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SunTrust Banks, Inc. (STI)

June 12, 2013 7:25 am ET


Aleem Gillani - Chief Financial Officer and Corporate Executive Vice President


Betsy Graseck - Morgan Stanley, Research Division

Betsy Graseck - Morgan Stanley, Research Division

Okay. Thanks, everybody for joining us on Day 2 of the Morgan Stanley Financials Conference. We're going to kick off with an audience poll for SunTrust before we introduce SunTrust's CFO. The question here is what would drive you to add to your SunTrust position? And you have the polling devices in front of you. A is improvement in Southeast housing. B is accelerating operating leverage. C is higher capital returns, and D is accelerating loan growth. So with that, we'd like to get you responses. And Kris, you can vote, too. A is housing improvement. B is operating leverage. C is capital return. D is accelerating loan growth. And the answer is interesting, very evenly split between operating leverage, capital return and accelerating loan growth. So people are looking for a little bit of everything I guess. All right.

So I just wanted to, again, say thank you for being here this morning. We are pleased to have with us today, Aleem Gillani, CFO of SunTrust. Aleem has been CFO since May 2011, prior to which he served as Corporate Treasurer of SunTrust. Three key debates we see in the stocks: Southeast housing improvement, expense management and capital return. We are overweight at SunTrust, which benefits from housing improvement we're seeing in the Southeast. And I think Aleem is going to touch on that in his presentation. So I'll turn it over to Aleem, and he will take some questions afterwards. Thank you.

Aleem Gillani

Thanks, Betsy. Good morning, everybody. Thank you, all, for joining us here at this early hour of the morning. I appreciate you being here after last night. Before I get started, let's get some housekeeping out of the way. You know what's coming. Our comments today may include forward-looking statements. And these statements are subject to risks and uncertainties. And actual results could differ materially. And we list some of the factors that might cause actual results to differ materially on Slide 2. We will also discuss non-GAAP financial measures today. You can find the reconciliation to GAAP in the appendix and on our website,, I suggest you visit often. I'll start today's presentation by briefly discussing our franchise and the momentum we built. I'll then spend the bulk of my time focused on our business segment and their strategies to drive our future growth.

The SunTrust franchise is concentrated in the Southeast and Mid-Atlantic portions of the United States, where we operate approximately 1,600 branches and 2,900 ATMs. Within these markets, we're skewed to the major metropolitan areas. As you would expect, this concentration helps to drive very attractive long-term demographic and growth characteristics. 76% of the MSAs in which we operate have better household income growth projections than the national average. Furthermore, projected population growth in our footprint also exceeds the national average. We're also well positioned within the markets in which we operate. Our deposit market share is first, second or third in 19 of our 25 largest MSAs. And within these markets, our average share is a significant 14%. So we clearly have absolute scale, and we can compete. Further, we're structured in a way that enables and encourages personal relationship building with our clients. We believe this provides a distinct competitive advantage and is a key component to our strong service level model, a model that has helped drive high levels of client loyalty.

Slide 5 shows the diversity of SunTrust revenue mix. First quarter revenue was split about 60-40 between net interest income and noninterest income. And the diversity within our fee income streams is also evident here. While our industry is certainly facing a challenging revenue environment, we believe the key for sustainable long-term growth is to have a diversity of income sources, which SunTrust clearly does. As expected, we're seeing the benefit from this in the second quarter as certain fee categories, for example investment banking, are rebounding from the seasonally low first quarter levels.

Let's take a few moments to review SunTrust's improving momentum. Our profitability has been on an upward trajectory for the past several years. First quarter net income to common was up almost 40% from the prior year. Capital levels are strong and growing, with our Tier 1 common ratio in excess of 10% and at an all-time high. The multiyear improvement in our credit metrics has also continued. First quarter net charge-offs were at their lowest level in 5 years and down 45% from the previous year. Nonperforming loans were also down by about 45% year-over-year and by over 70% from their peak.

We've also demonstrated notable improvement in our expense management, with expenses down 12% from the prior year, driven by lower core operating costs and reductions in cyclically high items. This expense decline has led to a 460-basis-point improvement in our tangible efficiency ratio in the last year. All of us know that efficiency hasn't always been a hallmark of SunTrust. However, we're making a concerted effort to change that. 7 of the 10 members of our executive leadership team are either new to SunTrust or new to our positions within the last 2 years. And we're really focused on transitioning our culture toward one that is more efficiency-minded. We've incorporated a required efficiency ratio target into the company's compensation plan. We are also transparent throughout the organization about the progress we've made and the ongoing improvements required. SunTrust teammates have really responded well, and our organization is focused on achieving a sub-60% efficiency ratio.

In addition to SunTrust performing better, the markets in which we operate are also exhibiting much more favorable characteristics. There is no question that the Southeastern markets were hit harder than most during the economic downturn. However, they are now recovering at a faster pace than most of the country. The housing rebound appears to have some real legs to it. And you can see in the graph on the left that home price growth in most of our largest metropolitan areas is equal to or greater than that of the Case-Schiller U.S. composite index. The unemployment situation is also improving. The absolute unemployment rates in most Southeastern states are now nearing the U.S. average. And the rate of improvement is more rapid within some of the larger states in our footprint. For example, Florida, which is about 1/3 of our deposit base, saw unemployment peaked at about 11%. Since then, unemployment in Florida has declined by over 4 percentage points, and the pace of that improvement has been most pronounced within the past year. Market conditions are clearly better, and we are seeing the benefits of that in things like lower delinquency rates, lower loss severities, improved roll rates and reductions in credit-related expenses. While overall loan growth is still fairly benign, we're seeing some potential precursors to future growth, including improved pipelines, slowing deposit growth and higher production in certain loan categories, some examples of which I'll share in a couple of minutes.

To take advantage of these improving market conditions, each of our business segments has specific strategies in place to help drive future growth. I'll spend the balance of today's presentation giving you a flavor for those, starting with our Consumer Banking and Private Wealth Management segment on Slide 10. This is our largest segment, with about $930 million in first quarter revenue, which equated to 44% of the company's total. Our retail business is the largest piece of this segment, representing over 60% of its revenue. As I mentioned earlier, our geographic footprint and strong market share are competitive differentiators for SunTrust. We also have a loyal client base as a result of our strong focus on client service. This loyalty imparts advantages as our research indicates that loyalty drives profitability. Our performance in Consumer Banking and Private Wealth Management has improved coincident with an improving economy, as well as from our efforts to reduce expenses. First quarter net income in this segment was up $43 million or 78% over last year. This was driven by a lower provision for credit losses, primarily in home equity, as well as a reduction in noninterest expenses, which, together, more than offset lower revenue. The 8% expense decline from last year was due in part to some changes we made in our branches. So let's take a look at those dynamics.

An important component of our strategy in the Consumer Banking business is the build-out of our digital channels, which are becoming increasingly utilized by clients. As such, we've made significant enhancements to respond to those changing client preferences. These channels also have the dual benefit of being much more efficient to operate. Our extensive ATM network represents an important component of our digital offering. We've made investments to upgrade our ATMs and add deposit imaging, which has resulted in ATM deposits increasing by almost 200% over the last 2 years. Another increasingly utilized digital channel is our mobile app. Sign-ons have grown dramatically over the last few years as our capabilities have been expanded to meet more client transaction needs. For instance, we've seen steady and marked increases in mobile deposits since we launched this capability in August. As you can see at the bottom of the page, our ATM, mobile and direct deposits have increased 9 percentage points over the last 2 years and now represent over half of our processed deposits. The obvious implication of the expanded digital usage is a reduction in branch transactions, and this is evident on the next slide.

In fact, branch transactions are down over 20% over the last 2 years. In response to this, we've made some changes to our staffing model and, more recently, to our retail branch network. Over the past 2 years, we have reduced branch staffing by 16%. And over the last year, our branch count fell 5%, with the pace of decline accelerating last quarter and additional closures planned throughout 2013. Overall, our concentrated branch network, as well as our mix of traditional and in-store branches affords us flexibility as we evaluate our branch needs. Further, because of our branch's density, our history is very good at maintaining deposit balances after branch consolidations. And the early indicators from our recent closures are very strong. Lastly, I will point out that while the number of branches will be declining, branches do remain an important part of our retail strategy. So while the role of their branch may be changing, they will remain a key sales and service distribution channel.

Another key initiative for our Consumer Banking and Private Wealth Management segment is the growth of consumer lending. Consumer loan production is up 32% from 2 years ago. And that growth was broad-based across most consumer lending categories. One of the primary drivers of consumer lending growth nationwide has been auto lending, and we certainly have seen this trend in our own auto portfolio. In addition, we have expanded our consumer lending product suite. We recently launched an online origination platform which targets super prime clients. We also introduced a simplified home refinance product. And as you can see on the bottom of the slide, the early results from this product have been good and exceeded our expectations.

Our Wholesale Banking segment represented 38% of SunTrust's first quarter revenue. This segment provides a complete line of banking and capital market solutions to our Corporate and Investment Banking, Commercial and Business Banking clients, as well as those with commercial real estate needs. Performance for this business segment has been strong. Net income grew 44% from the prior year, and expenses were down 13%. The efficiency ratio continued to improve, down 6 percentage points from last year. Furthermore, there was good loan growth that was diverse across industry segments. Wholesale Banking is an important component of our future growth plan. As such, we have several initiatives in each of the individual businesses that comprise this segment.

Focusing on our Corporate and Investment Banking business, this has developed a strong track record for growth. Growth has been enabled by our structure, which allows us to deliver the whole bank to clients. That is the full array of products and services that they might need. This is worth exceedingly well in our uniquely positioned middle market investment banking business, SunTrust Robinson Humphrey. We've attracted top talent, built out key capacities in some areas, such as syndication, investment grade and high-yield bond origination and distribution, sales and trading, as well as M&A. And we've seen results in terms of our top and bottom line performance. Further, revenue per FTE is up 12% compounded since 2008 to levels that we believe are amongst the best in the industry. And lead relationships have also expanded. Since January last year, we have increased our lead-syndicated relationships 18% to levels that were more than double what they were at the beginning of 2010. We've been filling in some industry expertise and expanding certain product capabilities. So far, in 2013, we've hired new bankers in our consumer, retail, financial services and technology, health care, industrials and real estate industry groups. We also expect to better leverage the success we've had in investment banking with our smaller Corporate Banking clients so that we can better penetrate and expand that client base.

Our Commercial and Business Banking units have been steadily growing over the last several years. Collectively, they have good profitability, and we have a strong and stable commercial market share ranked third in our footprint. However, we have opportunities to better leverage this share and our strong loyalty by meeting more of our client needs. Currently, 57% of our commercial clients utilize 50% or more of what we consider are core commercial product offerings. While this is a solid number, that leaves plenty of room to expand our current relationships. And we're striving to convert more clients to lead bank relationships as a means to improve client profitability. We're also focused on new client acquisitions, as well as on improving our sales teams' productivity by reducing some of their administrative duties and increasing their capacity to spend more time developing business. We've made some progress in this regard. For example, in the commercial line of business, we saw year-over-year growth in new business revenue per relationship manager and generated positive momentum in deepening client relationships. In addition, pipelines for commercial loans have rebuilt following the strong funding that occurred at the end of the fourth quarter. Another key component of growing our Commercial and Business Banking area is a multiyear strategy in treasury and payment solutions, where we are improving products, platforms and delivery channels in an effort to enhance the marketability of this profitable product suite. To that end, during the first quarter, we launched a new and improved small business online platform, which introduced new features and an improved online experience for over 200,000 clients so far.

Moving to Commercial Real Estate. Our focus in this business over the last several years was concentrated almost exclusively on maximizing the recovery of distressed assets. With these problems largely behind us now, more recent efforts have been focused on growth. We have plenty of balance sheet capacity to support this growth as current CRE loans are only about 4% of our balance sheet. And you can see that we've reached the inflection point in this business. In fact, last quarter was the first quarter that we saw growth in our core loan balances since before the economic downturn. Also, after several straight years of losses, this business returned to profitability in the first quarter. We're employing a targeted approach in our efforts to grow retail, office, multi-family and industrial CRE relationships, evaluating each asset class by our individual geographic market. And we're targeting clients and prospects that have track records of success and sustainable capital and liquidity structures, where we can realize sizable, profitable relationships. This will create a more diversified portfolio from both a geographic and product perspective than what we had previously. We're also building out our REIT business through a partnership between our Commercial Real Estate and CIB groups, and we've had some nice wins here recently. Further, we're leveraging the network that our experienced CRE leadership team has via pursuing institutional investor opportunities to further augment growth.

Our third major segment is our Mortgage Banking business. This business, which represents 15% of the company's revenue total, has had a share of challenges in recent years. So the underlying trends in our markets and our business are clearly improving. This is a business that we continue to believe can be a long-term, sustainably profitable and meaningful contributor to SunTrust. So let's take a look at some of the initiatives we have in place and the progress we've made here.

The footprint in which we operate imparts some distinctive managers, and we have added origination capacity to leverage the opportunities afforded by our market position. One such advantage is that our footprint has a significant remaining HARP II eligible population. In fact, we estimate that the remaining opportunity is 150% greater than the HARP II business we've already closed. Naturally, not all of these clients will ultimately refinance and the ultimate size of the opportunity will, in part, be dictated by the rate environment. But we do currently expect to see continued HARP activity over the next several quarters. HARP was a contributor to the strong refinance volume we saw in the first quarter when overall mortgage production was at it's highest level in over 3 years. We gained market share in the quarter as our capacity additions enabled us to improve turn times on our application pipeline, be more proactive in our outbound calling efforts and grow our correspondent and consumer direct channels. We currently expect these factors, as well as an improving purchase market, to drive another strong quarter of closed loan production volume in the second quarter. We have experienced a decline in new locked volume in recent weeks as mortgage rates have increased. Rate-driven volatility within a refi boom is, of course, an industry phenomenon. And time will tell whether this most recent trend holds or again reverses itself. But eventually, refi volume is going to wane, which is why we've continued to maintain a strong purchase market presence. And we've been pleased to see a fairly healthy spring selling season thus far.

We're also focused on efficiency within our mortgage business. As part of this, our capacity additions have been primarily in consumer direct, which is our phone- and online-based channel as we seek to increasingly utilize lower-cost delivery methods. This channel build-out is also consistent with client preferences as many prefer to utilize consumer direct due to its convenience. Closed volume and consumer direct was more than double the prior year, and it generated more than 15% of our first quarter applications. Taking a broader view of expenses, you can see that mortgage experienced a 19% decline over last year as legacy issues continued to abate.

Another opportunity exists to improve the penetration of our mortgage product with our in-footprint homeowners. We have a strong track record of broadening our consumer relationships with our mortgage clients. In fact, you can see on the pie chart that last year, 42% of new mortgage clients from our retail channel added at least one other SunTrust product in addition to their mortgage. However, there is a longer-term opportunity going the other way to meet more of our consumer clients' mortgage needs. Of our consumer households who have a mortgage, only about 11% have their mortgage with SunTrust, whereas we estimate that best-in-class is closer to 20%. Using round numbers, each percentage point increase in consumer household penetration could generate about $100 million in production revenue on agency product, and that provides us the potential for a lot of upside.

In sum, we see good potential in each of our business segments. There are meaningful opportunities to leverage our distinct position within each. And we have prioritized initiatives to help us capitalize upon those opportunities. Moreover, we're already making progress against several of these initiatives.

I'll conclude on Slide 22 with a quick recap of the main themes I presented. We have an attractive franchise with the right size to compete effectively. We have strong market share. Our footprint affords us growth opportunities, and we have diversity in our revenue and business mixes. Our franchise has improving momentum. This is evident in the favorable trends that our markets are exhibiting, as well as in our own financial metrics. And we're culturally committed to driving further improvements to our return profile and to achieving our efficiency ratio objectives. And lastly, we have clear opportunities in each of our business segments to grow from here, and our teammates are focused on meeting more client needs.

I hope you've gotten a feel for those plans today. In sum, we have considerable runway ahead of us, and the intensity is high across SunTrust towards fully capitalizing upon our potential. Thank you.

Betsy Graseck - Morgan Stanley, Research Division

Thank you, Aleem. So we have 3 or 4 minutes for questions. I'll kick off with a first one. SunTrust is not doing a breakout. So if you have a question, please raise your hand.

Question-and-Answer Session

Betsy Graseck - Morgan Stanley, Research Division

Aleem, so you indicated the path towards the expense target that you have, the expense ratio target that you have. Can you give us a sense as to what kind of ROA that expense goal translates to?

Aleem Gillani

A little bit of that, Betsy, depends on rates, obviously, but our -- what we expect to be able to see. If you think back to SunTrust's actual delivery of financial performance in the past, we were generating consistently ROAs north of 1. And when I take a look at the potential for our businesses and some of the things we talked about earlier today, I see no reason why we can't get north of 1 again. And I fully expect to see that kind of ROA. Your follow-up question is going to be, "Well, where will that translate to an ROE?" And a little bit of that depends on CCAR, on sort of future CCARs and the regulatory convergence with the industry on our ability to return more capital from our shareholders. I'm actually -- when I look at this year's CCAR compared to last year's, I'm actually pretty impressed with how the regulators and the industry converged better in terms of modeling. And I expect that as an industry, we will be able to start to return more capital to shareholders. And that's going to start to improve ROE as we can more proactively manage capital going forward than we've been allowed to in the past.

Betsy Graseck - Morgan Stanley, Research Division

Sure. The other follow-up question is the 1% plus. What kind of time frame are we dealing with? Do you think that you can get there by 2015?

Aleem Gillani

If the economy gets better, I think that we can get there by 2015. But don't all write that down right away. "If the economy gets better," write that part down, too. We're a financial institution. Therefore, we are levered to the economy like everybody else. And if the momentum that we've seen in the economy continues -- and I'm actually pretty optimistic about that, the kinds of business increases that I can see in our markets as I travel around, in Florida, in Georgia, certainly in the D.C. area and Virginia, even in places like Tennessee. Markets are feeling better. Clients are more optimistic and starting to do more business. And if that continues on, we're on a path to deliver much better results over the course of next few years.

Betsy Graseck - Morgan Stanley, Research Division

Okay, great. All right. Any questions? I'll just follow-up with one last one. Just on guidance, I know that we are longer-term investors than one quarter 4, but you do have some guidance out there for 2Q. I just wanted to ask if there is any change to the guidance that you've been giving for 2Q, which is essentially core NIM to be down in the mid-single digits, IB revenues up Q-on-Q, stable NPLs but lower NPLs, modest increase in expenses. Is that fair?

Aleem Gillani

I think we must have forecasted really well in April when we gave that guidance. I see no major changes to any of that. You mentioned core NIM. That's right, core NIM. Don't forget the swaps [indiscernible] swaps. But yes, I think all of the guidance that we gave in April, I think, is still good.

Betsy Graseck - Morgan Stanley, Research Division

Okay, great. We'll thank -- join me in thanking Aleem this morning. Thank you, Aleem.

Aleem Gillani

Thank you, all, for being here.

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Source: SunTrust Banks, Inc. Presents at Morgan Stanley Financials Conference 2013, Jun-12-2013 07:25 AM
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