SunTrust: Financial Loser

NEW YORK ( TheStreet) -- SunTrust ( STI) was the loser among the largest U.S. financial companies on Monday, with shares pulling back 2% to close at $29.76.

The broad indexes were down slightly, as investors awaited the results of a two-day meeting of European finance ministers in Luxembourg, which may include a financial aid package for Spain.

The KBW Bank Index ( I:BKX) declined slightly to close at 51.17, with all but three of the 24 index components seeing declines. The index has returned 30% year-to-date, compared to an 11% return for the Dow Jones Industrial Average and a 16% return for the S&P 500 ( SPX.X).

So what are investors to think about bank stocks, heading into third-quarter earnings, with mixed economic signals, and a financial industry still facing so many challenges?

"Our large cap bank coverage universe now trades at a median P/E multiple of 10.2x our 2013 EPS estimates," Stifel Nicolaus analyst Christopher Mutascio said early Monday, adding that the median forward price-to-earnings ratio for banks covered by his firm was "76% of the S&P 500 2013 P/E multiple of 13.5x - which is dead in line with the group's 15+ year median of 76%."

Mutascio also said that the group of banks covered by trades for the same 10.2 multiple of consensus earnings estimates.

The analyst also said that "if the banks continue their recent outperformance, then investors must be either arguing for an upward revaluation of the sector (banks are worth more today versus the broader market than they have historically) or they suspect the earnings normalization process will happen sooner than later." Using Stifel Nicolaus's "normalized" earnings estimates, Mutascio said banks covered by his firm would trade at a median forward P/E of "70% of the S&P 500's current 2013 P/E multiple (9.5x vs. 13.5x)," which "could suggest some further outperformance against the broader market for the banks will occur until they achieve the historical P/E multiple of 76% of the S&P 500."

Investors may be taking the long view and looking past the media and the brokerage analysts -- who typically rate stocks with 12-month investment horizons -- as they appear "currently willing to value the banks on what their future earnings prospects could be under a more normal interest rate environment (no matter when it may occur) or perhaps they are awarding a higher multiple for mortgage banking activity than they have historically."

Walmart and American Express announce Bluebird

In a fascinating development for the financial services industry, which will no doubt be of major concern to the Consumer Financial Protection Bureau and send major ripples through Washington, Walmart ( WMT) and American Express ( AXP) on Monday announced their new Bluebird cash card service, which will really serve as alternative bank account, with no balance minimum, no fees for deposits or withdrawals, unless made from an out-of-network ATM. Bluebird will also allow check deposits made through smartphone applications, direct deposits, and electronic bill paying, all for no charge.

The companies said that "if a customer's Bluebird card is ever lost or stolen, funds stay protected at American Express, and the card is replaced at no charge."

Additional Bluebird services that will be available for no charge include the "functionality of a digital wallet, including person to person (P2P) payments, mobile app functionality, and the ability to control subaccounts for friends and family right from a smartphone."

During the first quarter of next year, new services will be added for Bluebird customers, including "more options to deposit money and check-writing capabilities," the companies said.

Walmart made it clear that the companies were going after the "underbanked" market, as well as bank customers who may be "tired of navigating a complex maze of dos and don'ts to avoid the ever growing list of fees found on checking products," according to vice president of financial services Daniel Ekert.

Banks have been seeking ways to make up lost fee revenue through new checking account fees, after seeing revenue declines through the Durbin Amendment's limitation on debit card interchange fees, and other recent regulatory changes limiting checking account overdraft fees.

Walmart said that "according to an independent study by Bretton Woods, consumers now pay an average of $259 per year for a basic checking account and that cost is rising due to higher minimum balance requirements and a growing list of fees being added to these services."

Rochdale Securities analyst Richard Bove said that there is "no question this is a good deal for many consumers," but also hinted at what may be a regulatory can of worms for Walmart and American Express. "The politicians do not have to repeal the Dodd Frank legislation," he said, since Walmart "has done it for them."

Bove said that the Bluebird service "raises a series of questions as to whether a major slice of consumer finance activities have now slid into the shadow banking market away from the scrutiny of the regulators." One question is "whether the country will now deal with a two tier financial system. One tier is heavily regulated. The other is not regulated and where funds are transferred between companies in a murky area of non-disclosure," he said.

It remains to be seen how the Consumer Financial Protection Bureau will react, and how, or if, the agency will regulate the Bluebird service, but there is no doubt that today's move by Walmart and American Express is a very important development for the financial services industry.

Bove said that "If Wal-Mart is able to go up market with its products, it will hurt the banks. This is because banks are now relying on price increases on many of the products that Wal-Mart hopes to give away under its new card arrangement. Moreover, if Wal-Mart gets away with doing banking as a retailer many more retailers are likely to enter the fray and the price competition they represent for banks will be formidable."

Walmart's shares rose slightly to close at $75.25, while American Express was up slightly, closing at $58.82.


Getting back to today's financial loser, SunTrust of Atlanta has seen its stock return 69% year-to-date, following a 40% decline during 2011.

The shares trade for 1.1 times their reported June 30 tangible book value of $26.02, and for 11 times the consensus 2013 earnings estimate of $2.78 a share, among analysts polled by Thomson Reuters. The consensus 2012 EPS estimate $3.31.

SunTrust will announce its third-quarter results on Oct. 22, with a consensus earnings estimate of $1.83 a share (including several extraordinary items), increasing from 50 cents the previous quarter, and 39 cents a year earlier.

The company on Sept. 6 announced that it would end its investment in Coca Cola ( KO), in order to shore up its capital ratios, because the Federal Reserve's proposed capital rules will increase the risk weighting of banks' equity investments.

SunTrust accelerated two forward purchase agreements to sell its Coke shares, while also transferring $3 billion in portfolio loans to held-for-sale, and said that the moves, along with other actions, would lead to a pretax third-quarter gain of $1.9 billion, or $1.2 billion after taxes.

Jefferies analyst Ken Usdin rates SunTrust a "Buy," with a $33 price target, and said last Tuesday that "different treatment of the Coke gain across the Street makes it hard to speak to the headline EPS number, but we believe core trends should look good." Jefferies expects "continued strength out of mortgage (only a $3mm decline in production), progress on expenses, and a stable net interest margin excluding the impact of the Coke sale (3bp drag).

Usdin added that the company's "details on loan sales and subsequent reinvestment will be of interest, as it will dictate the 4Q starting point for net interest income."

Deutsche Bank analyst Matt O'Connor rates SunTrust a "Hold," and said last Monday that he expects the company to report third-quarter earnings of $1.96 a share, with "flat/modestly higher loan growth in 3Q--reflecting continued growth in commercial and industrial loans, offset by recently announced loan sales (likely to take place over the next few quarters) and declines in higher-risk segments such as commercial real estate, home equity and mortgage."

O'Connor expects another strong quarter for revenue from mortgage originations and sales, but said "this should be more than offset by the large $375m mortgage putback charge this quarter."

STI Chart STI data by YCharts

Interested in more on SunTrust? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

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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