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SunTrust Banks, Inc. (STI), JPMorgan Chase & Co. (JPM), Citigroup Inc (C): Three Solid Banking Companies to Buy

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SunTrust Banks, Inc.According to the Federal Deposit Insurance Commission, U.S. banks earned profits of $40.3 billion in the first quarter of 2013, which showed growth of 15.8% year over year. The recovery of the U.S. economy resulted in improvements in investment products, equity underwriting, mergers and acquisitions. I have analyzed three banks among the top 20 banks in the US. Let’s find out what the growth factors of these banking stocks are.

Challenging phase to tackle

Non-performing loans (NPLs) at SunTrust Banks, Inc. (NYSE:STI) improved in the first quarter. NPLs decreased quarter over quarter by 5% to 1.21% in first quarter of 2013. A decline in NPLs was seen across all loan segments, but a major decline was seen in residential and commercial loans. This decline was due to the writing-off of loans by SunTrust Banks, Inc. (NYSE:STI). With the current strong financial position of the bank and write-off of loans, a further 5% decline in NPLs is expected in the second quarter of 2013. Additionally, the bank will decrease its loan losses of $877 million to $722 million by the end of 2014. SunTrust Banks, Inc. (NYSE:STI) is showing improvement in asset quality by decreasing NPLs and other losses from its loans. This could give an additional benefit of $0.20 per share to the shareholders of SunTrust Banks, Inc. (NYSE:STI).

In contradiction to the decline in NPLs, the bank’s commercial and industrial (CI) loans grew by 2% quarter over quarter in the first quarter of 2013. However, its growth in overall loan segments was down by 2% from the previous quarter. The bank posted weak income from mortgage loans as well. Total income from mortgages is expected to come down from $1.01 billion to $814 million in the year 2014. SunTrust Banks, Inc. (NYSE:STI)’s growth in real estate loans and student loans is declining, which is offsetting the growth of CI loans. Intense competition in the loan segment from its peers is arising due to decreasing lending rates, which will put pressure on the profit margin of the bank in the future.

Cost reduction plan and growth in asset management

JPMorgan Chase & Co. (NYSE:JPM) manages assets worth $2 trillion and charges average management fees of 0.35% to clients. JPMorgan Chase & Co. (NYSE:JPM)’s asset management segment contributes 10.26% in total revenue and is growing by 11.94% year over year. Due to the increase in demand for financial products with improving economic conditions, JPMorgan Chase & Co. (NYSE:JPM) is planning to increase its presence in the U.S. market by opening new branches. It is also anticipating further improvement in global economic conditions in the coming two years. Taking this into consideration, it is estimated that JPMorgan Chase & Co. (NYSE:JPM)’s assets under management (AUM) could grow by 10% year over year. With this, it is also planning to increase its average management fees of 0.35% to 0.40% by the end of 2014. This 0.05% rise in management fees and expected rise in AUM from future expansion will lift the revenue of the bank by end of 2015.

The bank earned profits of $21.9 billion in the previous fiscal year and estimated an increase in profits to $27.5 billion for the current year. This outlook is driven by cost reduction measures at the bank. To reduce costs, it has planned to trim 6%, or 17,000 jobs, by the end of fiscal year 2014. As a part of this strategy, it will reduce 4,000 jobs in 2013. This will help JPMorgan Chase & Co. (NYSE:JPM) to save around $1 billion by the end of 2013. It is estimated that the overall job reduction plan will save around $4.25 billion by 2015.

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