Time For This Bank To Get Serious

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's a natural instinct to try and hold things together in whatever way possible when a company goes through a rough patch. Having worked in a bank for over 10 years, I know that there were times the bank “suggested” that we cut certain expenses, or that raises were either impossible or very small because of the trying economic environment. That being said, we knew that our day to day work did make a difference to the bottom line of the company, and that eventually things would turn around. Some banks have a hard time getting out of this “survival” mode, and I'm afraid that's exactly what's going on at SunTrust (NYSE: STI).

It's Time To Move Forward
It should be no secret that SunTrust had its share of problems due to the Great Recession. The company had been slowly working through its issues, and made what I have deemed, “The Worst Stock Sale In History.” In short, the company made one of the best investments in the history of finance by turning their $100,000 investment in Coca-Cola into 60 million shares. These shares were generating about $61 million in annualized dividend income, but now are gone. While it's true the company booked a large gain from the sale, and used the funds to shore up its balance sheet, there is no way to duplicate this type of investment again. 

That being said, it's time for the bank to move forward. Based on their last earnings release, the troops need their marching orders in a little more clear language. There are four key measures to any bank, unfortunately for SunTrust, they are falling behind in three of the four categories.

One Out Of Four Isn't Cutting It
The first thing investors should look at when measuring a bank is their deposit and loan growth. Banks that have strong deposit and loan growth, generally should have good earnings growth over time. SunTrust's contemporary banks are BB&T (NYSE: BBT), PNC Financial (NYSE: PNC), and M&T Bank (NYSE: MTB). To say that SunTrust is lagging behind when it comes to deposits and loans is a vast understatement. 

In the middle of a recession, SunTrust's 2% deposit growth might be acceptable. However, with the economy technically a few years out of a recession, this isn't good enough. When you consider that, BB&T grew deposits by 8.1%, M&T saw 10% growth, and PNC increased deposits by 11%, you can see SunTrust's competition is eating their lunch.

The same issue is facing SunTrust when it comes to loan growth. The company grew loans in the current quarter by an anemic 3%. BB&T increased their loans by 9.3%, M&T grew loans by 11%, and PNC saw a jump of 17%, by comparison. When your competition grows loans faster than you do, it means you missed some opportunities.

This anemic growth is showing up in another place on SunTrust's balance sheet, and that is their net interest margin. While it's true that all banks have felt the squeeze of margin compression because of ever lower interest rates, SunTrust is hurting more than their competition. In the current quarter, SunTrust reported a net interest margin of 3.36%. Relative to BB&T at 3.84%, M&T at 3.74%, and PNC at 3.85%, you can see, SunTrust will have a harder time making profits relative to their major competitors.

One of the only ways that SunTrust is outperforming its competition is, with their non-performing loan percentage. SunTrust's non-performing loan percentage was 1.27% in the current quarter. Only BB&T performed better with a non-performing loan percentage of 1.2%. Relatively speaking, M&T and PNC did worse with percentages of 1.52% and 1.75% respectively.

Snap Out Of It
The bottom line is, SunTrust management needs to spread the word to each of their offices that it's time to turn this ship around. The bank needs to aggressively pursue new relationships, and not be afraid to go toe to toe with their competition. The company's mortgage team already gets it, with mortgage production income going from a loss of $62 million last year to a profit of $242 million this year. Now it's time for the branches to get on board. 

The company needs growth in checking accounts, which only account for about half of SunTrust's deposits. With over $9 billion in long-term debt, the company could vastly improve their net interest margin by growing deposits and paying down debt. They also need to focus on growing their consumer loan portfolio, as this was a big part of the weakness in lending growth.

When it comes to valuation, SunTrust is a turnaround play. Analysts expect over 15% EPS growth and shares trade for about 10.8 times projected earnings. BB&T and PNC have lower P/E ratios at 10.37 and 9.7 respectively. BB&T and PNC also pay much better yields at 3% and 2.5% versus 0.7% at SunTrust. M&T has the highest relatively valuation at over 12 times projected earnings, and has the second lowest projected growth rate at 8.1%. If SunTrust is going to get anywhere near analyst expectations for earnings growth, it is time to move forward now. The company needs to stop managing like they are in crisis mode, and start growing again. Until SunTrust can show better organic growth, I would stay away from the stock.

MHenage has no position in any stocks mentioned. The Motley Fool owns shares of PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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