DBRS: SunTrust’s 3Q14 Core Results Bolstered by Lower Expenses

Summary:
• SunTrust reported net income available to common shareholders of $563 million, or $433 million excluding a tax benefit.
• Adjusted expenses declined more than adjusted revenues, resulting in a third consecutive quarter of positive operating leverage sequentially.
• 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) 3Q14 results as solid with the Company continuing to make progress on improving its efficiency. Indeed, adjusted expenses declined 5% sequentially, while adjusted revenues declined by 3% resulting in positive operating leverage for the third consecutive quarter. SunTrust also reported solid deposit growth, improved asset quality and still sound capital. Positively, the Company noted that investment banking and lending pipelines are healthy, which should help drive future growth.

The Company reported net income available to common shareholders of $563 million, which included a $130 million tax benefit following the completion of a tax authority examination. Excluding the tax benefit and numerous one-time items from 2Q14, net income available to common shareholders would have been down modestly to $433 million, driven by a higher provision for credit losses, lower investment banking income and the forgone income from the sale of RidgeWorth in 2Q14, which more than offset lower expenses. Despite the seasonal decline in investment banking income following a strong 2Q14, DBRS notes that YTD investment banking income has increased 14%.

With the Company once again generating positive operating leverage, SunTrust’s adjusted tangible efficiency ratio declined to 61.9%, or 63.5% for the first nine months, which positions the Company very well to achieve their targeted sub-64% adjusted tangible efficiency ratio for FY14.

Average loans were stable with broad-based loan growth being masked by the sale of $2 billion of government guaranteed mortgage loans. DBRS notes that the proceeds were used to purchase high-quality liquid securities. Positively, at over 90%, SunTrust is already in compliance with the liquidity coverage ratio that goes into effect on January 1, 2016. Meanwhile, average client deposits increased 1% and the mix improved.

Asset quality metrics continue to improve with lower delinquencies and nonperforming assets. Net charge-offs did increase by $5 million, but would have declined absent an additional charge the Company took moving $53 million of nonperforming mortgage loans to held-for-sale. Lastly, capital remains sound with a tangible common equity ratio of 8.53% and an estimated Basel III Common Equity Tier 1 ratio of 9.7%.

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.