We are maintaining our Neutral recommendation on
SunTrust Banks, Inc.
(
STI
) based on its successful expense reduction strategy and recently
launched restructuring initiatives. However, elevated mortgage
repurchase demand and deposit pricing pressure along with
stringent regulatory landscape remain the causes of concern.
Back in 2011, SunTrust launched an expense reduction strategy -
PPG Expense Initiative. This strategy turned out to be
highly successful as it achieved its targeted cost savings of
$300 million in the third quarter of 2012, almost a year ahead of
the scheduled date. Further, with this program, management
reiterated its aim to reduce the efficiency ratio below 60% over
the long term.
Moreover, in September 2012, SunTrust had announced a set of
restructuring initiatives in order to fortify its balance sheet,
improvise the risk profile and meet the regulatory capital ratio
requirements. Going forward, these are expected to be marginally
accretive to the company's Tier 1 common equity ratio. Moreover,
such initiatives will enable SunTrust to limit the margin
pressure and witness a better top-line growth.
Further, SunTrust continues to expect increased loan demand from
creditworthy commercial borrowers; however, the timing of such a
pickup in demand is uncertain. For the nine months ended
September 30, 2012, the company extended approximately $66
billion in new loan originations, commitments, and renewals of
commercial, residential and consumer loans to its clients. With
the gradual revival of the economy, we expect loan demand to
improve in the medium term, providing SunTrust the buoyancy to
maintain its profitability.
On the flip side, the company anticipates mortgage repurchase
demand to remain elevated and volatile from quarter to quarter.
If the repurchase requests continue to escalate, SunTrust would
need to increase its repurchase reserve further, which will
adversely hit its profitability.
SunTrust continues to face competition for deposits in the recent
quarters. Consequently, there remains deposit pricing pressure,
which will make the company lose its market share for deposits to
some extent.
Moreover, rising consolidation activities, driven by
increasing bank failures, as well as advantages of limited
regulatory restriction to non-banking financial institutions have
significantly elevated the competitive environment for the
company, which could result in an unfavorable blow to its
profitability in the long run.
Also, like many other peers -
PNC Financial Services Group Inc.
(
PNC
) and
BB&T Corporation
(
BBT
) - SunTrust's profitability will be affected by the financial
reform law due to the rising costs and fee restrictions. Further,
the new capital proposals unveiled by the Federal Reserve suggest
that banks would be required to maintain a total tier 1 ratio of
7% to risk-weighted assets. In the mid term, stricter capital
requirement is expected to reduce the company's flexibility with
respect to its business investments and lending volume to some
extent.
Currently, SunTrust retains a Zacks #3 Rank, which translates
into a short-term Hold rating.
BB&T CORP (BBT): Free Stock Analysis
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PNC FINL SVC CP (PNC): Free Stock Analysis
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SUNTRUST BKS (STI): Free Stock Analysis
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