Although it exceeded the market's second-quarter earnings estimate,
clearly had a difficult quarter, reporting weak revenue, particularly in its once well-regarded trust business, as well as higher expenses. Some analysts also claim the bank has skimped on its bad-loan reserve, a charge the nation's 10th-largest bank denies.
The Atlanta-based bank reported second-quarter operating income of $1.09 per fully diluted share, up 14% from the year-earlier period's 96 cents. The latest quarter's number exceeded the $1.07 expected by analysts surveyed by
First Call/Thomson Financial
But excluding $5 million of nonrecurring gains from securities and loan sales, SunTrust would have earned $1.07, matching the analysts' forecast. And had it boosted its bad-loan provision by enough to keep its overall loan-loss reserve, as proportion of loans, at the first-quarter level, then SunTrust would have earned less than a buck.
Just after noon, SunTrust's stock was off 1 3/8, or 2.8%, to 47 3/8, exceeding a 0.83% decline in the
KBW Banks Index
, which tracks the nation's 24 largest banks.
The bank's recurring revenue -- net interest income plus noninterest income, minus the securities gains -- fell marginally, to $1.18 billion in the second quarter from $1.19 billion in the year-ago period. Higher interest rates have rapidly pushed up the cost of the money that the bank borrows and lends on. And because there's a lag before the bank's borrowers bear those costs through higher loan rates, the profit margin on lending was squeezed to 3.55%, from 3.71% in the previous quarter. A bank spokesman said this margin began to expand again in June, providing some grounds for a recovery in third-quarter net interest income, which makes up nearly two-thirds of revenue at the bank.
Matter of Trust
Such an increase will be necessary if the bank's trust business is still in the doldrums. Revenue from this segment, the largest contributor to noninterest income, slipped slightly from year-ago levels, to $125 million. The departure of large institutional clients is mainly to blame. "The jewel of SunTrust's franchise is its trust business, and it's in disarray," remarks Charles Peabody, banks analyst at New York-based
, which hasn't done underwriting for SunTrust and rates the stock a sell.
"Our trust revenue needs a lot of attention," Philip Humann, SunTrust's chief exec, conceded on a conference call Thursday.
Noninterest expense edged up 2% to $720 million from the first-quarter level. "We will focus more on expenses, but we're trying to be intelligent about it," Humann said on the call, mentioning the possibility that the bank would shed 500 jobs this year.
Call Up the Reserves
Analysts spent most time on SunTrust's conference call probing Humann, also chairman and president of SunTrust, about the loan-loss reserve, which has become a talking point across the banking sector after bad-loan
. Since SunTrust's loan-loss provision, which is subtracted from earnings, was about the same as its loan losses in the quarter -- around $27 million -- the bank appears to have taken precautions. But the overall loan-loss reserve slipped to 1.22% of total loans, from 1.27% in the first quarter and 1.5% in the year-earlier period.
"SunTrust can't go much lower than 1.22%," says Michael Granger, banks analyst at
, which rates the bank a market perform and hasn't done recent underwriting with it. He thinks the quality of SunTrust's earnings was compromised by letting the reserve level slip as a percentage of loans.
A bank spokesman responds that the reserve is suitable for the composition and the current credit quality of SunTrust's loan book.