Regional bank SunTrust (NYSE:STI) has seen its capital base eroded by a down economy and historic losses in consumer loans. The potential for further loan losses means that book value figures must be taken with a grain of salt, but if conditions stabilize and SunTrust can return to profit levels seen in days past, there is considerable upside for shareholders.
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Company Overview
SunTrust is one of the top 10 largest banks in the country and recently ranked itself seventh largest in terms of bank branches (just under 1,700), deposits ($119 billion), and total assets ($177 billion). JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) continue to hold the top spot in most rankings with the larger regional players, such as SunTrust, Pittsburgh-based PNC Financial (NYSE:PNC) and Regions Financial (NYSE:RF) in Birmingham, Alabama.
SunTrust operates in four primary divisions: The retail and commercial segment offers traditional retail and commercial banking services; corporate and investment banking serving larger corporations and middle market firms, respectively; household lending, where it recently ranked sixth in terms of mortgage originations; and wealth and investment management that offers private wealth management services to individuals and institutions.
Recent Trends
According to SunTrust management, "during the second quarter of 2009, the core business generated solid fee income, expanded net interest margin, substantially grew low cost deposits, and continued strong expense management." Year-over-year deposit growth was 11.6%, net interest income grew 3% to $1.1 billion, and net interest margin expended to 2.94%.
However, a low single-digit decline in noninterest income pushed total revenue down 1%. Loan loss provisions were also significant and came in at $962.2 million, and the bank had to continue to shore up its capital base, raising $2.3 billion in capital through the issuance of common shares and sale of its remaining Visa (NYSE:V) shares. These moves pushed the Tier 1 capital ratio up to 12.25%, well above the acceptable levels stipulated by regulatory agencies and slightly above a peer group as defined by SunTrust, which includes the above mentioned regional banks and similarly-sized players. Total loan loss reserves also increased significantly to $2.9 billion.
Looking Towards the Future
Recent trends suggest that SunTrust is indeed performing well as far as its core operations are concerned. But as with most banks, the wild card consists of the extent of future credit losses, be it from traditional residential mortgages or commercial construction and loan exposure. SunTrust cited worrying trends in home equity loans and tepid commercial client performance.
Bottom Line
SunTrust listed second-quarter book value of $36.16 per common share. At a current stock price of just under $21, the price-to-book-value ratio looks compelling, but tangible book was only $23.41. However, SunTrust's average price-to-book ratio over the past decade is 1.9, and assuming returns on total shareholders' equity can eventually return to double-digit levels, a 10% ROE equates to $3.60 in annual earnings capacity. In other words, on a normalized basis, shares of SunTrust have considerable upside and are not at all unreasonable in terms of current book value considerations. (For more, see Book Value: Theory Vs. Reality.)
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