DBRS Comments on SunTrust Banks, Inc.’s 2Q13 Results – Senior at A (low); Trend Stable

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $365 million, up from $340 million in 1Q13 and from $270 million reported a year ago.

The quarter included significant improvement in asset quality, which was the primary contributor to higher sequential earnings given the $66 million decline in provision expense. Moreover, SunTrust reported modest average performing loan growth. Nonetheless, DBRS notes that revenues declined modestly while expenses increased 2% resulting in negative operating leverage; primarily reflecting weaker mortgage-related income and a specific mortgage-related legal matter.

Net interest income declined $10 million to $1.2 billion during the quarter reflecting net interest margin pressure. Specifically, the margin compressed eight basis points to 3.25% driven by lower swap income, as well as lower asset yields. SunTrust added some additional loan swaps, which should benefit net interest income by approximately $8 million per quarter going forward. The Company expects continued margin pressure in 3Q13 with stabilization coming in 4Q13.

Noninterest income was $858 million, a $5 million decline from 1Q13. Broad-based revenue growth in most fee-based businesses, especially within investment banking, was more than offset by lower-mortgage-related income. Indeed, mortgage production related income declined $26 million to $133 million reflecting lower spreads despite higher production. Meanwhile, mortgage servicing income declined $37 million to $1 million related to lower hedging gains. Positively, investment banking income increased $25 million, or 37%, driven by loan syndications, as well as high yield bond origination activity.

Noninterest expenses increased 2% sequentially to $1.4 billion. Excluding a specific mortgage-related legal matter that contributed to operating losses increasing $33 million to $72 million, expenses were well controlled benefitting from seasonally lower employee compensation and benefit expense. Compared to 2Q12, core expenses declined 10% evidencing the progress SunTrust has made lowering expenses over the past year.

As a result of lower revenues and higher expenses, the Company’s adjusted efficiency ratio increased to 66.4% from 63.8%, still well above SunTrust’s long-term target of a sub-60% efficiency ratio (65% target for 2013).

Average performing loans increased 1% to $120.0 billion, as C&I and CRE loan growth more than offset continued guaranteed mortgage loan runoff. Positively, the Company noted that loan pipelines were solid and that consumer and business confidence was gradually improving in their markets.

During the quarter, delinquencies, nonperforming assets (NPAs), and net charge-offs all improved. Indeed, NPAs reached their lowest level since 3Q07, declining $345 million to $1.4 billion, or 1.14% of total loans plus OREO, other repossessed assets, and nonperforming LHFS benefitting from improved housing conditions, as well as the return of certain loans to performing status that had been previously discharged from Chapter 7 bankruptcy. Excluding the $220 million reclassification, nonperforming loans would have declined a still strong 7%. Similarly, at $179 million, or 0.59% of total average loans (annualized), NCOs were at their lowest level since 4Q07. As a result of broad-based improvements in credit quality, the provision for credit losses was only $146 million, or a more healthy 22% of adjusted income before provisions and taxes.

Capital metrics remained relatively stable during the quarter. Even with a $468 million decline in accumulated other comprehensive income, a higher dividend, and $50 million of share repurchases, the Company’s tangible common equity ratio remained strong at 8.51%, down from 8.57% at March 31, 2013. Based on the Company’s current interpretation of the final Basel III capital rules, SunTrust estimated its Basel III Tier 1 common ratio was approximately 9.5%.

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

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