It’s a natural instinct to try and hold things together in whatever way possible when a company goes through a rough patch. Having worked in a bank for over 10 years, I know that there were times the bank “suggested” that we cut certain expenses, or that raises were either impossible or very small because of the trying economic environment. That being said, we knew that our day to day work did make a difference to the bottom line of the company, and that eventually things would turn around. Some banks have a hard time getting out of this “survival” mode, and I’m afraid that’s exactly what’s going on at SunTrust Banks, Inc. (NYSE:STI).
It should be no secret that SunTrust had its share of problems due to the Great Recession. The company had been slowly working through its issues, and made what I have deemed, “The Worst Stock Sale In History.” In short, the company made one of the best investments in the history of finance by turning their $100,000 investment in The Coca-Cola Company (NYSE:KO) into 60 million shares. These shares were generating about $61 million in annualized dividend income, but now are gone. While it’s true the company booked a large gain from the sale, and used the funds to shore up its balance sheet, there is no way to duplicate this type of investment again.
That being said, it’s time for the bank to move forward. Based on their last earnings release, the troops need their marching orders in a little more clear language. There are four key measures to any bank, unfortunately for SunTrust, they are falling behind in three of the four categories.
One Out Of Four Isn’t Cutting It
The first thing investors should look at when measuring a bank is their deposit and loan growth. Banks that have strong deposit and loan growth, generally should have good earnings growth over time. SunTrust’s contemporary banks are BB&T Corporation (NYSE:BBT), PNC Financial Services (NYSE:PNC), and M&T Bank Corporation (NYSE:MTB). To say that SunTrust is lagging behind when it comes to deposits and loans is a vast understatement.
In the middle of a recession, SunTrust’s 2% deposit growth might be acceptable. However, with the economy technically a few years out of a recession, this isn’t good enough. When you consider that, BB&T grew deposits by 8.1%, M&T saw 10% growth, and PNC increased deposits by 11%, you can see SunTrust’s competition is eating their lunch.
The same issue is facing SunTrust when it comes to loan growth. The company grew loans in the current quarter by an anemic 3%. BB&T increased their loans by 9.3%, M&T grew loans by 11%, and PNC saw a jump of 17%, by comparison. When your competition grows loans faster than you do, it means you missed some opportunities.
This anemic growth is showing up in another place on SunTrust’s balance sheet, and that is their net interest margin. While it’s true that all banks have felt the squeeze of margin compression because of ever lower interest rates, SunTrust is hurting more than their competition. In the current quarter, SunTrust reported a net interest margin of 3.36%. Relative to BB&T at 3.84%, M&T at 3.74%, and PNC at 3.85%, you can see, SunTrust will have a harder time making profits relative to their major competitors.
