Many banks have failed in the face of such tough environmental conditions. These conditions emphasize the importance of gaining an accurate picture of a bank’s financial health through detailed financial analysis. This financial analysis report analyzes SunTrust Bank’s profitability, solvency and financial stability using financial ratios that point to the basic health of its activities. The report also analyzes the overall health of the industry while examining SunTrust’s relative position to its competitors in the market. Finally, the report provides a future perspective of the Bank and its growth prospects. Description of the Company
The earliest form of SunTrust Banks began in 1811 as the Farmer’s Bank of Alexandria, Virginia which led to the Trust Company of Georgia in 1891. The Bank was one of the original underwriters for Coca-Cola’s IPO in 1919, becoming one of their largest shareholders for many years. The IPO became a huge asset for SunTrust when the Coca-Cola stock was later revalued in 1993 from its historic value of $110,000 to almost $1. 1 billion. The Bank, as it is today, is a result of the merger in 1985 of the Trust Company of Georgia and SunBanks, Inc. , of Florida. The merger resulted in the adoption of the current SunTrust name in 1995 (Hoover’s, 2012).
SunTrust Banks, Inc. (NYSE: STI) is one of the largest regional banks in the U. S. with over $178 billion in assets and ranked eighth amongst the top 10 banks in terms of number of branches, deposits and assets (SunTrust Profile, 2012). The company is headquartered in Atlanta, Georgia with a footprint focused on the southeastern and Mid-Atlantic states. SunTrust Banks has l,658 branches and over 28,000 employees in Alabama, Arkansas, Florida, Georgia, Maryland, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, West Virginia, and the District of Columbia.
The Bank and its subsidiaries provide a broad range of services within six lines of business: retail banking; diversified commercial banking, corporate and investment banking; mortgage banking; and wealth and investment management (SunTrust Profile). Economic and Industry Analysis Economic conditions remain shaky but have improved since the lows of the financial crisis in mid 2007 through 2008. Banks have been vilified by the media and public as the culprit of the financial crisis, causing greater scrutiny and tighter regulations.
Increased regulation has adversely affected some of the banking industry’s traditional fee income, most notably in service charges (e. g. overdraft fees) on deposit accounts. In addition to the decrease in fee revenue, there have been increased costs associated with the regulations. Banks scurried to recoup their lost revenues by adding fees to normally non fee products. Several banks, including SunTrust, tried charging fees to their clients for debit card transactions. A huge consumer backlash on the new fees quickly followed. The banks were left with no other choice then rescind the fees or risk losing customers.
Despite the dragging effect of the financial crisis on banks, the outlook for the banking industry has improved in several areas recently. More banks are improving their earnings. As reported by the FDIC, banks earned $26. 3 billion in the fourth quarter of 2011, an increase of $4. 9 billion (23. 1 percent) compared with the same period of 2010. There were also lower provisions for loan losses, reflecting an improving trend in asset quality. “Insured institutions set aside $19. 5 billion in provisions for loan losses in the fourth quarter, a decline of $13. 1 billion (40. percent) from fourth quarter 2010. ” (FDIC Quarterly, p. 1) Unfortunately, the improvements in earnings and loan losses have not extended to Banks’ operating revenues. Banks’ operating revenues are not growing due to “lower servicing income (down $8 billion), reduced gains on loan sales (down $4. 8 billion), and lower income from service charges on deposit accounts, which fell by $2. 1 billion (5. 9 percent). ” (FDIC Quarterly, p. 2) Also, while the industry’s noncurrent loans and loan losses continue to fall, they still remain well above pre-crisis levels. Competition
Competition is quickly encroaching on SunTrust’s territory. The financial crisis helped rivals gain more presence in SunTrust’s core markets through key acquisitions. BB&T bank, one of SunTrust’s main competitors, recently increased its presence with its acquisition of Florida-based BankAtlantic. This acquisition increased BB&T’s deposit market share to 6th in the Miami market. (BB&T Corporate Profile) BB&T Corporation (NYSE: BBT), headquartered in Winston-Salem, N. C. , has many similarities to Atlanta’s SunTrust Banks. Besides both banks being headquartered in the South, BB&T is similar in size with $174. billion in assets and approximately 1,800 financial centers. BB&T also operates within a similar footprint and lines of business. Its bank subsidiaries operate in the Carolinas, Virginia, West Virginia, Kentucky, Georgia, Tennessee, Maryland, Florida, Alabama, Indiana, Texas and Washington, D. C. BB&T offers consumer and commercial banking, securities brokerage, asset management, mortgage and insurance products and services. (BB&T Corporate Profile) SunTrust Bank, however, is well established within its southeastern and mid-Atlantic footprint.
SunTrust has extensive branch networks with several lines of business generating a strong fee income, which account for 40% of SunTrust’s operating revenues. (Standard & Poor’s, 2012, March 13) It is ranked top three in deposit market share. (Moody’s Investors Service, 2012) Unfortunately, its concentration in the southeast has meant greater exposure to the housing bubble that preceded the financial crisis, resulting in high unemployment and large decreases in home values. SunTrust took substantial losses due to their large book of residential real estate in the southeast, especially Florida.
Mortgage related expenses and write-offs have affected SunTrust’s earnings more than its competitor, BB&T, who did not suffer the same exposure during that time. Financial Ratio Analysis Unlike many industries, banking is highly leveraged and highly regulated. The government dictates banks capital requirements, sets the minimum reserves for deposits, restricts borrowing limits, and requires financial disclosure. The high government regulation lends itself to using the same CAMELS ratios as the bank examiners use in analyzing a bank’s financials.
CAMELS rating system examines a bank’s capital, asset quality, management, earnings, liquidity, and sensitivity to the market. Capital Adequacy The most important minimum requirement in banking regulation is maintaining minimum capital ratios. Capital provides a cushion to help withstand losses and possible future economic downturns. SunTrust Banks’ Tier 1 capital ratio in 2011 was 10. 90% compared to 13. 67% in 2010. BB&T’s 2011 and 2010 Tier 1 capital ratios were 12. 5% and 11. 8%. Unfortunately, the 2011 and 2010 capital ratios may already seem outdated ue to the recent Federal Reserve’s 2012 Stress Tests’ results released in March. “The Fed projected that SunTrust’s Tier 1 common capital ratio would fall below the 5% minimum threshold if SunTrust adopted its proposed capital plans. ” (Standard & Poor’s, 2012, March 14) As a result, SunTrust has had to revise and resubmit its capital plan, placing any dividend raise or stock buyback on hold. Fortunately SunTrust’s ratings were unaffected by the Federal Reserve’s findings. Asset Quality Lending is integral to bank revenues so measuring potential losses in delinquent loans is important.
Unfortunately, 40% of SunTrust’s loans are real estate loans with 27% of the loans tied up in Florida. (Standard & Poor’s, 2012, March 13) SunTrust’s non-performing assets to loans were relatively high in 2011 at 2. 33% and 2010 at 3. 44%. SunTrust’s net charge-offs in relation to average loans have been higher than its competitors but have improved. Net charge-offs fell to 1. 75% in 2011 from 2. 51% in 2010. Compared to the fourth quarter of 2010, net charge-offs decreased $149 million, or 24%. In comparison, BB&T’s had net charge-offs to average loans of 1. 60% in 2011 and 2. 9% in 2010, while its non-performing assets were 2. 20% in 2011 and 3. 70% in 2010. SunTrust remains more affected by its exposure to Florida’s residential housing market. Management While management is more of a qualitative than quantitative measurement, it is still important in measuring a company’s performance. Effective management is difficult to judge just by looking at financial statements since it is judged with a blend of performance ratios. Much of the current crisis in loan quality derives from management’s pre-crisis decision to grow Florida’s residential loan portfolio.
Currently, SunTrust management has been focused on cost-cutting measures. “Measures include reduction of redundancies, supplier management, and lower headcount. STI is 63% through this expense reduction program, and expects to be 80% through by year-end. ” (Morgan Stanley, 2012) Earnings Return on Assets (ROA) for SunTrust showed some movement in 2011 from 2010 as it edged upwards to. 38% from . 11%. The increase helped SunTrust generate more earnings from its assets. In comparison, BB&T’s ROA was . 79% in 2011 and . 51% in 2010. Net Interest Margin (NIM) for SunTrust increased slightly in 2011 to 3. 3% from 3. 30% in 2010. SunTrust was able to get a modest widening of the bank’s net interest margin. However, BB&T’s net interest margin has remained strong with a NIM of 3. 96% in 2011 and 3. 93% in 2010. This modest NIM shows SunTrust has not been as profitable as BB&T in the earnings it would normally receive by borrowing and lending funds. Unfortunately, Price to Book ratio (P/B) for SunTrust decreased significantly from . 81 in 2010 to . 48 in 2011. The decrease in price to book demonstrates the effect of SunTrust’s stock fell from $29. 51 in 2010 to $17. 70 in 2011.
However, many banks suffered similar downgrades in stock price during that period. BB&T’s price to book ratio even decreased from 1. 01 in 2011 and 1. 11 in 2010. Liquidity Core deposits have been the most stable source of funding for SunTrust. SunTrust’s deposits to loans remained fairly unchanged in 2011 at 1. 02 in comparison to 1. 03 in 2010. Liquidity remained strong for SunTrust due to growing core deposits which “represented a high-level of funding at 85% as of Dec. 31, 2011. ”(Fitch Ratings, 2012) BB&T had deposits to loans of 1. 12% in 2010 and 1. 00% in 2011.
The higher proportion of SunTrust’s deposits to loans means the less it will have to borrow to fund its assets and thus lower its interest expenses. SunTrust’s current ratio was also fairly stable at 1. 13 in 2011 and 1. 15 in 2010. BB&T’s current ratio was 1. 11 in 2011 and 1. 12 in 2010. Sensitivity to Market Risks Sensitivity to Market Risks was recently added to CAMELS to reflect how changes in interest rates, commodity prices, and equity prices can affect earnings and capital. While SunTrust’s primary market risk is interest rate risk, SunTrust’s current interest rate risk is low. Fitch) The real estate sector remains sensitive to market risks owing to its exposure to the weak Florida housing market. The bank has a $921 million mortgage servicing rights (MSR) portfolio. “In 2010 and 2011, the bank recorded MSR write downs of $161 million and $69 million, respectively, mostly to reflect increased prepayment rate assumptions. ” (Standard & Poor’s, 2012, March 13, p. 6) Assumptions Certain assumptions have been made in connection with the analysis. The financial ratios used do not necessarily provide an entire picture of the financial health of the Bank.
The calculation of the ratios was based on historical financial statements from 2011 and 2010. There may be new data such as the new BASEL III requirements since that selected time period which may alter the findings stated in the report. Results of Analysis The level of nonperforming assets to net charge-offs while improved, BB&T is in a better position due to lack of exposure to the southeast. BB&T also have a larger commercial lending portfolio that has not had the same levels of defaults as residential lending. Net Interest Margin is also better at BB&T.
Price to book value has come down for each institution and are historically low compared to previous years. Due to increased regulation, Tier 1 Capital still remains at or above regulatory standards for both banks. Despite growing deposit levels, loan growth has not expanded as many investors had hoped which is tied to stricter lending standards and lack of consumer demand. Conclusion SunTrust Banks, Inc. is in a highly competitive industry that has been seriously tested in the current economy. The banking industry has and will continue to experience more consolidation as seen in BB&T’s recent acquisition of BankAtlantic.
SunTrust’s ability to remain competitive and increase profitability will determine its fate. SunTrust has instituted recent cost cutting measures and experienced slight improvements in non-performing assets. However, the Bank needs to address issues that affect its ability to earn income and increase growth. Increasing the Bank’s earnings would help mitigate some of its loan losses and increase shareholder’s equity. REFERENCES BB&T Corporate Profile. (n. d. ). BB&T. Retrieved July 4, 2012, from http://bbt. mediaroom. com/index. php? s=22735 Credit Opinion: SunTrust Banks, Inc.. (2012, March 28). Moody’s Investors Service, For U.
S. Large Regional Banks, Strengthening Asset Quality Supported an Improvement in First-Quarter Results. (2012, May 11). Standard & Poor’s, pp. 1-7. Global Bank Credit Rating Methodology. (2012, April). Morningstar, pp. 1-15. Quarterly Banking Profile: Fourth Quarter 2011. (2012). FDIC Quarterly, 6(1), 1-27. SunTrust Banks Inc. Ratings Unaffected by Fed Review. (2012, March 14). Standard & Poor’s. SunTrust Banks Inc.. (2012, March 13). Standard & Poor’s, pp. 1-11. SunTrust Banks Inc. (2012). Hoover’s. Retrieved July 4, 2012, from http://ezproxy. fau. edu/login? url=http://search. proquest. com/docview/230617193? ccountid=10902 SunTrust Banks, Inc. Full Rating Report. (2012, March 15). Fitch Ratings, pp. 1-8. SunTrust Banks, Inc. (n. d. ). Thompson Reuters. Retrieved June 29, 2012, from http://www. knowledge. reuters. com/Views/Company/Fundamentals SunTrust Profile. (2012, March 8). SunTrust Bank – Frontline Presentation Builder. Retrieved from http://presentation-builder. suntrust. com/Client/_Libraries/7/default. asp? CurrentCatInTree=&LinkID=&ID=106 SunTrust, Upgrade to OW on Strong 2H Mortgage Revenues. (2012, July 2). Morgan Stanley, pp. 1-29. APPENDIX: Please see attached calculations & financial statements