DBRS Comments on SunTrust Banks, Inc.’s 1Q13 Results – Senior at A (low); Trend Stable

DBRS, Inc. (DBRS) has today commented on the 1Q13 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 $340 million, down from $350 million in 4Q12 ($313 million excluding one-time items), but up from $245 million reported a year ago. DBRS notes that an unusually low effective tax rate in the fourth quarter helped bolster 4Q12 results. Indeed, 1Q13 pre-tax income increased 20% sequentially to $509 million.

Highlights of the quarter include substantially lower expenses and continued improvements in credit quality. Nonetheless, revenues declined reflecting net interest margin (NIM) pressure, lower mortgage revenue, and weaker investment banking revenue following a record 4Q12. Overall, revenues declined less than expenses resulting in positive operating leverage.

During the quarter, net interest income decreased by $25 million to $1.22 billion reflecting a three basis point compression in the NIM to 3.33% and two less days in the quarter. Margin pressure should continue with asset yields still trending lower, as well as lower expected swap income. Meanwhile, noninterest income declined by $152 million, or 15%, to $863 million primarily reflecting an $82 million decline in mortgage production related income due to lower margins and a $44 million decrease in investment banking, which was hurt by seasonality and lower levels of activity primarily in loan syndications and high yield bond originations. Management expects investment banking to pick up in 2Q13.

Positively, expenses reached their lowest level in three years decreasing $147 million, or 10%, to $1.36 billion sequentially. With the exception of seasonally higher employment compensation related to benefits, all expense categories saw improvement. Most notably, credit-related expenses and operating losses contracted by half to $71 million. Given the material improvement in expenses, SunTrust’s efficiency ratio improved to 64.46% from 65.93% despite the revenue decline.

Even with continued solid commercial and industrial loan growth of $1.1 billion, average loans declined 1% sequentially to $120.9 billion driven by declines in residential real estate and government guaranteed loans following the 4Q12 loan sales. SunTrust noted that the loan pipelines strengthened towards the end of the quarter and that competition for new loans remains intense, especially on the pricing side. Meanwhile, average deposits were relatively stable.

Credit quality continues to strengthen with early-stage delinquencies, nonperforming assets (NPAs), and net charge-offs (NCOs) all improving during the quarter. Specifically, early-stage delinquencies (excluding government-guaranteed delinquencies) declined 7 basis points to 0.41%. Meanwhile, NPAs declined by $117 million during the quarter to $1.74 billion, or 1.44% of total loans plus OREO, other repossessed assets, and nonperforming LHFS. Lastly, NCOs were $226 million, or 0.76% of average loans (annualized), the lowest level in five years. DBRS notes that the allowance for loan and lease losses remains sufficient at 1.79% of period-end loans. As a result of the improved credit quality, SunTrust’s provision for loan losses declined by 39% to $204 million.

SunTrust continues to build capital and all capital metrics improved during the quarter. Specifically, the Company’s tangible common equity ratio increased 19 basis points to 8.57%, while the Tier 1 common ratio reached an all-time high of 10.10%. Management noted that its estimated Basel III tier 1 common ratio remained stable at 8.2% under its interpretation of the proposed rules. After the Federal Reserve’s non-objection to the Company’s capital plan, SunTrust announced that it plans to repurchase up to $200 million of common stock over the next four quarters. Moreover, the Company plans to double the common dividend to $0.10 per share from $0.05.

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

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