Shares of SunTrust rose more than 2% early Tuesday before erasing some of those gains by late morning. Still, shares were outperforming those of both Regions Financial (RF) and Fifth Third Bancorp (FITB), Goldman's other two top picks for the second quarter earnings season, both of which are buy-rated. The bank earnings season kicks off Friday, when JPMorgan Chase (JPM)and Wells Fargo (WFC) report.
SunTrust shares still offer upside for investors looking to capitalize on what are widely expected to be strong second quarter mortgage banking results, according to a report on mortgage banking published Tuesday by Goldman's analysts.
While Goldman's analysts acknowledge that "mortgage banking is a well known source of strength for banks in the low-rate environment," they argue "the tailwind could be even better and longer than expected." That's because some $5 trillion worth of mortgages, or 60% of the total outstanding, remain eligible for refinancing, according to Goldman. Industry analysts estimate only 20% of that total will actually refinance, leaving lots of room for a positive surprise, the report contends.Such a surprise would benefit Wells, Fifth Third and SunTrust above all, due to "market share, footprint and revenue contribution," according to the report. SunTrust shares also look attractive from a valuation standpoint, according to a separate Goldman report published Tuesday that focused broadly on second quarter earnings. The report states that SunTrust trades at 95% of tangible book value and 9.2 times 2013E earnings estimates, equating to 26% and 7% discounts to its regional peers. -- Written by Dan Freed in New York. Follow this writer on Twitter.
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