SunTrust: Expect a Very Slow Recovery
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Regional banking company SunTrust Banks (NYSE: STI) has reported results for the 2011 fourth quarter and full year. The results show the bank had a much better 2011 than 2010 as the sector moves further out from the 2007-2008 financial crisis and banks get their financial houses in order. However, the quarterly numbers point to a slowing of the pace of recovery. It appears that SunTrust is reaching the point where just fixing the sins of the past will make current results look much better than recent financial postings.
SunTrust Banks is headquartered in Atlanta, Georgia. The company has approximately 1,600 banking branches stretching from Florida up to Washington, D.C. The company provides a full service lineup of retail and business banking services, and it holds a large book of mortgage loans that have been a drain on earnings and have required significant reserve set-asides. The bulk of the problem home loans were originated in 2006 through 2008. Although the majority of these loans were agency guaranteed, they are still generating losses for the bank as the agencies require the bank to repurchase bad loans, which were originated not meeting underwriting guidelines.
When SunTrust is compared to other regional banking companies such as Regions Financial ?(NYSE: RF), BB&T Corp. ?(NYSE: BBT) and Keycorp ?(NYSE: KEY), the banks tend to split into two camps. The banks with fewer financial problems have share prices with break even results over the last year. The more problematic banks have seen share values decline by 20 to 30 percent over the 12 months. STI falls into the latter camp. Over the last year, the S&P regional banking select index was down about 4 percent and the STI share value dropped by 30 percent.
For the final quarter of 2011, SunTrust Banks reported net income of 28 cents per share and full year earnings of $1.09 per share. These numbers compare favorably with the 2010 results of 23 cents for the year ago fourth quarter and a net loss of 18 cents per share for the full 2010 fiscal year. The final 2011 results were pretty much in line with the Wall Street consensus estimates of 27 cents for the quarter and $1.08 in earnings for the full year.
However, some time in the look-back machine shows significant erosion in the Wall Street consensus numbers. In September the full year earnings consensus estimate was $1.12 per share and the 2012 estimated earnings were $2.18 per share. Now those number have fallen to the above mentioned $1.08 for 2011 and all the way down to a current estimate of $1.85 per share for 2012. Also, the fourth quarter earnings of 28 cents were much lower than the 39 cents the company earned in the 2011 third quarter. The decline in profits was attributed to an 8 percent decline in total revenue in the fourth quarter and a 20 percent drop in non-interest income. The lower non-interest income was due to a higher mortgage repurchase provision, a restatement of mortgage service income and lower credit card fees.
Of the two income sources for a banking company, SunTrust Banks is experiencing steady quarter-to-quarter growth in net interest income. The amount of outstanding loans continue to grow and the net interest margin is relatively stable, at 3.46 percent for Q4 2011 compared to 3.44 percent for Q4 2010. Non-interest income is in a quarter-to-quarter decline with the mortgage repurchase provisions acting as the main culprit. SunTrust still lists $10.2 billion of higher risk loans on the books, down 22 percent over the last year. As a comparison, net income for full year 2011 was $728 million.
At this point, the SunTrust year-end results point to some trends of slowing recovery compared to the first half of 2011. The Wall Street analysts have been lowering their estimates and it is not a great victory to meet those lowered expectations. There is no compelling reason to make a new investment in SunTrust Banks before the first quarter results are released in April. The current consensus estimate for Q1 is 32 cents per share of earnings. This estimate is down from a consensus of 39 cents three months earlier. Investors should be looking for the company to start beating the estimates and the analysts to start raising their future earnings estimates. Or, more aggressively, an investor could predict this is the pattern to be followed in the future, reversing the current pattern of earnings.
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