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What You Need to Know About SunTrust Banks, Inc. (STI)

SunTrust Banks, Inc. (NYSE:STI) is the holding company and publicly traded side of SunTrust Bank, one of the country’s biggest regional banks. SunTrust primarily does three kinds of banking: consumer banking and private-wealth management; wholesale banking; and mortgage banking.

SunTrust Banks, Inc. (NYSE:STI) puts up some impressive numbers, but there is at least one thing to watch out for. Thinking about investing in SunTrust? Here are seven things you need to know:

1. SunTrust is bigger than you think

SunTrust Banks, Inc.Go out to the Federal Reserve’s National Information Center, and you’ll see that SunTrust Banks, Inc. (NYSE:STI) is the country’s 17th biggest bank-holding company, ahead of both American Express Company (NYSE:AXP) and Deutsche Bank AG (USA) (NYSE:DB). Size doesn’t mean anything in and of itself, but used skillfully, size can help generate revenue and profit far beyond that of a smaller rival.

2. Great share-price performance over the past year

Since June 12 of 2012, SunTrust Banks, Inc. (NYSE:STI) has returned 49.24% to its shareholders. It’s true, investor darling Bank of America Corp (NYSE:BAC) has returned 83.79% over the past year, but that outsized return comes at the cost of greater balance-sheet and share-price volatility.

3. Solid year-to-date share-price performance

For the past six months, SunTrust Banks, Inc. (NYSE:STI) stock has returned 10.22%, not far off B of A’s own 11.22% performance for the same time period. B of A stock has been on a rocket ride since the start of 2012, but it can’t go up like that forever.

4. Impressive return-on-equity

Return-on-equity, or ROE, is a measure of management performance and gives you some idea of how much profit a company generates with shareholder money. SunTrust’s ROE is an impressive 10.50% 12 months trailing. Lean, mean, profit machine JPMorgan Chase & Co. (NYSE:JPM) has an ROE only slightly higher: 11.55% TTM.

5. Attractive valuation

SunTrust’s price-to-book ratio is 0.85: low enough to make it an attractive buy, but not so low it sets off alarm bells. Speaking of which, B of A’s P/B is 0.66, which is low enough to set off alarm bells. Wells Fargo & Co (NYSE:WFC)‘s P/B is 1.46. As Wells is rightly seen as one of America’s top-notch banks, the number is high enough to make the bank a potentially unattractive buy: too expensive.

6. A reasonable price-to-earnings ratio

SunTrust’s P/E is a very reasonable 8.6. Wells Fargo & Co (NYSE:WFC)’ P/E — again, one of the country’s most highly thought-of public banks — is only 11.71. Since I’ve already picked on B of A so much, I might as well continue: Its P/E is a sky-high 46.6. And you get a complimentary stomach ulcer with that.

7. A mixed quarter

Here’s where I’ll pick on SunTrust a bit. Maybe more than a bit. In the most recent quarter, it had year-over-year earnings growth of 40.80% on revenue growth of 0.10%. According to the press release: “Our expenses declined meaningfully, not only related to the continued abatement of cyclically high costs, but also as a direct result of our concerted efforts to improve our efficiency.”

So at least in part, the bank’s high net-income growth is the result of internal cost cutting. But you can’t do that sort of thing forever: You can only cut off so much fat before you start cutting into muscle. If SunTrust doesn’t start growing its revenue, shareholders won’t continue seeing sky-high income growth of this sort.