BB&T Corporation (BBT), Fifth Third Bancorp (FITB), SunTrust Banks, Inc. (STI): Regional Banks Presenting an Investment Opportunity

Regions Financials

Income from continuing operations at Regions Financials Corporation (NYSE:RF) came in at $273 million compared to $312 million in the third quarter of 2012. Compared to the third quarter, adjusted pretax preprovision income surged significantly due to lower non-interest expense and a moderately higher net interest margin. The fourth quarter net interest margin increased 2bps sequentially to 3.10%. Supported by continued declines in deposit costs, the bank’s net interest margin is expected to be relatively stable during the current year. During the credit quarter improved. Non-accrual loans and accruing restructured loans declined sequentially. Non-performing loans inflow declined $113 million, while net charge-offs as a percentage of average loans plunged to less than 1%.

The bank has upcoming maturities of high yielding CDs creating opportunity to refinance the expensive debt, which should reduce the bank’s funding costs. Further, the bank is expected to exceed expense management expectations.

SunTrust Banks

SunTrust Banks, Inc. (NYSE:STI)’s fourth quarter adjusted pretax income of $409 million was highest since the credit crisis. Its net interest margin declined 2bps to 3.36%. The net interest margin is expected to further decline during 2013, unless interest rates rise significantly. During the fourth quarter, adjusted non-interest income surged to its highest level in two years due to strong investment banking income and mortgage production. Credit quality at the bank also improved as non-performing loans fell by over $900 million due to a combination of accelerated core credit quality improvement and loan sales. The bank’s capital position also improved as its Tier 1 common ratio increased 20 bps to 10%.

Going forward, the bank has an opportunity to expand its earnings by reducing its credit expense as we see continued improvement in the US housing markets. However, the bank needs to focus on its expense management.

Conclusion

The improving credit quality and capital positions at the aforementioned banks present an excellent investment opportunity. Therefore, I recommend investors buy the banks considered in this investment thesis.

The article Regional Banks Presenting an Investment Opportunity originally appeared on Fool.com and is written by Adnan Khan.

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