SunTrust Earnings Slip, but Better Times Are Coming - TheStreet

SunTrust Earnings Slip, but Better Times Are Coming

Profit is down 3% from last year but matches analysts' estimate.
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Updated from 10:50 a.m. EDT

SunTrust

(STI) - Get Report

kicked off the third-quarter bank earnings season Thursday by reporting that its profit fell 3% from a year ago, but said it sees sunnier days ahead.

The Southeast regional lender's earnings of $331.6 million, or $1.18 a share, were in line with Wall Street's expectations, as measured by Thomson First Call. A year ago, the Atlanta-based bank posted net income of $343 million, or $1.20 a share.

Bank analysts pay a lot of attention to SunTrust's earnings and morning conference call to gauge how other banks will perform in the quarter. On the surface, analysts probably liked what they heard, even though SunTrust executives declined to offer any specific earnings guidance and some banking operations continue to show weakness.

"We are feeling a good bit better,'' said SunTrust Chief Executive L. Phillip Humann on a conference with analysts. He said the bank is seeing signs of a return "to above-average (earnings per share) growth," and "more things are moving in the right direction than the wrong direction."

Investors are looking toward next week, when the bank earnings season really gets going, to see if that optimism is shared by executives at

FleetBoston

(FBF)

,

Wachovia

(WB) - Get Report

,

Wells Fargo

(WFC) - Get Report

and

Bank of America

(BAC) - Get Report

.

In early morning trading shares of SunTrust rose 32 cents, or a half-percent, to $64.05. Like many bank stocks, SunTrust is trading near its 52-week, a fact that could make it difficult for investors to plow more money into bank stocks without more concrete signs of blockbuster earnings next year.

As for SunTrust, much of its slump in net income was the result of an 11% rise in noninterest expenses to $860 million. Some of the increase was due to a rise in marketing costs, which could be another indication of the bank's bullishness about the economy. But some analysts were disappointed with the expense numbers.

"We were discouraged particularly by weak cost control,'' said Rodrigo Quintanilla, a Merrill Lynch bank analyst, in a research note. Quintanilla has a "neutral'' rating on SunTrust shares and considers the stock, which he does not own, as "fairly valued.''

The bank's earnings also were hurt by a 32% decline in securities gains to $31.1 million. The decline in that category was due in part to a sharp rise in interest rates in the second half of the quarter, as higher interest rates may have lowered the value of the bank's portfolio of mortgage-backed securities and other investments.

One thing analysts will be looking for in the quarter is to see how banks handled the sharp turnaround in interest rates, in particular, the rise in the yield on benchmark 10-year Treasury to about 4.25%. The spike in rates has slowed the market for mortgage refinancings and made some bank investments less profitable.

Meanwhile, the bank also reported a continuing decline in bad loans, another sign that the worst of the corporate-loan crisis may have passed for the nation's banks. SunTrust said nonperforming assets, which include bad loans, fell 22% to $463.8 million.

The bank also set aside less money in the quarter to cover the cost of writing off bad loans. The provision for loan losses in the quarter was $79.7 million, down 19% from a year ago.

It wasn't all good news for SunTrust, however.

SunTrust said that low interest in the beginning of the quarter squeezed its net interest margin, a measure of the profitability of its lending operation. In the quarter, the margin fell to 2.98%, from 3.05% in the second quarter and 3.38% a year ago.

But with interest rates rising sharply in the second half of the quarter, its likely that SunTrust's net interest margin will expand. The bank also said its margins were weighed down by the impact of consolidating a commercial paper financing program onto its books. It had to take that action in a light of a new accounting rule for off-balance sheet entities called Fin 46.

Even with the margin squeeze, net interest income -- interest income minus expenses -- rose 3.4% compared to a year ago to $833 million, as the bank posted higher loan growth. The bank said average loans rose 8% to $77.7 billion.

But the rise in loan growth was mainly to the consumer sector, something that's been a strong point for banks throughout the economic downturn. Lending to corporations remains weak and may reveal that U.S. businesses still aren't sold on the strength of the U.S. economic recovery.

Also, the bank posted higher losses on its mortgage-servicing portfolio, due to rapid prepayments on mortgages earlier in the quarter. In that portfolio, it incurred a $52 million loss, up 44% from a year ago.