SunTrust Profit Slides, Misses Consensus

SunTrust Banks(STI Quote) on Tuesday reported a 45% drop in profit last quarter as it coped with higher credit costs and mark-to-market losses due to the downturn in the housing market.

The regional bank reported first-quarter earnings of $283.6 million, or 81 cents per share. That's down from $513.9 million, or $1.44 per share, a year earlier. Results were also far below average analyst expectations of $1.02 per share, according to Thomson Financial.

SunTrust shares tumbled 15 cents to $52.15 in recent trading.

The Atlanta-based bank boosted its provision for loan losses to $560 million and posted higher charge-offs from residential mortgages, home-equity loans and residential construction investments. It recognized $163.7 million in mark-to-market losses as it lowered the value of such assets.

Net interest income fell 1.7% from the year-ago period to $1.17 billion. Net interest margins declined from the fourth quarter due to lower interest rates. However, noninterest income surged more than 20% to $1.06 billion due to special gains.

SunTrust posted an $86.3 million gain from selling shares related to Visa's(V Quote) initial public offering. Many in the industry -- from M&T Bank(MTB Quote) and Fifth Third(FITB Quote) to bigger players like Bank of America(BAC Quote) -- also made healthy gains from the IPO. SunTrust posted an additional $89.4 million gain from selling Lighthouse Investment Partners and a $37 million gain from selling and leasing back property.

During a conference call, executives indicated that SunTrust's troubles are coming particularly from riskier investments in Alt-A mortgages, which require less documentation than standard loans and whose borrowers' credit levels often fall somewhere between prime and subprime. SunTrust loans brokered through third parties, its investments in Florida's tanking housing market and its auto loans are also performing especially poorly.

Though SunTrust is working to shed its riskier assets, the market for such investments has largely dried up. The company holds $1.6 billion worth of packaged securities that are backed by loans, a portion of which carry a high risk of delinquency or default. The value of those assets has dropped nearly 54% since the end of last year.

"We obviously are not too pleased with our credit performance and the impact on first-quarter performance," CEO James Wells said during the call. While he noted that the outlook for home values and consumer credit is far from certain, "there appears to be more downside risk to this view than there is upside possibility."

Chief Risk Officer Tom Freeman said he expects accelerated charge-offs and nonperforming asset levels for at least the next few quarters. The company still has $384 million worth of nonperforming loans that it has not yet written off, which could lead to $70 million worth of losses at present values, he said. However, he called the situation "manageable," noting that problem areas represent 13% of the company's book of assets.

SunTrust is also working to cut expenses while building its commercial-loan business and driving retail banking growth. The company spent an additional $10 million on marketing and customer development last quarter compared with the year-ago period as it tried to attract new business.

SunTrust is not alone, with most banks that have reported earnings so far indicating struggles with devalued homes and a tight credit market. Some, like Wachovia(WB Quote), Washington Mutual(WM Quote) and National City(NCC Quote), have issued new stock to shore up capital levels after massive housing-related losses. SunTrust, however, expects to boost Tier 1 capital by $1 billion from its planned sale of Coca-Cola(KO Quote) stock in the second quarter.

SunTrust's Tier 1 capital level -- a ratio of capital to total assets -- fell to 7.25% last quarter from 7.6% a year ago. That metric measures whether a bank has adequate capital and the federal government requires a level of at least 3%. The bank is maintaining a target level of 7.5%.

Morgan Keegan analyst Robert Patten said in a note that "credit deteriorated as expected but overall the quarter was not as bad as some expected."