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SunTrust (STI) Tops Earnings as Revenues Rise; Provision Up

A rise in revenues drove SunTrust Banks, Inc.'s STI first-quarter 2016 earnings of 84 cents per share, which outpaced the Zacks Consensus Estimate of 76 cents. Moreover, the figure compared favorably with the prior-year tally of 78 cents.

Results reflected an improvement in net interest income benefiting from the Dec 2015 rate hike. Further, growth in loans and deposits acted as a tailwind during the quarter. However, lower non-interest income, a jump in provision for credit losses and higher operating expenses were the downsides.

Net income available to common shareholders was $430 million, up 5% year over year.
    
Performance in Details

Total revenue (fully tax equivalent basis) grew 5% from the prior-year quarter to $2.10 billion. Further, the reported figure was above the Zacks Consensus Estimate of $2.04 billion.

Net interest income (FTE basis) surged 12% year over year to $1.32 billion. The rise was attributable to growth in average earning asset balances and yields, and a decline in interest-bearing liability rates.

Further, net interest margin was up 21 basis points (bps) year over year to 3.04%.

Non-interest income was $781 million, down 4% year over year. The fall was largely due to decrease in trust and investment management income, mortgage production related income and other non-interest income.

Non-interest expense rose 3% from the year-ago quarter to $1.32 billion. The increase was due to a rise in all expense components except FDIC premium/regulatory exams and other noninterest expenses.

As of Mar 31, 2016, SunTrust had total assets of $194.16 billion while shareholders’ equity summed $24.05 billion, representing 12% of total assets. As of Mar 31, 2016, loans grew 6% year over year to $139.75 billion. Total consumer and commercial deposits rose 6% year over year to $151.26 billion.

SunTrust’s estimated common equity Tier 1 ratio under Basel III (on a fully phased-in basis) was 9.85% as of Mar 31, 2016.

Credit Quality

Credit quality exhibited a mixed bag during the quarter. Total nonperforming assets were $1.04 billion as of Mar 31, 2016, up 49% from the prior-year quarter. The increase was mainly due to downgrades in certain energy-related loans.

Nonperforming loans increased 24 bps year over year to 0.70% of total loans. Also, provision for credit losses surged 84% year over year to $101 million. However, rate of net charge-offs decreased 5 bps year over year to 0.25% of annualized average loans.

Share Repurchase

During the quarter, SunTrust bought back shares worth $175 million.

Our Viewpoint

We believe SunTrust remains well positioned for future growth given its favorable deposit mix, continued expense discipline and enhanced credit quality. Also, the company’s steady capital deployment activities look impressive.

Though efficient cost-containment efforts continue to ease pressure on the bottom line, exposure to risky assets and heightened regulatory pressure will likely continue weighing on the profitability in the near term.

SunTrust currently carries a Zacks Rank #3 (Hold).

Performance of Other Major Regional Banks

A substantial rise in interest income drove BB&T Corporation’s BBT first-quarter 2016 adjusted earnings of 69 cents per share. This outpaced the Zacks Consensus Estimate of 64 cents.

U.S. Bancorp USB reported first-quarter 2016 earnings per share of 76 cents beating the Zacks Consensus Estimate by a penny. Organic growth was driven by higher revenues along with elevated average loans and deposits. However, increase in expenses and provisions were a major drag.

KeyCorp.’s KEY first-quarter 2016 adjusted earnings from continuing operations of 24 cents per share missed the Zacks Consensus Estimate by a penny. Results were adversely impacted by a significant rise in provision for loan losses, higher operating expenses and a decline in non-interest income, partially offset by an increase in net interest income.

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