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Reggie Middleton on Suntrust's Q3-09 Earnings
For all of you momentum chasing, non-calculating, never touched a
spreadsheet, CNBC luvin', James Cramer watchin' bulls out there, I have
a feeling you will be hearing a lot of I told'ja so's over the next 12
months. I express this in jest (yes, I'm a part time comedian), but
there is a serious streak here as well. I believe the equity prices are
soaring on top of near, or actually, insolvent companies.
Well, hopefully by now you have heard of the Doo Doo 32 (As I see it, these 32 banks and thrifts are in deep doo-doo!), of which Suntrust was a founding member. Well, they are even on the board of the The Doo Doo 32, revisited. Click the links, they're worth the read.
Since Suntrust reported today, I though I would go over some of the
numbers but before I do let's get the flavor from the main stream
media...
SunTrust posts 3Q loss but sees some signs improve 22 Oct 2009 - The Associated Press:
ATLANTA - SunTrust Banks Inc. on Thursday posted a big third-quarter
loss as it set aside more money to cover bad loans, but said the rate
at which mortgages were slipping into delinquency slowed for the first
time in a year.The bank reported a loss of $377.1
million, or 76 cents per share, compared with a year-ago profit of
$304.4 million, or 87 cents per share.The latest quarter included charges of 16 cents per share related to the valuation of certain debt.
Analysts polled by Thomson Reuters, on average, forecast a loss of 65
cents per share. Analysts typically do not include one-time gains or
charges in their estimates. Why
don't these analysts have thier banks part with a fraction of that
record trading revenue (I'll be getting to that in my next post) and
subscribe to BoomBustBlog!?Net interest income, or money earned from traditional banking
operations like deposits, slipped slightly to $1.17 billion from $1.18
billion. Total deposits reached $114.5 billion, up 14 percent from last
year.The bank more than doubled its
provision for loan losses — money set aside to cover souring loans — to
$1.13 billion, from $503.7 million in the 2008 quarter.Loans considered past due, or
non-performing loans, were $5.44 billion. That's up from $3.29 billion
in the 2008 quarter, but down marginally from the prior quarter.
SunTrust said the dip from the June period was the first decline since
the credit crisis began in 2007, and the increase in residential
mortgage loans slowed substantially from the rate seen in the past four
quarters.Restructured loans that were in
good standing rose 31 percent to $1.34 billion. Early stage
delinquencies, or loans that are 30 days past due, declined on both a
sequential and year-over-year basis.The bank wrote off more than $1
billion in loans as going unpaid, compared with $392 million last year.
The total largely reflected reworked loans for residential construction
and mortgages, along with additional charge-offs for corporate
borrowers in cyclical industries, the banks said.Noninterest income, or money earned
from fees and charges, dropped nearly 40 percent to $775.1 million from
$1.29 billion a year ago. The company said the decline was due to gains
generated in last year's quarter when it contributed company-owned
stock to the SunTrust charitable foundation, sold a subsidiary and
recorded gains on certain debt and hedges, which swing to a loss this
year. Trading accounts profit and commissions also fell.Chairman and CEO James M. Wells III
said the quarter's results "reflected the difficult operating
environment for more traditional banks." The recession was reflected in
lower fee income and weak loan demand as consumers and businesses work
to pay off debt, he said. Some trends indicate that the economy is
improving, but he said it will take time before that is reflected in
the bank's results.SunTrust shares slid 25 cents to
$20.51 in morning trading. They ended Wednesday's session down 30
percent since the start of the year.
Reggie's SunTrust 3rd Quarter Suntrust Review
SunTrust
Bank Inc (STI) reported another dismal performance, continuing its poor run for
another quarter this year. The bank's loan portfolio contracted and its non
interest income declined significantly, while loan portfolio continued to be
plagued with rising loan losses and charge-offs.
The
bank reported 3Q2009 net loss per diluted share of $0.76 compared with net loss
per diluted share of $0.41 per share in 2Q09. A significant decline in non-interest
income, down 27.7% q-o-q to $775.1 million coupled with higher provision for
loan losses ($0.19 per share) in 3Q09 led to an overall contraction in the
bank's profitability. The impact was partially offset by 4.4% q-o-q growth in
net interest income to $1.1 billion in 3Q09.
In
3Q-09 STI's net charge-offs increased to $1.0 billion or 3.3% of average loans
(up 17.8% q-o-q) off higher charge-offs from residential mortgage and additional
charge-offs related to large corporate borrowers in cyclical industries. Non-performing
loans declined marginally to $5.4 billion or 4.67% of total loans as of
September 30, 2009 led by reduction in nonaccrual commercial loans.
Click to enlarge
STI's
total net revenues declined 11.5% q-o-q to $1.9 billion in 3Q09 compared with
$2.2 billion in 2Q09 led by significant decline in non-interest income. Non-interest
income decreased compared to the previous quarter off non-recurring gains of $112.1 million and $156.9 million recorded from
the sale of Visa shares and recovery from impaired mortgage servicing rights in
2Q2009. Excluding the impact of aforementioned items, the Bank's non-interest
income contracted 3.4% q-o-q to $775.1 million in 3Q09 as compared to $802.7 million
in 2Q09. In 3Q09, non-interest revenues accounted for 40.5% of the total net
revenues against 49.6% in 2Q09.
Net
interest income increased 4.4% q-o-q to $1,137.5 million in 3Q09 compared with
$1,089.7 million in 2Q09 propelled by higher net interest margin which
increased 16bps q-o-q to 3.10%. This positive impact was offset by decline in average earning assets, down 2.4%
q-o-q to $149.6 billion in 3Q09 compared with $153.2 billion in 2Q09. Further,
as decline in total net revenues exceeded the decline in overall expenses, the
Bank's efficiency ratio deteriorated 385 basis points q-o-q to 73.5% in 3Q09 as
compared to 69.7% in 2Q09.
Net
losses to common shareholders were $133.5 million higher in 3Q09, driven by $106.5 million after-tax increase in provision for loan losses coupled with decline in non-interest
revenues.
The
credit losses continue to weigh on STI's performance with gross charge-offs
increasing to $1,046 million (annualized charge off rate of 3.6%) in 3Q09 from
$835 million (annualized charge off rate of 2.7%) in 2Q09 and $420 million
(annualized charge off rate of 1.3%) in 3Q08, while the provisions for loan
losses were $1,134 million in 3Q09 (annualized rate of 3.9%) against $962
million (annualized rate of3.1%) in 2Q09 and $504 million (annualized rate of1.6%)
in 3Q08.
Click to enlarge
Non-performing
loans declined marginally to $5,444 million (4.67% of total loans) at the end
of 3Q09 from $5,504 million (4.48% of total loans) at the end of 2Q09 but
relatively remained high when compared with $3,290 million (2.60% of total
loans) at the end of 3Q08. Total non-performing assets increased, and stood at
$6,095 million (5.23% of total loans) compared with $6,165 million (5.02% of
total loans) at the end of 2Q09 and $3,690 billion (2.91% of total loans) at
the end of 3Q08. However, the 90 days past due loans increased to $1,509
million at the end of 3Q09 from $1,411 million at the end of 2Q09 and $772
million at the end of 3Q08. The surge in 90 days past due loans and shrinkage
in tangible equity led to Texas ratio inching to 58.0% against 57.8% in 2Q09
and 40.8% in 3Q08. This is very high for a $130 billion dollar - oops that's
$116 billion this quarter (loan assets) bank. Watch out for this one! The FDIC
couldn't hold this one, even with a handle attached to it - see I'm going to try not to say I told you so....
Remember you hear it here first! If a bank the size of Suntrust goes down, the
floor will fall out beneath the market and make last March look like a bull
market! Thus far, WaMu was the largest pure lender to fall to the Asset Securitization Crisis (yes, I coined the term - go ahead
and click the link for the play by play), but
now the FDIC and related entities have shot their wad (excuse my Mandarin). No
amount of loss sharing with private entities will conceal the chain reaction
and loss of trust that will probably ensue. Of course, there would be no loss
of trust if the government made the big banks take their medicine up front, but
I guess nobody likes the taste of castor oil - or reduced bonuses/compensation/control.
Loans and Deposits
Owing to tough credit and
lending conditions, the total loan portfolio declined to $116.5 billion from
$122.8 billion in 2Q09 and $126.7 billion at the end of 3Q09. The decline was
largely contributed by reduced lending in commercial loans and real estate
loans segments. However, the total deposits increased to $119.3 billion from
$118.8 billion in 2Q09 and $115.9 billion at the end of 3Q09. Consequently, the
loan to deposit ratio declined to 97.6% from 103.4% in 2Q09 and 109.3% at the
end of 3Q09.
Tier 1 capital
In
spite of decline in Tier 1 common equity owing to 3Q09 losses, the Tier 1
common equity ratio improved to 7.45% from 7.34% at the end of 2Q09 and 5.83%
at the end of 1Q09 largely owing to the decline in risk weighted assets.
Here is some Suntrust research for subscribers:
Sun Trust Bank Report 2008-08-30 06:39:22 391.89 Kb
STI update 2009-09-03 06:33:37 1.08 Mb
Sun Trust Banks Simulated Government Stress Test 2009-05-05 11:37:13 1016.17 Kb
Shall we revisit how I felt about those stress tests that Suntrust failed to fail????
The Treasury with their stress tests, lacking any form of realistic stress:
- advertisements -
On the other side of the coin, STI still has 30 million shares of Coke which are carried at a book value of about one penny. Also, their CRE portfolio is much higher quality than other major SouthEast banks. STI's single largest CRE loan is only $54 million (that says a lot) to an office building in which STI is the largs tenant.
does STI continue to sit upon a large holding of KO (shares granted like 80 years ago when Coca Cola went public) ? If not last year, perhaps 2007, they had been selling that position down. Just a'wondering
These Reggie reports are outstanding.
Reggie,
Your analysis of Suntrust is dead on. However, that leads me to conclude that Suntrust will not be allowed to fail.
Peace.
Reggie, your analysis is quality. Keep up the good work and thanks.
I don't understand how STI is still around. I was looking at smaller banks on which I could capitalize from their capitulation. I came across BARI (Small bank in Rhode Island) which, upon closer inspection, was increasing its loans to commercial real estate to offset losses on its residential loans! Stephen King couldn't have come up with such a horrific plot line. Their stock is also on life support.
In any case, Reggie (or shall I call you Nostradomus?) this charade will come to its logical, and painful, conclusion... tick... tock.
One interesting thing in their release was an improvement in cost of deposits. What they neglected to break out was the fact that they have been quite aggressive in marketing structured product CDs. NOT CDS. These structured product offer FDIC insurance and are linked to market indices. They offer NO coupon.
I wonder how the FDIC would feel about insuring the collateral on a currency basket for example
Good review Reggie, and accurate. We follow STI intimately. It has so much bad CRE (especially in its' home state) it is ridiculous. Only a matter of time before STI implodes. You write: "I believe the equity prices are soaring on top of near, or actually, insolvent companies." We agree. Especially in the financial and banking sector.
ar...for what it's worth, i always enjoy your posts.
on sti, I would add that at the barclay's conf a few weeks back and one other time a few weeks before that, the ceo spoke rather bearishly on the sector and certainly did not do the usual ceo pump of his own stock, which was a bit novel. all i could think is that maybe we got a guy calling it straight (don't know the guy or don't follow closely like you and others).
nevertheless, sti shot up both times to stay > 20.