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Why Is SunTrust (STI) Up 12.2% Since Last Earnings Report?

A month has gone by since the last earnings report for SunTrust (STI). Shares have added about 12.2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is SunTrust 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 Q4 Earnings Top as Revenues Rise, Costs Fall

SunTrust’s fourth-quarter 2018 adjusted earnings of $1.50 per share outpaced the Zacks Consensus Estimate of $1.40. However, the figure compared favorably with the prior-year quarter’s adjusted earnings of $1.09.

Results were driven by rise in net interest income and lower expenses. The balance sheet position also remained strong during the quarter with improvement in loans and deposits. However, a decline in non-interest income and higher credit costs were the undermining factors.

After certain non-recurring items, net income available to common shareholders for the quarter was $632 million or $1.40 per share, down from $710 million or $1.48 per share in the prior-year quarter.

In 2018, earnings of $5.74 per share increased 40% relative to 2017 adjusted earnings. Net income available to common shareholders (GAAP basis) was $2.67 billion, up 22% from the prior year.

Revenues Improve, Costs Decline

Total revenues for the reported quarter were $2.37 billion, up 4% year over year. Also, the figure beat the Zacks Consensus Estimate of $2.35 billion.

In 2018, total revenues of $9.21 billion grew 3%. Further, the figure surpassed the Zacks Consensus Estimate of $9.19 billion.

Net interest income increased 8% year over year to $1.55 billion. Net interest margin (FTE basis) was up 10 basis points (bps) to 3.27%.

Non-interest income was $818 million, down 2% from the prior-year quarter. The fall was mainly due to lower trading income, mortgage-production related income and other non-interest income.

Non-interest expenses decreased 3% from the year-ago quarter to $1.48 billion. The fall was primarily due to a lower marketing and customer development costs, and regulatory assessments expenses.

Credit Quality: Mixed Bag

Total non-performing assets were $589 million as of Dec 31, 2018, down 21% from the prior-year-quarter end. Non-performing loans to total loans held for investment decreased 26 bps year over year to 0.26%. Further, the rate of net charge-offs to total average loans held for investment decreased 3 bps to 0.26%.

However, provision for credit losses rose 20% from the year-ago quarter to $89 million.

Strong Balance Sheet

As of Dec 31, 2018, SunTrust had total assets of $215.5 billion while shareholders’ equity was $24.2 billion, representing 11% of total assets.

As of Dec 31, 2018, loans held for investments were $151.84 billion, up 3% from the prior-quarter end. Total consumer and commercial deposits grew 1% from the prior quarter to $161.54 billion.

SunTrust’s estimated common equity Tier 1 ratio under Basel III was 9.21% as of Dec 31, 2018.

Share Repurchase

During the reported quarter, the company bought back shares worth $750 million.

Outlook

The company expects NIM in first-quarter 2019 to remain unchanged on a sequential basis. Beyond this, NIM will depend on the rate environment, loan growth and funding cost. Notably, two fewer days in the quarter will hurt NII by roughly $20 million.

Core personnel expenses will likely increase nearly $60-$75 million in the first quarter, due to the typical seasonal increase in benefits and FICA cost.

Management expects NCO ratio to be 25-30 bps in 2019. Provisions are expected to modestly exceed NCOs given the loan growth, with quarterly variability.

In 2019, the company expects effective tax rate on a reported basis to be 19%, and between 20% and 21% on a FTE basis.

The company targets to achieve tangible efficiency ratio of 56-58% over the medium term.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, SunTrust has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, SunTrust has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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