DBRS Comments on SunTrust Banks, Inc.’s 4Q12 Results – Senior at A (low); Trend Stable

DBRS, Inc. (DBRS) has today commented on the 4Q12 earnings of SunTrust Banks, Inc. (SunTrust or the Company). DBRS rates the Company’s Issuer & Senior Debt rating at A (low) with a Stable trend. The Company reported net income available to common shareholders of $350 million, compared to $1.1 billion in 3Q12 ($313 million excluding one-time items), and from $71 million reported a year ago.

Highlights of the quarter include record investment banking revenues, deposit growth, still solid, albeit lower core mortgage banking production related income, improved asset quality, and solid expense controls. DBRS notes that absent the $2.8 billion of loan sales, loans would have grown as well. However, the loan sales and modest net interest margin pressure did result in lower sequential net interest income, which declined 2% to $1.2 billion. DBRS expects margin pressure to continue over the intermediate term.

Despite the difficult operating environment, the overall core balance sheet trends were favorable. During 4Q12, the Company completed the remaining sales of the loans announced as part of 3Q12’s strategic actions, as well as another incremental $335 million of loans. Although the loan sales resulted in a $2.5 billion, or 2%, sequential decline in average loans, this was partially offset by growth in targeted loan categories; particularly commercial and industrial (C&I) loans and consumer indirect loans. Also, the favorable deposit mix shift continued with average client deposits up $2.6 billion, or 2%, sequentially, including growth in lower-cost accounts partially offset by declines in higher-cost time deposits of $0.8 billion.

In 4Q12, adjusted noninterest income increased a material $272 million, or 37%, to $1.0 billion. DBRS notes that noninterest income growth was primarily attributable to a $359 million reduction in mortgage repurchase provision to $12 million and a record quarter of investment banking income (up 35% QoQ to $112 million), partially offset by declines in core mortgage production (mortgage production was $8.0 billion in 4Q12 compared to $8.1 billion in 3Q12) and lower gain on sale margins, as well as lower mortgage servicing income. Solid investment banking performance reflected strong syndicated finance and bond origination fees.

Noninterest expense declined $216 million, or 12.5%, sequentially to $1.5 billion at 4Q12. Adjusted for the special 3Q12 items, core expenses decreased 1.8% driven by lower employee compensation and reduced benefits and credit-related expenses. Specifically, employee compensation and benefits expense decreased $42 million over the linked quarter, due primarily to lower contract labor costs, lower salaries, and lower incentive compensation. During 4Q12, SunTrust reduced headcount by another 1,222 full-time employees and have now cut over 2,400 positions in 2012. Nonetheless, SunTrust’s efficiency ratio of 66.3% at 4Q12 will necessitate additional expense savings, as well as revenue growth given its target efficiency ratio of below 60%.

During the quarter, asset quality trends continued to improve and benefited from the sale of problem loans. Indeed, nonperforming assets, net charge-offs (NCOs), and early stage delinquencies all declined during the fourth quarter. Specifically, nonperforming loans (NPLs) declined $184 million, or 11%, during the quarter to $1.5 billion, or 1.27% of total loans, driven primarily by declines in commercial problem loans. During the quarter, the Company reclassified mortgage and consumer loans that were discharged as a result of Chapter 7 bankruptcy related guidance put forth by the OCC, which added $232 million to NPLs. This change also added $79 million to NCOs. Overall, NCOs declined 22% to $398 million, or 1.30% of average loans. Adjusted for the policy changes and loan sales, NCOs were relatively stable on a linked-quarter basis. In DBRS’s view, the allowance for loan losses remained sufficient at 1.80% of total loans, or 1.95% excluding government guaranteed loans.

Capitalization remains solid and improved during the quarter. Specifically, tier 1 common capital expanded to 10.0% from 9.82% in 3Q12. Meanwhile, the tangible equity to tangible assets ratio increased 34 basis points to 8.82%. SunTrust noted that its estimated Basel III tier 1 common ratio is expected to be 8.2% under its interpretation of the proposed rules. DBRS notes that SunTrust issued $450 million of preferred stock in December.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]