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SunTrust Leads Bank Stocks Lower

NEW YORK (TheStreet) -- SunTrust (STI - Get Report) was the loser among large-cap U.S. bank stocks on Wednesday, with shares sliding more than 3% to $37.13.

The broad indices ended mixed, after China's government said the country's exports grew by 10.6% and its grew by 10% year-over-year during January. Those are very impressive figures, considering that other recent reports had indicated slowing manufacturing growth in China, as well as in the United States.

The KBW Bank Index (I:BKX) was down 0.2% to 68.37, with the 24 index components evenly split between winners and losers. The index has pulled back 1% this year, following a gain of 35% during 2013.

The Bank of England on Wednesday said it had increased its forecast of the GDP growth in the United Kingdom for 2014 to 3.4% from the previous estimate of 2.8%. It also said inflation in the UK had returned to the bank's target of an annual rate of 2%, and that the nation's unemployment rate was expected to improve to 7.0% "by the spring." That level of unemployment was the threshold the Bank of England's policy committee had previously set before considering raising its Bank Rate from the current interest rate of 0.5%.

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BOE governor Mark Carney said in prepared remarks that despite "exceptionally strong jobs growth," productivity growth was "disappointing," and that "there is greater slack in the labor market than we would have expected."

Carney went on to say that "as yet the recovery is neither balanced nor sustainable. A few quarters of above trend growth driven by household spending are a good start but they aren't sufficient for sustained moment." Therefore, the BOE is unlikely to raise the Bank Rate near term, as the BOE's policy committee is "seeking to absorb all the spare capacity in the economy over the next two to three years."

Also on Wednesday, Federal Reserve Bank of St. Louis president James Bullard when speaking to reporters at the New York Stock Exchange warned of a risk of asset-price bubbles, since U.S. economic growth has accelerated. "As the economy improves... and we continue to have low rates, that's a fertile environment for creation of asset bubbles in the future." Bullard said.

U.S. short-term interest rates are indeed very low, with the Federal Open Market Committee keeping the federal funds rate in a range of zero to 0.25% since late 2008. The FOMC has previously said this "highly accommodative" policy would likely be appropriate at least until the U.S. unemployment fell below 6.5%. The January unemployment rate was just above that threshold, at 6.6%.

But Federal Reserve chair Janet Yellen during testimony Tuesday before the House Financial Services Committee emphasized made clear that the federal funds rate isn't likely to be raised for quite some time:

"In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal."


Shares of SunTrust are have returned 1% this year, following a return of 31% during 2013. The shares trade for 1.4 times tangible book value, according to Thomson Reuters Bank Insight, and for 11.2 times the consensus 2015 earnings estimate of $3.32 a share. 

SunTrust made a presentation Wednesday afternoon at the Credit Suisse Financial Services Forum in Boca Raton, Fla. While a transcript of that presentation wasn't yet available, the company' slide presentation indicated it was seeking a "more balanced approach" to improving its efficiency during 2014, since the bank's recent progress was "driven entirely by expense reductions."

SunTrust's efficiency ratio for 2013 was 65.8%, improving from 69.3% during 2012. The efficiency ratio is a bank's percentage of overhead expense to revenue. SunTrust's goal for 2014 is to improve the efficiency ratio to 64%.

The bank is also looking to make some changes to its loan mix, bringing commercial and industrial loans closer to 50% from their current 45%, while growing consumer loans and shrinking residential mortgage loans held in portfolio.

Please see TheStreet's earnings coverage for a detailed discussion of SunTrust's fourth-quarter results.

This chart shows the performance of SunTrust's stock against the KBW Bank Index and the S&P 500 (^GSPC) since the end of 2011:

STI Chart data by YCharts

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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