DBRS: SunTrust Delivers Solid 3Q Results; Lower Expenses

Summary:
• SunTrust reported 3Q net income available to common shareholders of $519 million, up from $467 million in 2Q.
• Earnings were boosted by some one-time items including discrete tax benefits and recoveries related to the resolution of previous mortgage matters. Without these items, net income was flat quarter-on-quarter (QoQ).
• 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) 3Q15 results as solid reflecting positive operating leverage, still improving asset quality, and continued low cost, core deposit growth. Average loan balances were flat QoQ with growth in mortgage and consumer direct loans offset by paydowns in commercial and the full quarter impact of the 2Q15 indirect auto securitization. Investment banking results, which were very strong in the previous quarter, declined this quarter, driving a drop in non-interest income.

Partially offsetting the decline in non-interest income, net interest income increased sequentially, despite the flat balance sheet, on a higher quarterly day count as well as an increased net interest margin. Specifically, lower MBS premium amortization, a decline in wholesale funding and higher loan-swap income all helped drive an eight basis point expansion of the net interest margin to 2.94%. Management indicated that they expect SunTrust to maintain a relatively stable margin in 4Q, then experience modest margin pressure in 2016 until interest rates rise.

Expenses were down in the quarter on lower personnel costs, as well as mortgage-related recoveries. Given the lower expenses, the adjusted tangible efficiency ratio improved to 61% and the Company remains on track to achieve their full-year target of a sub-63% ratio.

Asset quality is strong and still improving. Indeed, nonperforming loans and net charge-offs both declined sequentially resulting in a continued modest provision for credit losses. The Company expects provisioning levels to increase modestly in 4Q15 and more closely match net charge-offs in 2016, as current net charge-off levels are likely unsustainable.

Capital metrics remain sound with an estimated fully phased-in Basel III Common Equity Tier 1 ratio of 9.88%. Meanwhile, the Company noted that its Liquidity Coverage Ratio was above 90%, which exceeds the January 1, 2016 requirement.

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.