SunTrust: Financial Loser

NEW YORK ( TheStreet) -- SunTrust ( STI) was the loser among large U.S. banks on Friday, with shares sliding 1.5% to close at $34.97.

The broad indices all ended lower on a light day for economic news.

The Commerce Department reported that seasonally adjusted sales U.S. wholesalers during June were up 0.4% from May, and had increased 5.6% from June 2012. Wholesale inventories were down 0.2%, following a 0.5% decline during May. Economists polled by Thomson Reuters had on average expected wholesale inventories to rise by 0.4%.

The Labor Department on Friday said that the four-week moving average for initial unemployment claims declined last week to 333,500, which was close to being the lowest level since late 2007. While the week-to-week unemployment claims numbers have been typically volatile this summer, the U.S. unemployment situation appears to have turned the corner, according to Deutsche Bank's research team.

The Labor Department last Friday said the U.S. unemployment rate had improved to 7.4% in July from 7.6% in June.

"From 1990 to present, a level of 336k on claims has been consistent with an unemployment rate closer to 5.5% (based on a simple linear regression)," Deutsche Bank's analysts wrote in a note to clients on Friday. "In the last labor market recovery after the 2001 recession, when claims finally dropped to similar levels in November 2004, the unemployment rate was 5.4%. As a result, if claims remain near recent levels, the unemployment rate is poised for significant further improvement," the analysts wrote.

The KBW Bank Index ( I:BKX) was down 0.4% to close at 65.33, with all but four of the 24 index components down for the session.

SunTrust

SunTrust of Atlanta and MetLife ( MET) on Monday announced a three-year agreement for the bank to finance up to $5 billion in commercial real estate loans to be originated and managed by MetLife. The insurer recently launched an asset management business for institutional clients, focusing on real estate investing.

SunTrust reported second-quarter net income available to common shareholders of $365 million, or 68 cents a share, increasing from $340 million, or 63 cents a share, the previous quarter, and $270 million, or 50 cents a share, a year earlier.

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.

>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 TheStreet.com 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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