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SunTrust: Good Quarter, Shrinking Future Loser

NEW YORK (TheStreet) -- SunTrust (STI) was the loser among the largest U.S. financial companies on Monday, with shares declining 3% to close at $27.67.

The broad indexes recovered late in the session to show slight increases, as U.S. companies continued to report "by far the worst results in this recovery cycle," according to UBS analyst Jonathan Golub, who said that "excluding Financials, companies have surprised by 40 bps on the bottom-line," and that "top-line trends have been even more concerning. Only one-third of companies are beating revenue forecasts, with the average company missing year-over-year sales projections by 70 bps."

For banks, net interest margin guidance has been "flat to down," according to FBR analyst Paul Miller, who said on Monday that that third-quarter results showed that "earning asset growth alone appears incapable of offsetting spread compression." Miller said that the third-quarter earnings reports "have reinforced our stance that names with diverse earnings streams, particularly those with a focus on mortgage banking, will benefit in the current environment as fee income will become an increasing driver of banks' ability to grow earnings in the coming quarters given our outlook that the refinance boom could last deep into 2013."

The KBW Bank Index (I:BKX) also recovered late, ending with a slight decline to close at 50.42.

SunTrust's Lumpy Quarter


SunTrust of Atlanta reported third-quarter net income available to common shareholders of $1.1 billion, or $1.98 a share, which included several special items that the company said added $753 million, or $1.40 a share, to third-quarter earnings:
  • A pre-tax gain of $1.9 billion on the preannounced sale of the company's shares in Coca-Cola (KO).
  • A $371 million mortgage putback provision, which SunTrust said "increased the mortgage repurchase reserve to a level that is expected to cover the estimated losses on loans sold to Government Sponsored Enterprises ("GSEs") prior to 2009."
  • Additional provisions for loan loss reserves of $172 million, on "the sale of $0.5 billion of nonperforming mortgage and commercial real estate loans."
  • A $92 million decrease in net interest income, from "the movement of $1.4 billion of delinquent and current student loans and $0.5 billion of delinquent Ginnie Mae loans to loans held for sale."
  • A $96 million increase in noninterest expense from "valuation losses related to the planned sale of $0.2 billion of affordable housing investments ."

SunTrust reported that its third-quarter net interest margin narrowed by only one basis point during the third quarter, to 3.38%, and that its third-quarter net interest income totaled $1.3 billion, declining slightly from the second quarter, and rising slightly year-over-year.

The company said that its total performing loans grew 1% sequentially during the third quarter, with total commercial loans growing by 2%.

Stifel Nicolaus analyst Christopher Mutascio has a "Hold" rating on SunTrust, and said that if all the special third-quarter items were backed out, the company's core third-quarter earnings would be 58 cents a share, beating his estimate of a 53-cent profit. "On the heels of strong mortgage banking production," the analyst raised his 2013 earnings estimate by only five cents to $2.7 a share, "as the strength in mortgage is offset by lower net interest income and a higher expense level."

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