DBRS: SunTrust’s 4Q Core Results Continue to Trend Positively

Summary:
• SunTrust reported 4Q net income available to common shareholders of $378 million, or $466 million excluding a $145 million legal provision.
• Adjusting for non-core items, SunTrust reported positive operating leverage in 4Q and for the year.
• 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) 4Q14 results as evidencing further progress in improving performance, while maintaining a strong balance sheet. Specifically, SunTrust reported solid loan and deposit growth, continued improvements in asset quality, and relatively stable capital metrics. However, the revenue outlook for 2015 should remain difficult hampered by continued net interest margin pressure, the loss of commercial loan swap interest income, and further loan sales, which will likely slow the pace of efficiency improvements, despite healthy pipelines and a strengthening economy.

Excluding the 3Q14 tax benefit and 4Q14’s legal provision (related to legacy mortgage matters, to increase legal reserves and complete the resolution of a specific matter), net income available to common shareholders increased $33 million sequentially to $466 million. Total adjusted revenues were up modestly highlighted by continued strength from investment banking and improved results in mortgage-related income. Meanwhile, adjusted expenses were down modestly. For the year, adjusted revenues declined 1%, but adjusted expenses fell a more pronounced 4%. Overall, the Company’s adjusted tangible efficiency ratio was 61.4% for the quarter and 63.0% for the year, which exceeded SunTrust’s target of below 64.0%.

The Company has targeted a sub 63.0% efficiency ratio for 2015 with SunTrust facing several headwinds, including the estimated loss of approximately $184 million of swap interest income, continued loan sales, and margin pressure. SunTrust also signaled that expenses and the provision for loan losses should be relatively stable.

SunTrust once again reported solid loan and deposit growth. Specifically, average performing loans grew 2% during the quarter benefitting from broad-based commercial and industrial growth, as well as higher commercial real estate and consumer balances. Meanwhile, average client deposits increased a strong 4%. DBRS notes that SunTrust is already fully LCR compliant with a ratio above 100%.

The balance sheet continued to strengthen with continued improvements in credit quality and relatively stable capital metrics. Indeed, nonperforming loans declined 17% and net charge-offs improved to 0.28% of average loans, and remains below normalized loss rates. Management noted that their energy portfolio totaled 3.5% of the total loan portfolio and is not a concern at this time. Moreover, the vast majority of the Company’s footprint should benefit from lower energy prices. Meanwhile, capital remains sound even with balance sheet growth and share repurchases.

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.