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SunTrust Bank (NYSE:STI) is among the largest of regional banks, and the eighth largest commercial bank overall with just under $175 billion in assets. I have been following the bank since the 1980's. It had a pretty solid 2012, and while nowhere near as profitable as it was pre-recession last decade, it is showing signs that it is getting back toward where it was, and rewarding all newer shareholders in the process.

In the fourth quarter of 2012, SunTrust posted earnings of $350 million, or $0.65 per share. This was a tremendous leap from the fourth quarter of 2011, when earnings were $71 million, or $0.13 per share. For all of 2012, earnings came to $1.96 billion, or $3.59 per share, but of that, $1.40 was due to realized gains in the third quarter related to a series of transactions involving SunTrust's sale of its 93 year old stake in Coca-Cola (NYSE:KO). The resulting adjusted earnings of $1.21 billion, or $2.19 per share in 2012 still more than doubled the 2011 earnings of $0.94 per share. That $1.21 billion represented a 0.69% return on assets, demonstrating that SunTrust's recovery still has a long ways to go. One must recognize that, after discounting the effects of the Coca-Cola sale, earnings have increased sequentially now for four consecutive quarters. Looking solely at the fourth quarter of 2012, the return on assets was 0.81%.

SunTrust's net interest margin is on the low side for a regional bank, at a year end 3.36%, which was ten basis points below the year ago figure. The Tier One Common Ratio at year end stood at 10%, up from 8.82% a year ago. Those numbers are still below most of SunTrust's peers, but as long as it seeks modest capital returns to shareholders, it should pass this winter's banking stress tests.

What SunTrust has been doing right is a substantial cleaning up of its balance sheet in the third quarter, when over $3 billion in questionable assets, most in the form of soured and non-performing loans, were jettisoned. Freed from that anchor, the bank has been looking to grow its balance sheet with mortgage loans along with judiciously underwriting some commercial and industrial loans. Not paying interest on its nearly $5 billion TARP loan that was paid for in early 2011 has been a help. Missing dividend payments from the sold Coca-Cola stock mitigates those savings. SunTrust's net interest income fell about $48 million from the year ago quarter, due to a lower loan volume and lowered interest margin. SunTrust's non-interest income skyrocketed by $310 million, due to mortgage and investment banking income, along with a much lower provision for agency mortgage claims after a massive contribution for such claims in the third quarter.

Analysts see SunTrust's earnings growing quickly, in the 16% range on average over the next five years. I agree with this, and see the company, with a trailing price to earnings ratio based upon adjusted earnings of 13, as a long-term winner.

One of SunTrust's many competitors is the Southeast's largest bank, Bank of America (NYSE:BAC). Despite massive losses from one-time legal settlements in the fourth quarter, it managed to edge out a profit in the fourth quarter of $732 million, or $0.03 per share. Analysts had been expecting $0.01 per share, so by that measure, at least, the quarter was a success. But various signs are not generally positive. A myriad of one-time charges was roughly matched by a $2.4 billion income tax credit in the quarter, and trying to really segregate Bank of America's core earnings from the various one-time items is hopelessly confusing.

The good news for Bank of America is that its Merrill Lynch unit is riding a wave of improved investment bank activity climate, brought on by companies issuing debt to take advantage of prolonged, historically low long-term interest rates. Investment banking income was $1.6 billion, the best quarter in several years for the former Merrill Lynch. The other good bit of news from Bank of America is that it has peer leading capital levels. Its Tier One Common ratio at the end of 2012 stood at 11.06, up 121 basis points from the year earlier, and nearly twice what regulators regard as "well capitalized." Its Basel III capital level was an estimated 9.25%, up 130 basis points over the course of the year, and well above the anticipated 8.5% requirement that is to apply in 2019. If I were a shareholder in Bank of America, I would want management to show an ability to turn meaningfully consistent profits before returning capital to shareholders, but the bank does have plenty of capital to work with.

Showing consistent meaningful earnings has been beyond Bank of America's grasp since last decade's recession, making it the last big bank to show real recovery. For all of 2012, Bank of America earned just over $4 billion, for a paltry return on assets of 0.18%.

Looking forward, much is made that many of Bank of America's worst problems related to legacy mortgage issuance and foreclosure practices were being cleared away. With that, Bank of America can focus more on growing its consumer and commercial loan portfolios. But the fact is most banks have already benefited mightily by the boom in mortgage refinancings at the same time Bank of America had been retrenching. Revenues in the fourth quarter fell to under $19 billion, compared with $26 billion in the fourth quarter of 2011. Although Bank of America's cost cutting plan "New BAC" has already resulted in 14,600 lost jobs, those reduced expenses cannot fully compensate for that sort of decline in income.

Bank of America has a vast retail footprint, a well known logo and brand name, but the company's past keeps on getting in the way. Despite selling at a 45% discount to its stated book value (though a much smaller discount to its tangible book value), I just cannot endorse a purchase in Bank of America unless or until there are actual core earnings.

Regions Financial (NYSE:RF) is a large Southern regional bank. After stammering through most of the past five years, fourth quarter and all of 2012, Regions appears to be back on track. Fourth quarter earnings came to $311 million, or $0.22 per share, which not only turned around a large loss in the fourth quarter of 2011, but also beat Wall Street estimates by a penny. As a result, the stock has been bid up over 4% on the day of the earnings release.

Overall in 2012, Regions posted earnings of $1.1 billion or $0.76 per share in 2012, representing a 1.01% return on assets. That is not too shabby for a bank on the brink of failure two years ago. But looking forward, it is all about growing revenues. In the fourth quarter of 2012, Regions' loan portfolio averaged $74.6 billion, down about 6% from the same quarter of 2011. Assuming the bank is able to arrest the decline in its loans and reverse it at least modestly, there should be earnings improvements due to some $6 billion in high cost certificates of deposits coming due in the first half of 2013, bearing an average interest rate of 1.51%, about 130 basis points higher than Regions is currently paying. I therefore look for a bit of interest margin expansion in 2013 from Regions low 3.08% recorded in the fourth quarter of the year.

Region's capital is in excellent shape with a Tier One common ratio of 10.8%, though I would like to see Regions plow profits back into its business for another year before worrying about deploying capital to shareholders. On balance, I think that Regions is still a higher risk investment than most banks, but I look for it to be able to continue to expand its earnings in 2013 and beyond.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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