The Rate Also Rises (Part II)

| About: SunTrust Banks, (STI)


SunTrust is a large regional bank with a retail footprint in the Southeast and the Mid-Atlantic regions.

SunTrust has turned the ship around in terms of efficiency and is poised for revenue and earnings growth.

SunTrust has developed several products that target consumer lending to supply it with loan growth.

SunTrust is growing its Corporate and Investment Bank and is now competing at the national level.

SunTrust Banks, Inc. (NYSE:STI)

Market Cap ~ $22B

Yesterday morning, William Rogers, Chairman and CEO of SunTrust Banks, presented at the Goldman Sachs Financial Services Conference. Above all, if you are interested in investing in STI, you should take the 35 minutes to listen to the webcast and read the presentation slides (here and here). This article is a follow up to my prior article entitled, "The Rate Also Rises." With the updates from yesterday's presentation, I will examine SunTrust's strategic initiatives over the near and long term and offer my views on the bank's potential for growth.

Over the past year, the main initiative of the company had been to improve the bank efficiency ratio. Mr. Rogers executed admirably on this target, improving STI's efficiency ratio from 71.7% in 2011 to 63.5% in 2014 (year to date). Since 2011, SunTrust's retail branch presence has shrunk by 12% creating a leaner and more efficient structure to serve the bank's customers. This is a significant accomplishment in and of itself. Perhaps more impressive is the fact that SunTrust has simultaneously grown loans on a year-over-year (YOY) basis in a national market where loan growth is rarer than a black swan.

In the presentation today, Mr. Rogers explained that past growth has been a combination of initiatives made by STI as well as above average growth in its footprint. However, Rogers also presented his three main drivers for SunTrust to grow consumer loans organically in a market that is not particularly kind to net interest margin (NIM) based businesses.

Consumer Loan Growth

The first is SunTrust's credit card book. SunTrust is sorely lacking in this market when compared with universal banks like JPMorganChase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC) as well as regional banks such as US Bank (NYSE:USB) and Capital One (NYSE:COF). Credit card growth in footprint seems to be a major initiative, one I have been hoping to see from SunTrust for a while now. I was very pleased to hear Mr. Rogers note the importance of growing the credit card loan book. I believe targeting in-footprint growth of the credit card book is a smart, conservative choice as many banks have fallen prey to the temptation of national card businesses only to find themselves caught by non-performing loans and deteriorating loan books.

The second driver of growth is LightStream, SunTrust's digital lending platform. I find LightStream fascinating - it is one of the first Lines of Business (LOB) that SunTrust has operated on the national level. LightStream offers "The AnythingLoan" a low-rate personal loan that can be used for almost anything. Examples on the website include motorcycle loans, horse loans, jewelry financing, time share financing and a dozen other purposes in addition to staples like credit card refinancing and auto loans. SunTrust emphasizes the low rates it charges via LightStream and the high FICO (credit) scores of its customers.

LightStream is, in many ways, the traditional commercial bank's answer to the rise of peer-to-peer lending companies like Lending Club (PENDING: LC) and Prosper. SunTrust is significantly more conservative with it's lending policies than other unsecured bank lenders have been in the past (e.g. ING Direct) as well as more conservative than most investors in peer-to-peer portfolios. While I believe financial innovation (e.g. peer to peer lending and its potential for securitization) should be thoroughly scrutinized before being outright praised, Lightstream seems to be an incremental step, more evolutionary than revolutionary in the realm of unsecured financing.

Perhaps most interesting about LightStream, SunTrust has instituted a Customer Experience Guarantee - if you have a bad experience and report it, you can fill out a survey about that experience and receive a $100 payment. This tactic is strategic in terms of building a national direct banking brand, but it also creates an effective feedback loop for determining where inefficiencies and customer hardships occur in the system.

The third driver is SunTrust's partnership with GreenSky Credit. GreenSky is a home improvement finance company that SunTrust partners with to offer loans for items purchased in several major retailers. This offers SunTrust wider exposure to loan growth in the consumer space, a lever that could generate substantial returns over the next several years.

The consumer finance levers that SunTrust is using to add to its existing lending arms fascinate me because these are largely unsecured forms of consumer finance. Unsecured lending, the practice of lending without any collateral, is generally a higher risk proposition than secured lending. The most notable example of this is the financial crisis. With a mortgage, a lender can ultimately recover the real asset. Auto loans are likewise backed by automobiles (though these generally depreciate at a much greater rate than real estate as real estate may go up in value and generally automobiles do not).

Nevertheless I believe that the levers that SunTrust is exploring in the consumer finance space are actually surprisingly conservative. By slowly and methodically rolling out their consumer brand nationally via LightStream, SunTrust should be able to manage its brand image. During the presentation, Mr. Rogers noted that the FICO for its unsecured consumer lending was generally "over 750," hitting the segments prime and super-prime. While charge-offs do occur in these levels, they generally much safer bets than the majority of unsecured lending.

Though it is imperative to keep an active eye on both the general lending market and the performance of the loan books for these three segments, I believe that they could drive significant loan and revenue growth for SunTrust going forward.

Growth in Corporate and Investment Banking

In addition to growth in the consumer lending space, SunTrust has made great strides in its Corporate and Investment Banking (CIB) that operates under the name SunTrust Robinson Humphrey. Market share is expanding across the board, from syndication of loans to junk and investment grade bonds. In addition, the revenue mix of the CIB has been shifting. As was noted in my last article, STI has aggressively hired staff in investment banking, trading, and equities research over the last year. This has led to a shift in revenue coming from equity and advisory sources from 25% to 29% over the last year.

Over the last 18 months, SunTrust Robinson Humphrey offices have opened in Dallas, Chicago, San Francisco, Los Angeles, and Boston. The CIB has added new product capacities through the closest thing to organic growth in the investment banking space: hiring bankers. As noted in the my prior article "Character: The Fundamental Basis Of Business And The Future Of Finance," SunTrust seems to be pursuing a strategy of growing into what I call a universal regional bank. SunTrust is a regional bank with a regional consumer footprint; however, SunTrust is growing several different LOBs into the national market in an attempt to grow organically and build a national brand presence.

While it is technically a consumer LOB and is also in its early stages, it would be remiss for me to ignore SunTrust's development of SummitView, a platform for high-net-worth and ultra-high-net-worth individuals. SunTrust has received significant qualitative feedback in support of the platform. Just as exciting is the 10% growth in investment management revenue over on a year over year basis for the year to date period. SunTrust has a strong client base with an average net worth higher than that of the national average. Returns from the investment management may also be a significant lever that management can use to grow earnings.


SunTrust has made significant strides improving its efficiency ratio over the past year. Now, as the company turns to growth it has targeted a handful of markets where it has potential to significantly expand its loan book to drive meaningful returns for shareholders. While I believe that SunTrust is undervalued for the bank it currently is, the potential for strategic, conservative earnings growth suggests to me that STI is drastically undervalued from the bank it could become if Mr. Rogers plans come to fruition.

Please note that I am not a registered investment advisor and this is not a recommendation to buy or sell securities. This article is simply a reflection of my thoughts and analysis concerning a company that interests me.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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