Higher Rates, Fee Revenues to Aid SunTrust (STI) Q1 Earnings

SunTrust Banks, Inc. STI is scheduled to report first-quarter 2018 results on Apr 20, before the opening bell. Its revenues and earnings are projected to grow year over year.

Last quarter, the company’s earnings surpassed the Zacks Consensus Estimate. Results benefited from improvement in revenues, stable adjusted expenses and lower provisions. However, a decline in loan and deposit balances was the undermining factor.

SunTrust has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three and matched in one, over the trailing four quarters, the average beat being 3.1%.

SunTrust Banks, Inc. Price and EPS Surprise
 

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

However, the company’s activities in the first quarter failed to impress analysts to revise earnings estimates upward. As a result, the Zacks Consensus Estimate for earnings of $1.11 remained unchanged over the last seveb days. Nevertheless, the figure represents a year-over-year improvement of 27.6%.

Further, the Zacks Consensus Estimate for revenues of $2.27 billion for the to-be-reported quarter reflects an improvement of 2.8% from the prior-year quarter.

However, the company’s price performance has not been very impressive. Its shares have lost 3.8% in the past three months compared with the industry’s decline of 8.9%.

Will the price performance improve post first-quarter earnings release? Let’s check which factors are expected to impact SunTrust’s Q1 earnings.

Factors to Influence Q1 Results

Net Interest Income (NII) to Improve: The Zacks Consensus Estimate for earnings assets of $184.6 billion for the first quarter reflects an improvement of nearly 1% year over year. Moreover, the quarter witnessed a modest improvement in lending, particularly in the areas of commercial and industrial, to which the company has a high degree of exposure. Thus, given the loan growth and rising interest rates, NII is expected to improve in the quarter.

Also, management expects first-quarter net interest margin to be up 0-2 basis points (bps).

Relatively Stable Non-Interest Income: While overall mortgage servicing fees remained decent in the first quarter, production volumes slowed down. Thus, mortgage production income is expected to remain weak. Moreover, with the refinance boom nearing its end, this segment is not going to be much of a help and hence, SunTrust’s overall mortgage revenues are not expected to witness much improvement.

Coming to investment banking activities, strong equity issuances globally might have boosted IPOs and follow-on offerings, thereby having a positive impact on the related fees. However, the trend of pocketing solid advisory and underwriting fees for debt issuance may reverse to some extent in the to-be-reported quarter, as rising rates are likely to have slowed down corporates’ involvement in these activities. Thus, investment banking income is expected to remain muted in the quarter.

Nevertheless, given the significantly high volatility experienced in the first quarter, particularly in the months of February and March, trading activities remained strong. This is expected to boost trading income for the company.

Expenses to Decline Slightly: Driven by branch consolidation efforts, SunTrust’s expenses have been declining for the past few years. While the company expects core personnel expenses to increase approximately $75 million in the quarter due to the seasonal increase in 401(k) and FICA expenses, overall costs are expected to remain low.

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

Earnings Whispers

According to our quantitative model, chances of SunTrust beating the Zacks Consensus Estimate in the to-be-reported quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better — which is required to be confident of an earnings beat.

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

Zacks ESP: The Earnings ESP for SunTrust is -0.27%.

Zacks Rank: SunTrust currently carries a Zacks Rank #3. While this increases the predictive power of ESP, we also need a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around.

BB&T Corporation BBT is slated to release results on Apr 19. It has an Earnings ESP of +1.43% and carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Regions Financial Corporation RF has an Earnings ESP of +1.21% and carries a Zacks Rank of 3. The company is slated to release results on Apr 20.

Synovus Financial Corp. SNV is scheduled to release results on Apr 24. It has an Earnings ESP of +0.38% and a Zacks Rank #3.

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