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.
Growth in investment banking and asset management segment
Citigroup Inc (NYSE:C)‘s operating margin in investment banking saw an upsurge in the quarter ending in March. In North America, its revenue in the investment banking segment increased by 48% in the first quarter of 2013. Additionally, in this segment, its revenue from merger advisory and equity underwritings surged by 85% and 45% respectively, in the first quarter of 2013. The reason for growth in the investment banking division is because of the improvement in the U.S. equity market. Furthermore, it is expected that the rise in investment banking activities like the equity underwriting process, mergers and acquisitions will drive its profits higher for the next two years. Due to this, the operating margin in this segment will improve to 43% from the current 32%, until the first quarter of 2015.
The bank decided to sell its stake in Smith Barney, which was a joint venture with Morgan Stanley, as Smith Barney was incurring losses. Citigroup Inc (NYSE:C) received $1.89 billion in the previous fiscal year from the stake sale. It will receive $2 billion in the second quarter of this fiscal year and around $2.25 billion in 2015. Moreover, the bank’s costs will decline significantly from selling Smith Barney and it will bring in additional cash as well. Citigroup Inc (NYSE:C)’s operating margin was flat in the previous year and in the next two years it is expected to rise by 20%-25%. This will lift investors’ confidence in this stock.
Conclusion
Shrinking NPL and reduction in loan loss is a positive indicator for SunTrust Banks, Inc. (NYSE:STI). However, the decline in loan growth will spread negativity within the stock. I advise investors to hold this stock. On the other hand, cost reduction plans and increasing AUM will lift profits of JPMorgan Chase & Co. (NYSE:JPM) in coming years. Citigroup Inc (NYSE:C)’s operating margin in the investment banking segment will boost profit in the upcoming two years. Recovery in the equity market will increase merger and acquisition activities, which will likely lift the revenue. I recommend that investors buy shares of JPMorgan and Citigroup Inc (NYSE:C).
The article 3 Solid Banking Companies to Buy originally appeared on Fool.com and is written by Madhu Dube.
Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup Inc (NYSE:C) and JPMorgan Chase & Co (NYSE:JPM). Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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