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Why Is SunTrust Banks (STI) Up 4.7% Since Its Last Earnings Report?

A month has gone by since the last earnings report for SunTrust Banks, Inc. STI. Shares have added about 4.7% in the past month, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is STI 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 catalysts.

SunTrust Beats on Q4 Earnings as Revenues Improve

SunTrust’s fourth-quarter 2017 adjusted earnings of $1.09 per share outpaced the Zacks Consensus Estimate of $1.05. Also, the figure was up 21% year over year.

Results were primarily driven by an increase in revenues (supported by higher interest rates), stable adjusted expenses and lower provision for credit losses. Also, improving asset quality was a tailwind. However, a decline in loan and deposit balances was the undermining factor.

After considering one-time discrete gains including tax reform related benefit, net income available to common shareholders was $710 million, up 58% from the prior-year quarter.

For 2017, adjusted earnings of $4.09 per share beat the Zacks Consensus Estimate of $4.06. Also, the figure was up 14% year over year. After considering non-recurring items, net income available to common shareholders was $2.2 billion, up 20% from the prior year.

Rise in Revenues Supports Results

Total revenues for the quarter grew 5% from the prior-year period to $2.27 billion. However, the figure lagged the Zacks Consensus Estimate of $2.31 billion.

For 2017, total revenues were up 4% from the prior year to $8.99 billion. The figure lagged the Zacks Consensus Estimate of $9.40 billion.

Net interest income (FTE basis) increased 7% year over year to $1.47 billion. The rise was attributable to higher earning asset yields.

On a year-over-year basis, net interest margin was up 17 basis points (bps) to 3.17%, mainly reflecting higher earning asset yields and lower premium amortization in the securities portfolio. This was partly offset by higher rates paid on interest-bearing liabilities.

Non-interest income was $833 million, up 2% from the prior-year quarter. The modest rise was largely driven by an increase in commercial real estate related income and wealth management-related income.

Non-interest expenses rose 9% from the year-ago quarter to $1.52 billion. The increase was mainly due to several non-recurring items. After excluding those, operating expenses were relatively stable.

Credit Quality Improved

Total non-performing assets were $741 million as of Dec 31, 2017, down 19% from prior-year quarter. Non-performing loans fell 12 bps year over year to 0.47% of total loans held for investment.

Further, the rate of net charge-offs decreased 9 bps year over year to 0.29% of total average loans held for investment. Also, provision for credit losses decreased 22% from the year-ago quarter to $79 million.

Strong Balance Sheet

As of Dec 31, 2017, SunTrust had total assets of $206 billion while shareholders’ equity was $25.2 billion, representing nearly 12% of total assets.

As of Dec 31, 2017, loans held for investments declined 1% on a sequential basis to $143.2 billion. Total consumer and commercial deposits fell 1% from the prior quarter to $159.8 billion.

SunTrust’s estimated common equity Tier 1 ratio under Basel III (on a fully phased-in basis) was 9.75% as of Dec 31, 2017.

Share Repurchase

During the reported quarter, the company bought back shares worth $330 million.

Outlook

Given that the company sold $3 billion of securities in the fourth quarter of 2017 and reinvested in a portfolio with a similar mix and higher yields, interest income is expected to increase approximately $20 million per year, all else equal.

The company expects NIM in first-quarter 2018 to increase in the range of 0-2 bps. Beyond that, NIM trends will depend on the rate environment and management expects a slight NIM expansion in 2018 as the short end of the curve continues to rise.

On the cost front, management expects core personnel expenses to increase approximately $75 million in the first quarter of 2018 due to the seasonal increase in 401(k) and FICA expenses. Moreover, despite the fact that the tax reform might create some headwinds to efficiency, management remains on track to improve efficiency ratio in 2018.

Management expects NCO ratio to be in the range of 25-35 bps in 2018. Also, provisions are expected to match NCOs, with quarterly variability.

In 2018, the company expects effective tax rate on a reported basis to be 20%, and between 21% and 22% on a FTE basis.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter compared to one lower. While looking back an additional 30 days, we can see even more upward momentum.

SunTrust Banks, Inc. Price and Consensus

 

SunTrust Banks, Inc. Price and Consensus | SunTrust Banks, Inc. Quote

 

VGM Scores

At this time, STI has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was also allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise STI has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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