SunTrust Banks Inc.'s (STI) third-quarter profit surged as the regional bank benefited from the sale of Coca-Cola Co. (KO) stock, but future revenue and expenses remain marred by challenges from a slow-growing economy and low interest rates.
The stock fell more than 3% in morning trading, to $27.73, a reversal for a stock that has been one of the best performing large-cap bank stocks this year.
SunTrust reported a profit of $1.08 billion, compared with a year-earlier profit of $215 million. Per-share earnings of $1.98 were a penny short of the average analyst estimate according to Thomson Reuters.
One-time items lifted earnings by $1.40 per share. Revenue rose 75% to $3.84 billion, but when the securities gains are stripped out, revenue fell 13% to $1.9 billion.
SunTrust had told investors about the gains and charges in September, and there were few surprises Monday in the results, analysts said.
Investors were more puzzled by what to expect from the bank's results going forward, particularly about how much the company would be able to reduce costs, analysts said. Management told investors during a conference call that revenue from lending and investing should decline next year, and the profit margin in that business should fall.
The call's overall tone left shareholders with little sense that results would improve, Sandler O'Neill + Partners LP analyst Kevin Fitzsimmons said.
Andrew Boord, an analyst with Fenimore Asset Management Inc. said SunTrust "wrapped up a ton of their problems," and "hopefully this marks an inflection point" for the bank. Still, he said he won't buy the stock because "SunTrust is one of those really big banks in the crosshairs of regulators."
The investor's remarks illustrate the struggle large regional banks face in convincing investors that they can grow now that low-interest margins have put pressure on lending revenue and the benefit from improving credit quality becomes less of an earnings driver.
SunTrust's mortgage revenue was strong and is expected to remain strong, and loans grew more than some analysts had predicted. Still, SunTrust's loan book grew mainly through business loans, and demand for new loans has slowed in the third quarter because businesses have become more reluctant to borrow money ahead of the elections and any solution to the United States' fiscal problems.
"We saw some slowing of loan demand," said Chief Financial Officer Aleem Gillani during the conference call. "Loan pipelines still remain fairly strong," but it is unclear how much of the pipeline would translate into actual loans, he said. Meanwhile, the net interest margin, the profit margin from lending and investing, is expected to contract about 5 basis points in the fourth-quarter, and fall further next year, the CFO said.
Many banks have resorted to expense cuts to offset weakening revenue from lending. SunTrust completed a cost-cutting initiative in the third-quarter that lowered expenses by $300 million annually. "It's not lost on me or anyone at SunTrust that we still have work to do," Chairman and Chief Executive William Rogers Jr. told investors.
"We're not going to roll out a new program...nor will we publicly track our progress," he said. But "we're not finished in our efforts to improve our efficiency." Mr. Gillani told investors to expect expenses to remain flat in the fourth quarter.
Stifel Nicolaus analyst Christopher Mutascio said in a research report that savings from the cost-cutting haven't yet "hit the income statement in a positive way."
What's more, investors may have expected costs to continue to fall to offset headwinds from falling interest rates, said Oppenheimer & Co. analyst Terry McEvoy. Instead, "core expense guidance would suggest expenses do not go any lower."
The slew of one-time gains and charges included the sale of Coca-Cola Co. (KO) shares. The bank's predecessor underwrote Coca-Cola's public offering in 1919 and retained a stake that was then worth $100,000.
SunTrust started to divest Coke shares in 2008 and had an agreement to sell more in 2014 and 2015 to cash in the massive gains. But SunTrust said in September the stake would weigh on the bank's capital ratio under new capital rules and potentially hurt its ability to raise its dividend, and it decided to sell it earlier than expected.
In the third-quarter, SunTrust booked a $1.9 billion gain, as it sold 59 million of the remaining 60 million shares. It transferred the remaining 1 million shares to its SunTrust Foundation.
Further, the bank provided $371 million for demands to buy back faulty mortgages it previously sold to Fannie Mae and Freddie Mac in the third quarter, and moved $1.4 billion of student loans and $500 million of delinquent Ginnie Mae loans to its held-for-sale loan portfolio, which decreased its noninterest income by $92 million.