SunTrust Banks Inc. (NYSE:STI) is both a bank holding company and financial holding company. Such a dual designation allows the bank to engage in a broader range of financial services beyond the limited banking activities regulated under the Bank Holding Company Act. The expanded services include securities underwriting and dealing, merchant banking and corporate advisory, for example, M&A.
In fact, the bank has expanded its wholesale banking unit to show a national footprint, despite being a regional bank of consumer banking with branches primarily in its home state of Georgia and the southeast region. In particular, the bank is seeking to increase its M&A services for mid-size companies, which may help bring in some needed growth at a time when revenue from its consumer banking and other loan operations have been down for the last five years.
Mostly known as a regional bank, SunTrust derives more than half of its revenue from interest and fees on loans, totaling between $4.5 billion and $5 billion a year. Since 2011 up till 2015, that part of its revenue has been on a steady decline, coming up short of a few percentage points each year from the year before. However, annual net interest income after loan loss provision performed better during the same period, because the bank had better results on interest-related costs in both deposit and other borrowings.
But squeezing more earnings out of cost control is not a long-term solution for sustainable earnings growth. If the bank cannot find new revenue sources from its traditional banking operations, it should take advantage of its also being a financial holding company and look into other financial services for potential revenue growth.
Currently, SunTrust's financial services revenue is less than two thirds of its loan-related interest revenue, as shown in the bank's 2015 income statement, and this leaves plenty of room for future growth. From 2011 to 2015, non-interest revenue such as fees and commissions from certain financial services and gains from investment securities was consistently in a state of volatility, up more than 50% one year and then down as much another year.
However, the bank managed to bring in more revenue from various financial services in 2015 than what it generated five years ago in 2011, something that it couldn't do with interest revenue from loans. If the bank can smooth out the revenue volatility in its financial services operations and further expand into areas like M&A, it may have a chance to grow again.
SunTrust reported a 10% increase in net non-interest income in 2015 over 2014, thanks primarily to a 14% increase in investment banking income, which helped offset the slight decline in total non-interest revenue. It's evident that there's a better operating efficiency in the bank's financial services, and M&A advisory is likely to be a lead product for the bank as it continues to grow its nascent investment banking business. The bank's own survey shows that there's an increasing number of mid-size companies interested in expanding their businesses through M&A deals.
Meanwhile, with annual revenue between $10 million and $150 million, these mid-size companies may not be able to attract the interest of large Wall Street banks. This creates a rare opportunity for lesser-known, aspiring investment banking operators such as SunTrust to fill the gap and spring into bigger roles later in corporate finance and advisory.
SunTrust stock has been trading in and out of the $40 mark for two years in 2014 and 2015 after an upswing of about $20 in the two years prior. Now coming into 2016, the stock is heading down to the $30 line. The market is likely concerned about the bank's lack of growth with its traditional banking business, while waiting to see whether the bank can really execute its revenue initiatives in M&A and other investment banking activities. If successful, this should give the bank a differentiated business model and set the stage for future growth.
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