SunTrust Leads Banks Higher After Upgrade

NEW YORK ( TheStreet) -- SunTrust ( STI) led major U.S. banks higher on Thursday, with shares rising 1.6% to close at $35.98.

The broad indices all ended higher, after Janet Yellen answered questions before the Senate Banking Committee, which considered her nomination by President Obama to succeed Ben Bernanke as the next chairperson of the Federal Reserve. Yellen currently serves as the central bank's vice chair.

Yellen has been a very strong supporter of the Federal Reserve's "highly accommodative" stimulus policy, which has included keeping the short-term federal funds rate in a range of zero to 0.25% since late 2008. That's the Fed's main policy tool, but through its "QE3" stimulus policy, the central bank has been making monthly net purchases of $85 billion in long-term securities, in an effort to hold down long-term interest rates. The QE3 purchases have continued since September 2012.

The stock market has ramped up over the past two years, fed in part by the historically low interest rate environment.

Addressing the eventual rise in short-term rates and tapering of the Fed's bond purchases, Yellen said "It's important not to remove support, especially when the recovery is fragile, and the tools available to monetary policy should the economy falter are limited, given that short-term interest rates are at zero . . . I believe it could be costly to withdraw accommodation."

After Senator Mike Crapo (R., Idaho) -- the ranking Republican member of the Senate Banking Committee -- expressed concern about the ballooning of the Fed's balance sheet, with a limited boost to U.S. GDP growth and "very serious risks" from quantitative easing, Yellen said "these purchases have made a meaningful contribution to economic growth and to improving the outlook."

"The purpose of these purchases was to push down longer-term interest rates. We have seen interest rates fall very substantially. Lower mortgage rates particularly have been . . . a positive factor in generating a recovery in the housing sector."

When Crapo asked how long "such extreme levels" of quantitative easing could continue, Yellen said "I would agree that this program cannot continue forever, that there are costs and risks associated with the program."

When pressed for an estimate for a "beginning of the tapering" of bond purchases, Yellen said, "we have seen meaningful progress in the labor market" and that the Federal Open Market Committee was looking for signs of "growth that is strong enough to promote continued progress." She held her ground by not providing a "set time" for tapering.

Senator Richard Shelby (R., Ala.), a longtime critic of the Federal Reserve monetary stimulus policy, pointed out that the Fed is now funding a huge portion of the national debt through its purchases of U.S. Treasury bonds. Yellen answered, "we're certainly not doing so for the sake of helping the government finance the deficit. We're doing so to achieve the goals that Congress has assigned to the Federal Reserve, in circumstances where we have run out of scope for conducting additional monetary policy. Once our overnight interest rate hits zero, we have to rely on alternative techniques."

Senator Bob Corker (R., Tenn.) called the Federal Reserve's economic stimulus policy "an elitist policy," since "the largest Wall Street institutions have done the best and fund managers have made a lot of money, but it really hasn't trickled down to the economy." Yellen responded by saying "these policies to some extent boosted the stock market," but that the policies have also "played an important role in helping the housing sector and boosting housing prices."

The KBW Bank Index ( I:BKX) rose 0.6% to $66.11, with all but three of the 24 index components showing gains.


Shares of SunTrust of Atlanta have returned 28% this year. The shares trade 1.4 times their reported Sept. 30 tangible book value of $26.27, and for 12.2 times the consensus 2014 earnings estimate of $2.96 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $3.28.

Oppenheimer analyst Terry McEvoy on Wednesday upgraded SunTrust to an "outperform" rating from a "perform" rating. His price target for the shares is $40.00.

In addition to upgrading SunTrust the analyst reiterated his "outperform" rating for KeyCorp ( KEY) of Cleveland, while raising his price target for KEY to $14 from $13.00. In a note discussing the upgrades, McEvoy cited both companies' "further opportunities to reduce expenses," along with a "more favorable" outlook for earnings growth than regional bank peers.

McEvoy raised his 2014 EPS estimate for SunTrust to $2.95 from $2.75. In a client note, the analyst discussed the ongoing real estate recovery and improving loan pipelines in Florida and Georgia, along with a further benefit to SunTrust from improving asset quality. "While many would argue this is old news, with reserves of 153% of nonaccrual loans while peers have reserve coverage of 129% , SunTrust's earnings will be positively impacted by lower credit costs well into 2014, in our view," he wrote.

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.

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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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