Higher Loans, Fee Income to Aid SunTrust (STI) Q1 Earnings

SunTrust Banks STI is scheduled to report first-quarter 2019 results on Apr 18, before the opening bell. Its revenues are projected to grow year over year, while earnings are likely to remain stable.

In the last reported quarter, the company’s earnings beat the Zacks Consensus Estimate. Results benefited from rise in net interest income and decline in expenses. However, fall in non-interest income and rise in provisions were the undermining factors.

SunTrust has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average beat being 10.2%.

SunTrust Banks, Inc. Price and EPS Surprise

SunTrust Banks, Inc. Price and EPS Surprise | SunTrust Banks, Inc. Quote

In a major development during the quarter, SunTrust and BB&T Corp. BBT announced a merger deal, which will lead to creation of the sixth largest commercial bank in the United States (in terms of assets and deposits). The all-stock deal, termed as “mergers of equals,” is valued at $66 billion. (Read more: Blockbuster Merger: BB&T, SunTrust to Create 6th Biggest US Bank)

Notably, the company’s activities in the first quarter were not able to impress analysts. As a result, the Zacks Consensus Estimate for earnings of $1.29 moved nearly 1% lower over the past seven days. The figure is on par with the prior-year quarter level. The consensus estimate for revenues of $2.30 billion reflects a rise of 2.9%.

Factors to Influence Q1 Results

Modest increase in net interest income: The quarter witnessed decent improvement in lending activity, mainly in the areas of commercial and industrial, in which SunTrust has significant exposure. Further, increase in loans is expected to lead to a rise in earning assets. The Zacks Consensus Estimate for average earning assets of $192.6 billion for the to-be-reported quarter reflects 5.3% rise on a year-over-year basis.

Thus, given the loan growth and higher interest rates, SunTrust is likely to record a rise in net interest income, while flattening of yield curve and rise in deposit betas are expected to be offsetting factors.

Further, management expects net interest margin to remain stable sequentially.

Relatively stable non-interest income: As the mortgage rates declined during the first quarter, there is a chance of slight rebound in mortgage originations. As such, mortgage servicing fees and production income are expected to offer some support to SunTrust’s overall mortgage revenues.

Coming to investment banking activities, equity issuances globally have been hurt by fears of global economic slowdown and the U.S. government shutdown at the beginning of the quarter. However, the Fed’s dovish stance on future rate hikes seems to have led companies to issue debt. So, overall underwriting fees are expected to provide some support. However, SunTrust’s advisory income will likely be hurt by decline in global M&A deal volume and value. Thus, performance of investment banking is expected to be weak.

Given the lower volatility and decline in client activity in the first quarter, there will be a fall in trading activities. This is expected to hamper SunTrust’s trading income growth.

Operating expenses to remain manageable: Due to the branch consolidation initiatives, SunTrust’s expenses have been declining over the past few quarters. This is expected to have continued in the to-be-reported quarter as well.

Nonetheless, management expects core personnel expenses to increase nearly $60-$75 million in the first quarter due to the typical seasonal increase in benefits and FICA cost.

Asset quality to offer some support: SunTrust expects loan loss provision to slightly exceed net charge-offs in addition to providing for loan growth.

Further, the consensus estimate for non-performing assets of $591 million for the to-be-reported quarter shows a 24% decline year over year. Likewise, estimates for non-performing loans of $531 million reflect a 25.4% fall.

Now, let’s check what our quantitative model predicts.

Chances of SunTrust beating the Zacks Consensus Estimate in the to-be-reported quarter are low. This is because it doesn’t have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for SunTrust is -0.54%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3. This increases the predictive power of Earnings ESP. But we need to have a positive Earnings ESP to be sure of the positive surprise.

Stocks That Warrant a Look

Here are a few bank stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

The Bank of New York Mellon Corporation BK is scheduled to release results on Apr 17. The company, which carries a Zacks Rank of 3, has an Earnings ESP of +0.63%.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Earnings ESP for BankUnited, Inc. BKU is +1.89% and it carries a Zacks Rank of 3. The company is scheduled to report quarterly numbers on Apr 24.

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