SunTrust
SunTrust Banks, Inc. (NYSE:STI) reported a modest 1.6% EPS beat when it disclosed its first-quarter results. The reported EPS came in at $0.63, compared to the consensus mean expectation of $0.62 per share. The reported revenue remained 8% below the linked quarter’s figure.
The decline in revenue was attributed to the three basis points (bps) of sequential compression in the bank’s net interest margin. The margin compressed a significant 16 bps over the previous year. Similarly, the bank’s fee-based income was also hit by a decline in mortgage production activity. Mortgage production declined 33% over the linked quarter. The decline in revenue was partially offset by a decline in non-interest expenses, which fell 10% over the prior quarter. The bank also experienced improvement in its credit quality, as its non-performing-loans-to-total-loans ratio fell from 2.16% to 1.21%.
State Street
State Street Corporation (NYSE:STT) experienced a strong first quarter, thanks to better expense control and improved fee revenue. The bank reported earnings per share of $0.96, $0.02 ahead of the consensus mean expectation, while the reported revenue of $2.44 billion remained $0.04 billion behind.
During the quarter, the bank experienced weakness in its net interest income, which came in at $577 million, 4% below the prior quarter. The shortfall in net interest income was a result of a five bps contraction in net interest margin and the prevailing lower reinvestment rates. Operating expenses for the quarter came in at $1.81 billion, up 7% from the linked quarter. The surge in expenses was only seasonal. During the rest of 2013, you should expect the bank to save around $220 million in expenses related to the long-term program and the announced headcount reductions.
Further, the bank continues to show improvement in its capital base as its Basel I Tier 1 common ratio stood at 16.1%, while its Basel III Tier 1 common ratio improved 20 bps to 10.6%.
KeyCorp
KeyCorp (NYSE:KEY) reported its first quarter EPS of $0.21, in line with the consensus mean expectation. However, due to the prevailing revenue-challenged environment, its revenue of $1.01 billion remained $0.02 billion behind what analysts were expecting KeyCorp to report.
Among other highlights in the latest results is the 5.4% year-over-year growth in the bank’s net interest income, as its net interest margin expanded eight bps over the same time period. This is despite an industry-wide net interest rate compression. Further, the bank posted fee-based income of $425 million, which remained relatively flat over the prior year, but down 3.2%, sequentially. This was partially supported by relatively flat non-interest expenses. During the first quarter, the bank’s credit quality improved, while mortgage originations surged. The net charge-offs-to-average-loans ratio fell from 0.82% a year ago to 0.38%, while originations surged 2.5% over the same time period.
Conclusion
While the near-term fundamentals remain challenging, I continue to favor State Street Corporation (NYSE:STT) and KeyCorp (NYSE:KEY). I believe these banks are best positioned to outmaneuver the prevailing, challenging macroeconomic environment. KeyCorp has demonstrated this very well during the first quarter of the current year by expanding its net interest margin and growing its market share in the U.S. mortgage originations arena. On the other hand, State Street Corporation (NYSE:STT) presents excellent long-term positioning, coupled with a healthy capital base. I have a neutral rating for SunTrust Banks, Inc. (NYSE:STI), as it wasn’t even able to increase its mortgage originations.
The article 2 Banks To Buy, 1 To Hold originally appeared on Fool.com and is written by Adnan Khan.
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