SunTrust Banks, Inc. (NYSE:STI) got good income growth in the second quarter of 2012 compared to the second quarter of 2011, though it came almost entirely from exploiting a widening in interest rate spreads. Interest income actually fell 3%, led by a decline in interest on loans; however, the bank was able to cut interest on deposits by 27% and so net interest income edged up.
In addition, SunTrust only allocated $300 million to provide for credit losses (compared to $392 million in the second quarter of 2011) and this factor alone accounted for most of the company’s increase in earnings before taxes. The bottom line came in at 51 cents per share versus 33 cents per share in the previous year’s quarter – a large increase, but we don’t think that the bank can get further growth from these areas. The decrease in credit loss provisions may be appropriate – compared to the beginning of this year, SunTrust has a larger share of its consumer and home loan assets associated with borrowers with credit scores over 700, with little change in the overall size of the portfolio – but we doubt this is sustainable.
The market has rewarded SunTrust’s recent performance, however. The stock is up 55% since a year ago, and the sell-side believes that the bank actually can generate strong income growth. The trailing price-to-earnings ratio is 19, which is higher than at many larger banks, but the forward multiple based on consensus 2013 earnings is 10 and the five-year PEG ratio is 0.5. We also can look at the P/B multiple, which is 0.8, and see that there is a value case here that is not dependent on the sell-side’s estimates (though, again, some larger banks trade at even greater discounts to book value).
Crispin Odey’s Odey Asset Management Group more than doubled its stake in SunTrust Banks, Inc. during the second quarter to 2.9 million shares. Odey moved heavily into financial stocks last summer and nearly half of its 13F portfolio at the end of June consisted of financials (see what other financial stocks Odey liked). Adage Capital Management, which was founded by two former employees of Harvard Management in 2001 (the Harvard endowment owns a minority stake in Adage) also substantially increased its position in the stock, closing June with 3.6 million shares in its portfolio (find more stock picks from Adage Capital Management). George Soros reduced his position in SunTrust during the second quarter but still reported ownership of 2.4 million shares on the 13F (research other stocks that Soros owns).
SunTrust’s most notable competitors include: Bank of America Corp (NYSE:BAC), BB&T Corporation (NYSE:BBT), Wells Fargo & Company (NYSE:WFC), and PNC Financial Services (NYSE:PNC). These banks are all larger, with BB&T coming the closest to SunTrust’s market cap at $23 billion versus $16 billion. PNC is about twice SunTrust’s size, with the megabanks being considerably larger. Bank of America was one of the larger banks that we were thinking of with lower multiples: it trades at 10 times earnings on both a trailing and forward basis, and at half the book value of its equity. Of course, some of the negative sentiment towards Bank of America is still deserved, as even with its aggressive job-cutting plan it may still have too many businesses under the same roof.
PNC trades at about book value, while Wells and BB&T trade at premiums of about 30%. All three of these banks are also bunched at between 12 and 14 times trailing earnings, a bit lower than Suntrust on that basis. BB&T and Wells also posted increases in earnings last quarter compared to a year ago. We see the current interest rate environment as remaining about the same for the near future, and so we’re not sure where further growth at SunTrust is supposed to come from. However, it seems priced about compared to most of its peers. Bank of America may be a better value, but we acknowledge that investors may want to avoid a company undergoing such a transition.