The overwhelming factor in the earnings improvement was a continued decline in the amount the bank set aside each quarter to cover expected loan losses. The second-quarter provision for credit losses was $146 million, down from $212 million in the first quarter, and $300 million during the second quarter of 2012.
Net interest income declined to $1.242 billion in the second quarter, from $1.251 billion the previous quarter, and $1.306 billion a year earlier. The net interest margin narrowed to 3.25% in the second quarter, from 3.33% the previous quarter and 3.39% a year earlier.
Second-quarter noninterest income was $858 million, declining only slightly from $863 million in the first quarter, but down sharply from $940 million during the second quarter of 2012. The year-over-year decline "was primarily driven by declines in mortgage-related income, trading income, and securities gains, which were partially offset by a reduction in the mortgage repurchase provision," according to the company.
Large banks are seeing a considerable decline in mortgage application volume, as the major wave of home refinancing supported by the Home Affordable Refinance Program, or HARP, is coming to an end. Rising long-term interest rates have also lowered banks' gain-on-sale margins for newly originated mortgage loans. SunTrust CEO Bill Rogers said during the company's earnings conference call that "near-term mortgage revenue is likely to slow."
KBW analyst Christopher Mutascio rates SunTrust "market perform," with a $35 price target, and estimates the company will earn $2.72 a share this year, with EPS increasing to $2.72 in 2014. "The vast majority of the company's estimated pre-tax income growth of 30% in 2013 and 5% in 2014 is driven by lower loan loss provision levels," the analyst wrote in a note on July 23. "This is not sustainable, in our view, and the sequential-quarter decrease in loan loss provisioning is likely to materially slow in the coming quarters."
"The potential for stabilizing loan loss provisioning, coupled with some further modest [net interest margin] compression and weaker mortgage banking income, could result in the flattening out of quarterly EPS growth," Mutascio added.
SunTrust's shares have returned 24% this year, following a return of 61.5% during 2012. The shares trade for 1.3 times their reported June 30 tangible book value of $26.08, and for 11.8 times the consensus 2014 EPS estimate of $2.96, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $3.29.
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-- Written by Philip van Doorn in Jupiter, Fla.