This summary is based on the third quarter fiscal 2008 earnings call conducted by SunTrust Banks Inc. (STI) on October 23, 2008.
Management:
-
CEO: Jim Wells
-
CFO: Mark Chancy
-
Chief Risk and Credit Officer: Tom Freeman
-
Director, Investor Relations: Steve Shriner
Key Investors Issues
- Revenue increased 20.7% to $2.46 billion from $2 billion in 2007.
- Net income of $307.3 million or 88 cents per share, down 25.5% from $412.6 million, or $1.18 a share in 2007.
Year To Date Highlights:
- Revenue was $7.28 billion, up 12.4% over the prior year.
- Net interest income was $3.53 billion, a decline of 2.7% from 2007 while net interest margin was relatively flat.
Third Quarter Highlights
Revenue rose 21% to $2.46 billion from $2 billion in 2007 as positive net market valuation impacts, the gain on the sale of TransPlatinum, and core fee income growth more than offset a decline in net interest income.
- The funding strategy remains primarily centered on stable deposits which fund 91% of loans.
- The balance sheet restructuring in the first half of last year which resulted in a de-leveraging of the balance sheet by $9 billion has reduced its brokered and foreign deposit levels significantly.
- Deposits from consumer and commercial clients comprised 88% of total deposits while only 12% were brokered or foreign.
- The average daily overnight borrowing position is down significantly coincident with a 25% decrease in the brokered and foreign deposits.
The firm reported net income of $307.3 million or 88 cents per share, down 25.5% from $412.6 million, or $1.18 a share in 2007 due to the increase in net charge-offs, nonperforming loans, and credit-related expenses.
- The firm realized a $68.5 million of reversal of a deferred tax liability associated with the contribution of 3.6 million shares of the Coca-Cola common stock to the charitable foundation.
- Overall average loan balances excluding non-accruals remained flat although particular targeted areas such as commercial and consumer direct exhibited good growth.
- Home equity lines grew as well but that is more a result of very low attrition against normal draw volume.
- Declines continued in areas where the firm is intentionally shrinking the portfolio namely specific areas of mortgage, construction, and indirect auto.
On the deposit front average deposits declined from the second quarter level primarily driven by lower CDs and DDA resulting from increased deposit competition and a general strain on consumer and commercial liquidity.
- Largely offsetting the decline in these products was an increase in money market accounts influenced by sales strategies in which money market products were used a lead product to help retain a greater portion of maturing CDs and other client balances.
- Deposit balances trended down mostly in CDs and DDAs while money market balances increased,but this trend reversed significantly in late September coincident with increased media coverage of credit and liquidity conditions impacting some other organizations.
- From a low of just of $100 billion at the end of August core customer deposits increased by $1.8 billion to end September at $101.8 billion.
- Non-interest income growth was 57% driven by services charges on deposits, investment banking income, card fees, and mortgage servicing though this was largely offset by decreases in trust and investment management as well as mortgage production income.
The firm recorded $236 million in write downs including a $64 million loss on a $70 million note issued by Lehman Brothers and purchased from one of the Ridgeworth Money Market Mutual Funds.
- It has also taken a charge of $173 million on anticipated settlement regarding SunTrust’s sale of Auction Rate Securities to selected clients.
- Credit related costs continue to increase, and the firm recently recorded another $48 million in reserves for expected losses related to the Twin Rivers mortgage re-insurance company, prompting the bank to established a $40 million reserve for expected future fraud related losses.
- Gross savings related to the efficiency and productivity initiatives reached $149 million and the bank expects full year 2008 savings to approximate $540 million.
Segment Highlights:
-
Retail and Commercial Banking net income was $64.7 million, a decrease of $138.1 million, or 68.1% from 2007 due to higher provision expense due to home equity line and commercial net charge-offs.
- Income decline was also due to lower deposit related net interest income and higher credit and fraud related noninterest expense, partially offset by strong growth in service charges on deposits.
- Net interest income decreased $51.6 million, or 7.3%, driven by a shift in deposit mix and compressed spreads due to increased competition for deposits.
- Average deposits increased $0.9 billion, or 1.1%, while deposit spreads decreased 18 basis points resulting in a $32.8 million decrease in net interest income.
-
Wholesale Banking net income was $42.1 million, an increase of $9.7 million, or 30.2%, as lower mark-to-market trading losses and higher investment banking income was partially offset by higher incentive based compensation.
- Net interest income decreased $10.8 million, or 7.6%.
- While average loan balances increased $5.2 billion, or 17.7%, the corresponding net interest income declined $13.1 million, or 11.4%.
Average loans in the legacy Wholesale Banking line of business increased approximately $3.1 billion, or 10.5%, driven by growth from large corporate clients partially offset by reductions in the residential builder portfolio.
- The decline in loan related net interest income is due to a shift in mix away from higher spread residential construction loans to lower spread commercial loans, as well as increased residential construction nonaccrual loans.
- Total average deposits were up $4.0 billion, or 75.8%, primarily in higher cost corporate money market and Eurodollar accounts.
- The net interest income associated with the higher-cost deposit categories was relatively flat as the additional volume was offset by lower deposit spreads.
Operational Insights:
