DBRS: SunTrust Reports Positive Operating Leverage in 1Q14 on Lower Expenses

Summary:
• Adjusted core noninterest expenses declined 4% quarter-over-quarter even with seasonally higher employee compensation and benefits expense.
• Balance sheet fundamentals continue to improve with average loan and deposit growth, stronger asset quality, and stable capital metrics.
• DBRS rates SunTrust Banks, Inc. Issuer & Senior Debt at A (low) with a Stable trend.

DBRS, Inc. (DBRS) views SunTrust Banks, Inc.’s (SunTrust or the Company) 1Q14 results as demonstrating that the Company is successfully executing on its strategic initiatives. Indeed, noninterest expenses were lower than anticipated, including SunTrust achieving its $50 million reduction in Mortgage Banking expenses one quarter early and lower cyclical credit costs. As a result, expense declines easily outpaced modest revenue contraction resulting in positive adjusted operating leverage. Overall, SunTrust reported net income available to common shareholders of $393 million, which included a non-core $36 million impairment of legacy affordable housing assets.

Balance sheet fundamentals continue to improve with average loan and deposit growth, stronger asset quality, and stable capital metrics. Excluding residential mortgage-related products, loan growth was broad-based with particular strength in commercial real estate lending. Moreover, management indicated that loan pipelines are healthy and were 10% higher when compared to 1Q13 levels. The expected loan growth should offset continued modest net interest margin pressure resulting in higher net interest income.

DBRS notes that Mortgage Banking finally returned to profitability benefiting from achieving cost savings one quarter earlier than expected, as well as higher servicing income.

Given lower expenses, the Company’s adjusted efficiency ratio improved sequentially to 65.1% for 1Q14, which positions SunTrust well to achieve an efficiency ratio of below 64% in 2014.

The Company’s 2014 Capital Plan was not objected to by the Federal Reserve, which included a proposed increase in the dividend to $0.20 cents per share from $0.10 cents per share and the repurchase of up to $450 million of common shares, both subject to Board approval.

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.]