SunTrust Initiated As Neutral

We are initiating coverage on SunTrust Banks Inc. (STI: 22.37 -0.11 -0.49%) with a Neutral recommendation.

 

SunTrust’s fourth quarter operating loss of 64 cents per share was lower than the Zacks Consensus Estimate of a loss of 75 cents. Last year, the company reported a loss of $1.07 per share. Net loss was $316.4 million versus $374.9 million in the year-ago quarter.

 

The better-than-expected results were aided mainly by an improvement in revenue, which was supported by an expansion in net interest margin (NIM). However, as a result of the continuation of the market turmoil, credit quality metrics have further deteriorated.

 

SunTrust’s successful expense management has been allowing it to increase investments over the last several quarters. These investments will ultimately help fuel its future revenue-generating capacity. For example, the company has been investing in several small acquisitions that supplement its existing capabilities and expand its product offerings. Also, an accelerated realization of merger-related cost savings is expected to drive growth.

 

Additionally, SunTrust is taking steps to address the issue of deposit growth, including marketing campaigns and additional loan sales, which will help stabilize NIM. Going forward, an improved deposit mix and a low cost of funding will help improve NIM to a great extent.

 

However, despite operating in attractive demographic markets, top-line growth remained somewhat lackluster at SunTrust during the last several quarters. We do not expect any significant improvement with respect to revenue trends in the near term as the global economy will take some time to rebound to its historical highs.

 

We are also concerned about SunTrust’s exposure to Alt-A mortgage and construction loans, which have been facing headwinds. Besides, higher mortgage rates and slow home sales will restrict the growth in mortgage income.