Why Is SunTrust (STI) Up 10.7% Since the Last Earnings Report?
A month has gone by since the last earnings report for SunTrust Banks, Inc. STI. Shares have added about 10.7% in that time frame , outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
SunTrust Beats Q4 Earnings; Provisions & Costs Rise
Improvement in revenues drove SunTrust’s fourth-quarter 2016 earnings of $0.90 per share, which outpaced the Zacks Consensus Estimate of $0.88. However, the figure was down 1% year over year.
Results reflected an improvement in net interest income and a rise in non-interest income. Further, growth in loans and deposits acted as a tailwind. However, a jump in provision for credit losses and an increase in operating expenses were the downsides.
Net income available to common shareholders was $448 million, down 4% year over year.
For 2016, earnings of $3.60 per share beat the Zacks Consensus Estimate of $3.56. Also, it was up 1% year over year. Net income available to common shareholders was $1.81 billion, down 3% from 2015.
Revenues Improve, Costs Up
Total revenue (fully tax equivalent basis) for the quarter grew 7% from the prior-year quarter to $2.19 billion. Further, the reported figure was above the Zacks Consensus Estimate of $2.17 billion.
For 2016, revenues (on FTE basis) increased 7% year over year to $8.74 billion. Also, this was above the Zacks Consensus Estimate of $8.64 billion.
Net interest income (FTE basis) jumped 7% year over year to $1.38 billion. The rise was attributable to growth in average earning assets and higher net interest margin (NIM). NIM was up 2 basis points (bps) year over year to 3.00%, reflecting higher earning asset yields, partially offset by higher funding costs.
Non-interest income was $815 million, up 7% from the prior-year quarter. The rise was largely driven by higher capital markets and mortgage production-related income, partially offset by lower mortgage servicing and wealth management-related income.
Non-interest expenses were up 8% from the year-ago quarter to $1.40 billion. The increase was mainly due to increases across most expense categories, other than outside processing and software expenses.
Deteriorating Credit Quality
Total non-performing assets were $919 million as of Dec 31, 2016, up 25% from prior-year quarter. The increase was mainly due to rise in energy-related loans and home equity products. Non-performing loans increased 10 bps year over year to 0.59% of total loans held for investment.
Also, provision for credit losses surged 98% from the year-ago quarter to $101 million, owing to higher net charge-offs. Further, rate of net charge-offs increased 14 bps year over year to 0.38% of total average loans held for investment.
Strong Balance Sheet
As of Dec 31, 2016, SunTrust had total assets of $204.9 billion, while shareholders’ equity summed $23.6 billion, representing 12% of total assets.
As of Dec 31, 2016, loans were up 1% on a sequential basis to $143.3 billion. Total consumer and commercial deposits grew 1% sequentially to $158.9 billion.
SunTrust’s estimated common equity Tier 1 ratio under Basel III (on a fully phased-in basis) was 9.63% as of Dec 31, 2016.
Share Repurchase
During the quarter, SunTrust bought back shares worth $240 million.
Outlook
Management expects NIM to increase 5–6 bps in first-quarter 2017. Beyond that, NIM will be dependent on the interest rate environment.
Assuming relatively stable rates in the first quarter, SunTrust anticipates mortgage servicing income to be above $50 million. Further, the company expects wealth management related revenues in 2017 to build from 2016 level on the assumption of reasonably stable market conditions.
On the cost front, personnel expenses will increase $75–$100 million in first-quarter 2017, given the seasonal increase in 401K and FICA expenses. Moreover, management targets to achieve an efficiency ratio in the range of 61–62% in 2017.
Further, management is undertaking initiatives to lower its branch network. The company expects to reduce branch network nearly 7% by Jun 30, 2017.
Management expects NCO ratio to remain within a range of 30–40 bps in 2017 as lower energy charge-offs will likely be offset by normalization in other asset classes. Also, allowance for loan losses ratio will remain stable, which will result in provisions to match NCOs, with quarterly variability.