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Morningstar | Growth Slows for SunTrust; Pending BB&T Merger Remains Key Driver of Next Profitability Step Up

No-moat-rated SunTrust reported decent first-quarter results that fit well within our overall thesis on the bank. Adjusted earnings per share came in at $1.33, up roughly 3% year over year. The primary adjustment to results was charges related to the pending merger with BB&T. Adjusted return on tangible equity came in slightly lower for the quarter, at 14.9%, as noninterest income was a bit soft and noninterest income growth slowed as well. Even so, expenses were well controlled, and year-over-year efficiency did improve. We may lower our near-term estimates to account for some of the slow growth to start the year, but the real key for SunTrust remains the gains to be had from its merger with BB&T. As such, we do not anticipate any material changes to our fair value estimate of $72 per share.

Loan growth was once again strong during the quarter, with average loans up 8% year over year. This was driven by strong growth in the wholesale portfolio as end-of-period commercial and industrial loans were up 10% and commercial real estate balances were up over 40%. The consumer direct portfolio also showed strong growth, up 23%, as the bank’s digital lending investments continue to pay off in the form of high loan growth. Net interest income growth, while up year over year, slowed down compared with the fourth quarter of 2018, remaining essentially flat. With increasing deposit costs and no more rate hikes in sight, we expect some near-term pressure on net interest margins.

Credit costs remain pristine, with nonperforming loans decreasing as a percentage of total loans, net charge-offs remaining range-bound, and provisioning primarily growing with the loan book. Adjusted expenses were essentially flat year over year, growing slower than revenue over the same time period. It will be the expense synergies from the merger with BB&T, which were reaffirmed during the call, that will drive SunTrust’s profitability to the next level.

Noninterest income still struggled to grow compared with the previous year’s quarter. On the positive side, mortgage-related fee income did recover, and we would not be surprised to see this continue, given the current yield curve environment. Also, SunTrust’s investment banking-related fees were not hit as hard as some peers'. However, deposit service charges and investment management-related fee items have struggled to consistently move higher. Even with some recovery on the investment banking side, we’re not sure how much growth we’ll see here for the full year.

For our recent analysis of bank M&A opportunities, please see our March Select presentation, "The Fellowship of the Banks: U.S. Banks Merging for Size, Scale, and Scope."