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SunTrust Banks (STI)Stock (Financial Services Industry, Money Center Banks Industry)
 SunTrust Banks, Inc. (NYSE: STI) is the ninth largest bank in the United States, with assets of approximately $183.1 billion. SunTrust operates approximately 1,700 branches through out the US, but mostly concentrated in the Southeast. Over 20% of SunTrust's branches are located within retail outlets, including over 100 within Wal-Marts.[1] Given SunTrust’s higher cost structure, the bank's profitability has suffered in the current interest rate environment as lower net interest margins, and lower demand for loans driven by falling real estate prices, have placed downward pressure on profits. More recently the bank began offering wealth management services to ultra high networth individuals. While this may provide further diversification of their revenues, it is unlikely to offer any significant competitive advantage as this strategy has already been implemented by most of its competitors. One ray of hope in an otherwise murky outlook is the 2007 restructuring plan. The plan announced earlier this year is expected to yield approximately $400MM in cost savings by 2009.[2]
[edit] Business Financials [edit] Retail (36.8% of Net Income)The Retail segment offers loans, deposits, and other fee-based financial services for consumers and business clients with less than $5 million in sales (up to $10 million in sales in larger metropolitan markets). From 2006 to 2006, net income to the retail segment decreased 15.9%.[3] [edit] Commercial (22.8%% of Net Income)The Commercial segment offers commercial lending, financial risk management, and treasury and payment solutions including commercial card services. The client markets served by the Commercial segment include “Diversified Commercial” ($5 million to $50 million in annual revenue), “Middle Market” ($50 million to $250 million in annual revenue), “Commercial Real Estate” (entities that specialize in commercial real estate activities), and “Government/Not-for-Profit” entities. From 2006 to 2007, net income to the commercial segment decreased 12.2%.[3] [edit] Corporate Investment Banking (2.8% of Net Income)The Corporate Investment Banking segment focuses on these industry sectors: consumer and retail, financial services and technology, energy, healthcare and industrials. The CIB segment offeres mergers and acquisitions services, capital raising in debt and equity markets, financial risk management, asset securitization and market making in cash securities and derivatives to middle and large cap corporations. From 2006 to 2007, net income to the Corporate Investment Banking segment decreased 76.1%.[3] [edit] Mortgage (0.5% of Net Income)The Mortgage segment offers residential mortgage products through its retail, broker and correspondent channels. The Mortgage segment has been hit hard by the U.S. Housing Market decline. From 2006 to 2007, net income to the Mortgage segment decreased 96.8% (from $224 million to $23.9 million)[3] due to lower profits from portfolio loans and higher funding costs. [edit] Wealth and Investment Management (5.2% of Net Income)The Wealth and Investment Management segment includes brokerage and individual wealth management, and loan and deposit products to individuals. This segment also offers accounting, investing, and estate planning products to families to manage and sustain their wealth across multiple generations. From 2006 to 2007, net income to the Wealth and Investment Management segment decreased 70.7%.[3] [edit] Corporate and Other Treasury (13.7% of Net Income)The Corporate and Other Treasury segment includes the investment securities portfolio, long-term debt, end user derivative instruments, short-term liquidity and funding activities, and balance sheet risk management. From 2006 to 2007, net income to the Corportate and Other Treasury segment increased 837.2%.[3] [edit] Reconciling Items (18.1% of Net Income)In 2007, STI made $296.4 million in reconciling items, a 29.7% increase from 2006.[3] From 2006 to 2007, total revenue increased 0.5% and net profit decreased 22.8% due to risky loans.
[edit] Strategies[edit] Expansion strategySunTrust operates an extensive network of branches and ATMs across the Mid-Atlantic States and the Southeast. When expanding to a new market, SunTrust builds only a few full-service branches. In addition, SunTrust opens a series of in-store branches (located within retail stores) with more limited offerings. This method is used to expand rapidly at a relatively low cost. The in-store branches gather deposits and serve to advertise and steer customers to the full-service branch. The full-service branches then market and operate SunTrust’s lending activities. It is notable that SunTrust’s expansion strategy differs from competitors such as Chase and Bank of America. SunTrust concentrates on growth rather than acquiring other companies. Thus far, SunTrust has not made any major outreach attempts beyond the Southeast. Analysts feel SunTrust has not saturated the market, but SunTrust’s negative quarterly growth rate despite its expansion may suggest the added branches are not proving to be profitable. [edit] Conservative Lending CultureDuring the past six years, SunTrust's highest annual loan charge-off has been well below the average of most large banks. A conservative culture can be harmful if a bank becomes overly focused on avoiding risk at the expense of profitable growth. SunTrust’s revenue growth has compounded at just a 4.1% annual pace since 1998 despite the firm's footprint in high-growth Southeastern states like Florida, Georgia, and South Carolina.[4] [edit] New presence in wealth managementRecently, SunTrust has acquired a number of firms in the Southeast in order to establish a presence in the investment management space. Specifically, SunTrust concentrated on ultra high-net worth clients. This combined banking and investment management strategy is similar to that taken by a number of Global Investment Banks like UBS which make an effort to take in their underwriting and lending clients as wealth management clients as well in order to increase profits.
[edit] Underwriting & Capital MarketsUnderwriting refers to the raising investment capital on behalf of corporations and governments that are issuing securities. SunTrust's debt capital-markets operation (a type of underwriting which refers to raising money through the issuance of debt), one of its fee-based businesses, has been generating strong results. These results were fueled by the many debt and equity offerings that SunTrust has been involved in. SunTrust is not often involved in large underwriting activities and mostly concentrates on deals in the $50 to $150 million dollar range. Debt capital-markets, and underwriting in general, is a fee based business which charges corporations and governments a fee for both underwriting and marketing the debt securities issued by the client in order to raise money. SunTrust is known to have a more conservative underwriting practice than some of its competitors. In underwriting, the lender (the bank) takes on a risk of distributing the securities. If the bank is unable to distribute the securities, they must take on the security themselves. While by underwriting safer loans SunTrust keeps it self relatively unexposed to risk, it is unable to derive the rewards of underwriting more risky securities. [edit] Coca-ColaIn 1919, the Trust Company of Georgia provided underwriting services to the Coca-Cola Company (KO) and, in return, received shares of the company’s first publicly traded stock. As of July 2008, SunTrust held 48.3 million shares (representing 3.58% of the company as a whole) of Coca-Cola. The shares were worth approximately $2 billion and paid about $59 million a year in dividends.[5] On July 22, 2008, however, SunTrust announced that it would be selling its stake in Coca-Cola to shore up capital, after posting a 21% drop in quarterly profit.[6] [edit] Trends and Forces[edit] Interest RatesOne factor that influences the performance of banks is the interest rate yield curve. The yield curve is a term that economists use to capture the overall movement of interest rates (also known as "yields" in finance language). Ordinarily, short-term bonds carry lower yields to reflect the fact that an investor's money is under less risk. The longer you agree to be denied access to your cash, the theory goes, the more you should be rewarded. Since banks “borrow” (take deposits) at short term interest rates, they benefit when long-term rates rise relative to short term rates. This is because they must pay out to depositors in short-term rates but take in money at long-term interest rates. [edit] Florida real estateRecently, SunTrust has been very active in making residential real estate loans in Florida. In recent times, some signs have begun to show up that many of the loans made in that real estate market are in danger of not being repaid. Given its activity in Florida, SunTrust’s overall results would be impacted by the fate of the many small loans made in that area. Since a large part of SunTrust’s loan portfolio and assets are linked to residential real estate, real estate loan losses in the state, a place SunTrust does a lot of business, could be significantly harmful.
[edit] Subprime MeltdownUnlike many of its competitors Sun Trust is characterized by conservative lending and underwriting policies. However, while many had hoped that this would protect SunTrust from the subprime mortgage shutdown, that has not been the case. Many of SunTrust’s loan problems come not from the sub prime market, but from another type of loan known as “Alternative A” loans. While Alternative A loans are significantly less risky than subprime loans, they are loans are for borrowers with poor credit histories. That said, SunTrust has not been hit as hard as many of its competitors. 44.52% of Wells Fargo’s loans were listed as nonperforming, as well as 4.25% of National City Bank and 3.59% of LaSalle Bank. In the case of SunTrust, the percentage of non-performing mortgages was less than 1%. Also it should be noted that out of the $525 million in past-due mortgages in its portfolio, SunTrust only has a credit exposure of $72 million (relative to $1.4 billion for Bank of America) on their bad loans. [edit] CompetitionWith a market cap of $30.22 Billion, SunTrust sits close to the industry average of $21.7 Billion, but below many of its key competitors, whose market cap sits in the $200 Billion plus range.[7] Largely, SunTrust is considered a competitor to the large national banks because of its presence in investment management and capital market services. These businesses are largely the domain of large, national banks rather than banks with a regional presence. Its declining quarterly revenue growth (.-20%) can be considered a problem and lags behind many of its competitors, such as Bank of America’s (35.50%) and the industry average of 20.40%. This suggests that SunTrust’s expansion efforts have not been successful in terms of creating profit for the company. Its operating margins of 50.69% sit very close to the industry average of 49.51%. Operating margin refers to the proportion of a company’s revenue left over after paying the costs of production (raw materials, wages, etc). This can be viewed as problematic, however, because operating margins are one of the areas in which banks are able to differentiate themselves. Bank of America, for example, has operating revenues of almost 58%. This is particularly problematic in the case of SunTrust because SunTrust doesn’t derive a great deal of profit from high-yield (high risk) loans.
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