DBRS: SunTrust Banks, Inc.’s Improved Performance Reflects Broad-based Loan and Revenue Growth

Summary:

• Core adjusted revenues grew 3.5% sequentially, while average loans increased by 2.3%.
• Core earnings improved 15% to $413 million sequentially.
• DBRS rates SunTrust Banks, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) considers SunTrust Banks, Inc.’s (SunTrust or the Company) 4Q13 results to be solid supported by improving performance fundamentals including loan, deposit, and revenue growth. While core 4Q13 expenses increased by 4% primarily reflecting higher employee compensation and benefits, DBRS notes that core expenses were down 9% on a YoY basis, as the Company successfully executes on improving its efficiency. Overall, SunTrust reported net income available to common shareholders of $413 million.

The Company’s diverse revenue stream benefited from average loan growth (loan pipelines remain healthy), a one bp improvement in the net interest margin, and stronger mortgage servicing and trading income. While down modestly sequentially, investment banking had another strong quarter resulting in a record year. Lastly, DBRS notes that residential mortgage originations declined by 51%, but mortgage production income was considerably higher sequentially following 3Q13’s large provision to settle certain legacy mortgage repurchase matters.

Despite the revenue improvements, higher expenses resulted in a modest increase in SunTrust’s efficiency ratio to 66.8%. For the year, this metric was 65.8%, or slightly above the Company’s 65% target. For 2014, SunTrust has now targeted an efficiency ratio of below 64%, as the Company continues to execute on its strategic goals.

Asset quality improvements were broad-based reducing the Company’s risk profile. Indeed, nonperforming loans, nonperforming assets, and net charge-offs are all at their lowest levels in over six years bolstered by the stronger housing market. At $2 billion, or 1.60% of total loans, the allowance for loan losses remains adequate.

While loan growth and capital returned to shareholders modestly pressured most capital metrics, capital remains sound including an estimated Basel III Tier 1 common equity ratio of 9.6%. SunTrust completed its $200 million stock repurchase plan during the quarter.

DBRS rates SunTrust Banks, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]