I’m a big fan of Peter Lynch, and one statement that he made always sticks with me. He said that his stock picking method was all about turning over more rocks to find great companies — in essence, if you don’t try, you can’t succeed. I’m wondering whether the bankers at SunTrust Banks, Inc. (NYSE:STI) need to be hit over the head with a rock to make this lesson stick. The bank is underperforming its peers, and it seems like its shackles need to come off.
The Worst Of The Worst
If the bank was having a problem in one particular area, I would suggest that management put more focus on that particular line of business and move on. However, SunTrust Banks, Inc. (NYSE:STI) isn’t just struggling in one thing; it’s struggling in multiple areas at once. For instance, when you compare the bank to its peers, it reported the worst deposit growth of the group.
SunTrust Banks, Inc. (NYSE:STI) reported average deposits up just 1%. By comparison, U.S. Bancorp (NYSE:USB) reported deposits up 7.3%, BB&T Corporation (NYSE:BBT) saw deposits up 4.7%, and PNC Financial Services (NYSE:PNC) recorded deposits up 9%.
While PNC Financial Services (NYSE:PNC) had the benefit of the RBC U.S. acquisition in its results, there is little doubt that a 1% increase in deposits is the worst performance of the bunch. While SunTrust did blame this low growth on a shift from interest bearing accounts to non-interest bearing accounts, this explanation only makes things a little bit better.
Considering that U.S. Bancorp (NYSE:USB) saw non-interest bearing accounts increase by 4.4%, and still managed to grow average deposits by 7.3%. SunTrust’s 5% increase in non-interest bearing accounts with 1% overall growth just doesn’t look that good.
PNC saw non-interest bearing deposits increase 7%, and BB&T Corporation (NYSE:BBT) lead the pack with a 24.2% increase in non-interest bearing deposits. Since SunTrust competes with each of these banks in different areas, it’s a good bet that SunTrust lost deposits to their peers.
I wish I could say that SunTrust was making up for their deposit challenges with good loan growth, but I can’t. In fact, compared to PNC’s loan growth of 13%, U.S. Bank at 5.8%, and BB&T at 5.3%, SunTrust’s loan growth of negative 1% looks like the bank lost market share in lending as well. Losing deposits and loans to your competition isn’t the way to get ahead.
So What Should SunTrust Do?
To be quite honest, its competitors’ relative success suggests that SunTrust is obviously missing opportunities. The bank’s management needs to embolden its managers and lenders to go after more deals. I’m afraid that the challenges of the last few years have left SunTrust a little gunshy of getting burned again. However, looking in your rearview mirror won’t help you reach your destination.
In the bank’s loan portfolio, we see that mortgage loans were down 10.36%, and home equity loans were down 6%. We also see that SunTrust’s yield on their home equity portfolio is just 3.64%.
These facts tell investors two things. First, SunTrust’s lenders aren’t being aggressive enough about making deals happen. When your peers report loan growth, and you report declines, there are only two choices, either make sure you don’t lose deals, or go after more deals that you can win.
Second, it’s true that not everyone is in a position to do a mortgage or home equity. However, there are still millions of homeowners that can borrow, and SunTrust needs to find them. In addition, the bank needs to focus on higher margin lending. A home equity portfolio yield of 3.64%, tells me that SunTrust is doing a lot of home equity lines of credit and not fixed-rate loans. A typical second mortgage (aka. home equity loan) rate according to Bankrate Inc (NYSE:RATE) is about 6%.
Since home equity lines of credit are based on the Prime Rate (currently 3.25%) plus a certain amount, usually between 0% and 2%, lines of credit can be found for as low as 3.25% to the 5% or 6% range. Since SunTrust’s home equity portfolio has such a low yield, we can assume their borrowers have good credit, but are taking advantage of the historically low interest rates. SunTrust needs to look for more borrowers who want a fixed rate, and make more calls to get these deals.
What Should Investors Do?
I know there are some SunTrust fans out there, but to be blunt, I don’t see a great reason to choose this stock over any one of its peers. The company’s lackluster deposit and loan growth isn’t inspiring. Its net interest margin of 3.33% is worse than its peers’ margins of between 3.48% and 3.81%. The stock’s yield of about 1.3% is lower than its peers’ as well, with BB&T at 3%, PNC at 2.5%, and U.S. Bank at 2.3%. Until SunTrust learns to turn over more rocks, and find more deals, I’m afraid this stock could sink like a stone.
The article This Bank Needs to Turn Over More Rocks originally appeared on Fool.com and is written by Chad Henage.
Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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