Morningstar | SunTrust Caps Off a Strong 2018 for the Bank; 2019 Likely to Be More of the Same
No-moat-rated SunTrust reported solid fourth-quarter results that fit well within our overall thesis on the bank. Adjusted earnings per share came in at $1.40, up roughly 28% over adjusted results for the fourth quarter of 2017. The return on tangible equity remained well above the bank’s cost of capital, at 16.1% for the quarter. This brought full-year 2018 returns on tangible equity to 16.9%, a significant improvement over last year’s average of roughly 13.4%. At this point, we believe SunTrust is operating at full capacity. While we don’t see any imminent declines in return on capital for the bank, we also don’t see them being sustainably much higher. The bank is much improved on multiple fronts, particularly with its expense discipline as SunTrust met its efficiency ratio target a year early. We do not expect to make any material changes to our fair value estimate based on our initial reaction to earnings, but we may alter it slightly as we more fully incorporate the results into our model.Loan growth picked up in the quarter, up 2.5% compared with last quarter. This was driven by strong growth within the wholesale portfolio, largely due to commercial and industrial loans as well as commercial real estate loans. Retail loan growth was also decent, up 2% from last quarter. Credit costs remain pristine, with nonperforming loans decreasing as a percentage of total loans, and net charge-offs remaining range-bound. Expenses did tick up a bit in the quarter, but were still growing slower than revenue. Net interest margins were steady in the quarter, but with the growth of the balance sheet, net interest income was still up 2% quarter over quarter. We would expect additional net interest margin expansion in 2019, but view 2019 as the last year of this tailwind.
Finally, noninterest income still struggled to grow compared with the previous year’s quarter. The bank is dealing with some headwinds within the mortgage market, as well as other headwinds in more market-sensitive areas, and we hope to see stronger growth here in 2019.
For our recent analysis of deposit costs and net interest margins, please see our December 2018 Financial Services Observer, "The Return of the Bank: Net Interest Margins Reach a Turning Point."
SunTrust Banks is a financial services holding company. Through its subsidiary, SunTrust Bank (the Bank), the company provides a line of financial services for consumers, businesses, corporations, institutions, and not-for-profit entities, both through branches (located primarily in Florida, Georgia, Virginia, North Carolina, Tennessee, Maryland, South Carolina, and the District of Columbia) and through other digital and national delivery channels. The Bank provides deposit, credit, mortgage banking, and trust and investment services to its clients through a selection of channels, including branch, call center, Teller Connect? machines, automated teller machines, online, mobile, and tablet.
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