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SunTrust Banks Inc.’s (STI) fourth-quarter 2012 earnings came in at 65 cents per share, marginally beating the Zacks Consensus Estimate of 61 cents. This is significantly ahead of the prior-year quarter earnings of 13 cents.

For the full year 2012, SunTrust recorded earnings of $3.59 per share. This is slightly ahead of the Zacks Consensus Estimate of $3.56 and significantly above the last year’s earnings of 94 cents.

Better-than-expected quarterly results benefited from augmented revenue and lower operating expenses. Further, stable asset quality, capital ratios as well as improvement in loan and deposit balances were the tailwinds.

Net income available to common shareholders in the fourth quarter was $350 million, substantially ahead of $71 million in the prior-year quarter. In 2012, it stood at $1.93 billion versus $495 million in 2011.

Performance in Detail

In the fourth quarter, total revenue jumped 12% year over year to $2.30 billion. The increase was primarily driven by higher mortgage-related revenue and investment banking income. Total revenue was almost in line with the Zacks Consensus Estimate.

In 2012, total revenue surged 23% year over year to $10.60 billion. The rise was largely due to increases in net interest income, mortgage-related revenue and investment banking income. These positives were partially offset by a decline in card fees. Moreover, total revenue significantly surpassed the Zacks Consensus Estimate of $8.61 billion.

Net interest income declined 3.6% from the prior-year quarter to $1.28 billion. The fall was due to lower yields on earning assets, a dip in commercial loan-related swap income and the foregone dividend income as a result of the accelerated termination of the agreements related to The Coca-Cola Company’s (KO) shares. These were partly offset by lower rates paid on deposits and a reduction in wholesale funding.

Likewise, net interest margin came down 10 basis points (bps) from the year-ago quarter to 3.36%. The decrease was attributable to reduced loan yields, which were partially offset by a decline in rates paid on interest-bearing liabilities.

Non-interest income was $1.02 billion, surging 40.4% from $723 million in the prior-year quarter. The drastic improvement was mainly driven by higher mortgage-related and investment banking.

Non-interest expense plunged 9.4% to $1.51 billion on a year-over-year basis. The fall was attributable to lower operating losses and dip in credit-related expenses. These were partially offset by higher personnel expenses.

SunTrust’s efficiency ratio improved to 65.93% from 81.45% in the prior-year quarter. The decline in efficiency ratio indicates an increase in profitability

Balance Sheet

As of Dec 31, 2012, SunTrust had total assets of $173.4 billion, while shareholders’ equity stood at $21.0 billion, representing 12% of total assets.

Average loans in the fourth quarter totaled $121.6 billion, up 2% year over year. Growth was primarily driven by commercial and industrial loans as well as high credit-quality non-guaranteed residential loans and indirect loans. These were partly mitigated by decreases in commercial real estate, home equity loans, government-guaranteed residential and student loans as well as non-accrual loans.

Average consumer and commercial deposits inched up 2% from the year-ago quarter to $127.9 billion. Increases in average demand deposits, interest bearing transaction accounts and savings accounts were partially offset by a decline in time deposits and money market accounts.

Credit Quality

Overall credit quality showed improvement during the quarter. Nonperforming loans dropped 110 bps year over year to 1.27% of total loans. Similarly, net charge-offs fell 27 bps from the year-ago quarter to 1.30% of annualized average loans.

Yet, provision for credit losses increased marginally from $327 million in the year-ago quarter to $328 million. The rise was largely driven by incremental charge-offs related to the sales of nonperforming loans and the junior lien credit policy change.

Capital Ratios

As of Dec 31, 2012, SunTrust’s capital ratios remained strong. Tangible equity to tangible asset ratio improved 72 bps year over year to 8.82%, tier 1 common ratio increased 78 bps to 10.00% and Tier 1 capital ratio was up 20 bps to 11.10%.

Moreover, as of Dec 31, 2012, book value per share and tangible book value per share improved compared with the prior-year quarter and were $37.59 and $25.98, respectively.

Peer Performance

BB&T Corp.’s (BBT) fourth-quarter 2012 earnings were a penny ahead of the Zacks Consensus Estimate and outpaced the prior-year quarter’s earnings by 29%. Growth in revenue and a fall in operating expenses, partially offset by slightly higher provision for credit losses, were mainly responsible for the improvement in the quarterly results. Further, overall credit quality showed improvement, while capital as well as profitability ratios were stable. Moreover, accelerating growth in loans and low-cost deposits were impressive.

Our Viewpoint

Better average client deposits, robust credit quality and favorable deposit mix are amongst SunTrust’s key strengths. Moreover, its recent acquisitions, restructuring initiatives and cost-cutting programs are quite encouraging despite the persistent low interest rate environment and industry challenges. However, we remain concerned about the company’s exposure to risky assets, limited margin improvement and continued regulatory pressures.

SunTrust currently retains a Zacks Rank #3 (Hold). Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.