Morningstar | SunTrust's Merger With BB&T Should Create Value For Shareholders
Since the crisis, SunTrust has refocused its operations and brought its loan book back under control. With many positive steps having been taken to improve the core operations of the bank, a successful commercial banking franchise, and a generally positive banking environment for the foreseeable future, we believe SunTrust's returns should only improve over the medium term. After 2008, SunTrust reduced its exposure to residential loans, increased lending standards, refocused its nonloan operations, and has consolidated roughly one third of branches. This has helped profitability improve since William Rogers became CEO in 2011. As a bonus, the bank has benefited from improving net interest margins. We also see initiatives such as that with Lightstream, providing further growth for SunTrust.The bank navigated the latest credit episode in energy relatively well. The energy portfolio now accounts for only 2% of the total loan book, and net charges-offs peaked at very manageable levels and have since moderated. Credit quality is now at cyclical highs in terms of quality, and provisioning levels as well as other expenses related to loan quality, such as credit and collection services, are at cyclical lows, without much room to improve. While we don't see much room for improvement, we also don't see a drastic turning of the credit cycle as imminent, either. We like the strength of SunTrust's investment banking group and believe the bank will have room to increase noninterest revenue over time. We also like the bank's strategy of focusing on its core, corporate client base and bringing more IB offerings and expertise to generate more fees. SunTrust also offers investment management and trust services, and is building out further treasury and payments platforms, which should add to fee income over time. And while SunTrust's mortgage business has been under some pressure as refinancing activity has fallen, this should still be a steady fee generator as housing purchases continue in the future.We view the pending merger between BB&T and SunTrust positively and believe the combination makes a lot of sense strategically and should improve both franchises' profitability.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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