.01%. However, Tier 1 common equity ratio decreased 23 bps to 9.90% and Tier 1 capital ratio was down 35 bps to 10.85%.

As of Mar 31, 2014, book value per share and tangible book value per share improved from the prior-year quarter and were $39.44 and $27.82, respectively.

Share Repurchase

During the quarter, SunTrust bought back 1.35 million shares for $50 million. This was part of the company's 2013 capital plan.

Additionally, in Mar 2014, SunTrust received approval from the Federal Reserve for its 2014 capital plan that included repurchase up to $450 million of its common stock between the second quarter of 2014 and the first quarter of 2015.

Our Viewpoint

We believe that disciplined expense management, strong credit quality and a favorable deposit mix will continue to support SunTrust's financials. Moreover, the company's enhanced capital deployment activities reflect its strong balance sheet position.

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

At present, SunTrust carries a Zacks Rank #3 (Hold).

Performance of Other Major Banks

KeyCorp. KEY and M&T Bank Corporation MTB surpassed the Zacks Consensus Estimate. While M&T Bank's results benefited from lower provisions, KeyCorp's results were driven by lower expenses, a decline in provision for loan and lease losses and higher fee income.

However, a decline in the top line led BB&T Corp.'s BBT first-quarter earnings to fall short of the Zacks Consensus Estimate. This was partially offset by prudent expense management.