A Downgrade for SunTrust
Usdin on Friday downgraded SunTrust (STI - Get Report) of Atlanta to "hold" from "buy," while lowering his price target for the shares to $30 from $32. "We are more concerned about the revenue transition gap that could emerge with the likely refi slowdown and gain-on-sale margin normalization." Jefferies estimates that SunTrust's mortgage gain-on-sale margin will decline to 2.86% in 2013 from 3.29% in 2012, with the margin declining further to 2.61% in 2014. The firm also estimates that the bank's mortgage production revenue will decline to $828 million this year from $1.056 billion in 2012, declining further to $679 million in 2014. Usdin estimates the company will earn $2.70 a share this year, with 2014 EPS of $2.85.
Taking It a Step Further
Jefferies conducted a "static test," which Usdin described as a "'what if?' scenario in which gain-on-sale margins reverted to 2011 levels overnight." The analyst said "banks in our stress test could see 5% negative EPS revisions for 2013 and 3% revisions in 2014 vs. our published EPS estimates." SunTrust, along with BB&T (BBT - Get Report) of Winston-Salem, N.C., and Fifth Third Bancorp (FITB - Get Report) of Cincinnati "screen the worst in our simple exercise, relatively speaking, given the size of their underlying mortgage businesses and above-average gain-on-sale margin expansion seen over the last year, Usdin said. Under the "2011" scenario, SunTrust's 2013 EPS estimate would decline by $0.27 and his 2014 estimate would decline by $0.16.