Will SunTrust Outperform Rivals In 2012?
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With a few notable exceptions, bank stocks did well in 2011. I am going to look today at two of the largest regional banks in the country, SunTrust (NYSE: STI) and Regions Financial (NYSE: RF). These banks both rank among the top ten domestic commercial banks by assets, and I am pairing them not just due to their similar size, but also due to their overlapping footprints. They are the two largest of the southern banks, and their footprints were hit hard in the recent recession. They are hardly the same though and their differences will be the focus of this article. I will, for comparison sake, touch upon BB&T (NYSE: BBT) as well.
SunTrust is the result of Trust Bank of Georgia's merger in the mid 1980's with Sun Banks. Along the way the combined bank has acquired dozens of banks, but the bulk of SunTrust’s assets remain in Florida and Georgia, which were two of the hardest hit states in the recent recession. At the end of 2011, SunTrust had almost $177 billion in assets. Its stock was recently trading at almost $23 per share. It has a 52-week range from $30.45 to $15.79, and a price-to-earnings ratio of about 20. Its market capitalization is $12.2 billion, and its current quarterly dividend is five cents, for an annual yield of 0.9%.
Trust Bank of Georgia was the original incorporating bank of Coca-Cola (NYSE: KO) and the two companies were tightly linked for generations. As a SunTrust shareholder, I always felt good about the vast and increasing value of the Coke stake that culminated at nearly $2 billion in unrealized gains. But to my dismay, SunTrust sold its stake in Coke when it became clear that additional capital was needed to deal with SunTrust's souring mortgage and commercial loan portfolios.
Early in 2011, SunTrust sold about $1 billion in common stock, and another $1 billion in debt, to utilize to pay its nearly $5 billion in TARP debt. It was a steep price to pay, no doubt, but at least got SunTrust out of its commitment to pay $300 million per year in preferred dividends to the Treasury.
Looking more carefully at SunTrust’s recent past and near future, I am not very comfortable. While it is a good thing of course that early stage delinquencies and late stage foreclosures have declined markedly, allowing loan loss reserves to fall dramatically, SunTrust has not shown it can earn money through its traditional banking operations. In 2009, 2010, and 2011 SunTrust reserved for loan losses $4.06 billion, $2.65 billion, and $1.51 billion, respectively. In 2009, SunTrust posted a net loss of $1.56 billion. In 2010 and 2011, net profits were $189 million, and $728 million, respectively. So, while it seems nice that SunTrust nearly quadrupled profits from 2010 to 2011, its overall profits in 2011 were less than the difference in loan loss reserves of $1.14 billion. It is entirely probable that SunTrust reserves will fall by a few hundred million further in 2012, but SunTrust is going to have to start earning money via its interest rate spread, and not simply by reducing reserves.
The good news is that I believe the depth of the housing and economic malaise, especially in Florida, presents the likelihood of tremendous future growth. I fully anticipate SunTrust to significantly expand its mortgage and commercial loans in 2012 and beyond, perhaps at a double digit annual clip, assuming no distressing issues arise regarding SunTrust's capital ratios. The bank increased its loan portfolio by $7 billion, or 6% at year end 2011 versus year end 2010. SunTrust's 2011 earnings represented just a 0.41% return on assets, so there is plenty of room for improvement. SunTrust made two modest recent acquisitions of institutions First Again, and CSI Capital Management, both of which specialize in high net worth and credit worthy individuals.
Which brings us to Regions. While SunTrust has put the distressing work of diluting shareholders to pay back the Treasury behind it, Regions has done nothing but ponder its limited options. It really cannot sell stock to raise capital, as its stock is selling now at a little under $6 per share, and the book value at the close of 2011 was nearly $11 per share. Any sale of stock at this point would be doubly dilutive. While SunTrust recorded one year of losses, for about $1.5 billion in 2009, Regions has posted sizable losses of $5.5 billion in 2008, $1.03 billion in 2009, and $540 million in 2010. After accounting for preferred dividend requirements, Regions lost about $2.5 million in 2011. This came as Region's provision for loan losses, which historically had been around $150 million per year, skyrocketed to $3.5 billion in 2009, before settling back to $2.9 billion in 2010 and $1.5 billion in 2011.
Regions is in anything but growth mode. Loans outstanding, which topped out at about $96 billion in 2008, have declined now to below $75 billion. During 2011, in its push to raise capital, Regions sold its Morgan Keegan brokerage for nearly $1.2 billion to Raymond James Financial (NYSE: RJF). If Regions simply issues debt, it will substitute one form of interest payment for another, albeit it won't be a $3.5 billion debt issue.
BB&T is another large Southern regional to consider, with assets placing it larger than Regions, but smaller than SunTrust. It is further along in recovering from the credit brought recession, with its 2011 earnings of $1.33 billion making for a 0.82% return on assets. But that profitability was illusory, as its provisions from loan losses fell about $1.5 billion in 2011 as compared to 2010. That amount alone accounted for all of the profit. I do not believe there is the growth potential in BB&T’s footprint either, which focuses upon Appalachian states, but does include Florida and Georgia
I can see the day when SunTrust again posts a 1.0% return on assets, as it did annually prior to 2007, though that day won't be for two or three years. Under no circumstance can I see the same for Regions, whose toughest days in some respects are still ahead of it. If you have a long time horizon, take a look at SunTrust. I would not touch Regions with a ten foot pole. I am ambivalent about BB&T in general. But right now its current market valuation of $20.4 billion, is a 67% premium to SunTrust. I believe BB&T is overvalued at present compared to SunTrust.
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