DBRS: SunTrust’s Core 2Q14 Results Improve; Broad-based Loan Growth

Summary:
• Solid adjusted revenue growth and continued expense discipline result in positive operating leverage.
• Broad-based loan growth across industries, lines of business, and geographies.
• 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) 2Q14 results as solid reflecting positive operating leverage, broad-based loan growth, strong investment banking results, deposit growth and continued expense discipline. Moreover, the Company was able to resolve certain legacy mortgage matters.

The Company reported net income available to common shareholders of $387 million, but the quarter included various one-time items. These items included a settlement agreement related to the Company’s administration of the federal Home Affordable Modification Program, the sale of an asset management subsidiary, and a litigation accrual reversal related to other legacy mortgage matters. Excluding these items, SunTrust would have reported net income available to common shareholders of $436 million, up almost 20% from a year ago.

Adjusted core revenues increased 4% sequentially primarily reflecting broad-based fee revenue growth, especially in investment banking. Moreover, net interest income grew modestly despite continued net interest margin pressure, driven by solid loan growth. The Company expects its FY14 margin to decline, albeit at a slower rate than the 16 basis points of compression seen in FY13. Meanwhile, adjusted expenses increased 1% sequentially. As a result of positive operating leverage, SunTrust’s adjusted efficiency ratio improved to 63.6% from 64.9%, as the Company continues to make progress towards achieving its goal of having a 2014 adjusted efficiency ratio below 64%.

Positively, SunTrust delivered broad-based loan growth across industries, lines of business and geographies, with average loans growing approximately 2% sequentially. Moreover, loan pipelines strengthened, which portends well for continued commercial loan growth.

During the quarter, the Company sold $325 million of government guaranteed residential mortgages (generated a $19 million gain) and $149 million of accruing restructured residential mortgage loans. In addition, SunTrust transferred another $2.1 billion of government guaranteed residential mortgage loans to held-for-sale with the expectation of selling them during 3Q14. Management noted that the proceeds would likely be invested into high-quality liquid securities to help meet upcoming LCR requirements.

SunTrust’s balance sheet continues to strengthen with lower levels of nonperforming loans, stable net charge-offs, higher deposit balances, and stable capital metrics even with balance sheet growth. The Company noted that it now expects to repurchase between $300 million and $350 million over the next three quarters, or approximately $50 million lower than its previously stated guidance, reflecting a reduction in share based issuances from its original forecast.

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

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