DBRS Comments on SunTrust Banks, Inc.’s 3Q13 Results – Senior at A (low); Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 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 $179 million, down from $365 million in 2Q13 and from $1.07 billion reported a year ago. DBRS notes that 3Q13 results included the previously announced resolutions to legacy mortgage matters and tax items that in aggregate negatively impacted net income by $179 million. Excluding non-core items, core earnings would have been $358 million, down from $365 million in 2Q13, but up from $313 million a year ago.

During the quarter, SunTrust was able to further lower the risk profile of the Company through certain previously disclosed resolutions to legacy mortgage matters and continued improvements in asset quality, which resulted in a 35% decline in the provision for credit losses. Investment banking also turned in another solid quarter and overall core expenses declined. Moreover, SunTrust delivered loan growth with average performing loans increasing $1.6 billion, or 1.3%. Nonetheless, lower mortgage banking revenues and a $37 million impairment of lease financing assets primarily contributed to the sequential decline in core earnings.

Net interest income was relatively stable; declining $3 million to $1.208 billion. Earning asset growth and one extra day in the quarter mostly offset continued net interest margin pressure of 6 bps to 3.19%. SunTrust indicated that it expects further margin compression in 4Q13, although not as pronounced.

Noninterest income decreased to $680 million from $858 million driven by the decline in core production income, as well as the additional mortgage repurchase provision related to the settlements. Specifically, mortgage production income declined $143 million sequentially to a loss of $10 million driven by lower production volumes (mortgage applications dropped 45% sequentially) and tighter gain on sale margins, as well as higher repurchase provisions driven by the settlements. Positively, investment banking had another solid quarter with revenues increasing $6 million to $99 million, reflecting growth in M&A advisory and equity transaction fee revenue.

Even without the one-time mortgage charges, the Mortgage Banking segment would have lost $61 million this quarter. In order to improve results, the Company plans to reduce its mortgage staff by 20%, or approximately 800 employees.

Noninterest expense increased $346 million to $1.74 billion reflecting the legal settlements and the increase in the mortgage servicing advances allowance. Adjusting for these non-core items that totaled an aggregate $419 million, expenses would have declined 5.2% to $1.32 billion reflecting lower compensation expense. Most of the decline in compensation expense was related to a reversal of previously accrued incentives following the weaker financial results in 3Q13. DBRS notes that SunTrust has closed 8% of its branches over the past year and further consolidation is likely, although at a reduced rate. Overall, the Company’s adjusted efficiency ratio was a still high 66.4% and above SunTrust’s longer-term goal of a sub-60% efficiency ratio.

Once again, early stage delinquencies, nonperforming assets (NPAs), and net charge-offs (NCOs) all improved during the quarter. Specifically, early stage delinquencies improved 6 bps to 0.65%. NPAs declined 7% to a very manageable $1.3 billion, or 1.04% of total loans plus OREO, other repossessed assets, and nonperforming LHFS, compared to 1.14% in 2Q13. DBRS notes that the bulk of NPAs are comprised of residential mortgage loans, which have benefitted from higher housing prices. Lastly, NCOs of $146 million, or 0.47% of average loans annualized, reached their lowest level since 3Q07.

Capital remained solid with the Company’s tangible common equity ratio improving three bps during the quarter to 8.54%. SunTrust noted that its Tier 1 Common ratio was approximately 9.7% on a Basel III basis. In 3Q13, SunTrust repurchased $50 million of common stock leaving an additional $100 million shares authorized to be repurchased by the end of 1Q14 pursuant with the Company’s 2013 capital plan.

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

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