Is SunTrust Banks a Trustworthy Investment?

Continued improvement in its overall credit portfolio has helped Atlanta-based SunTrust Banks (NYSE: STI  ) report an impressive second quarter. Let's take a closer look at its performance to figure out whether SunTrust is a trustworthy investment.

The quarter in detail
The bank saw a huge jump in its net income as compared to the second quarter of 2010. SunTrust's second-quarter net income of $174 million was almost fifteen times the (very low) profit it reported last year. But, compared to the preceding quarter's profit of $180 million, the bank failed to see any improvement. Growth in profits has been primarily driven by higher net interest income and a considerable improvement in credit quality.

Higher investment banking income also helped increase revenue before provisions marginally to $2.17 billion from $2.31 billion. Lower rates paid on deposits, continued shift toward lower-cost deposits, and a cut in higher-cost funding enabled the trust bank to record a 7% increase in net interest income, as compared to the same quarter a year ago.

Competitors such as BNY Mellon (NYSE: BK  ) and State Street (NYSE: STT  ) also reported increases in earnings on the back of higher fee revenues and increased assets. So, this trend is not exclusive to SunTrust.

Credit quality is the key
Declines in net charge-offs and allowances for loan losses resulted in a noticeable decline in provisions for credit losses. Net charge-offs reduced to $505 million, down 30% from $722 million in the prior-year quarter. Nonperforming loans were down 23%, making it the eighth consecutive quarterly decline. Similar improvements in credit quality helped KeyCorp (NYSE: KEY  ) post a leap in profits in its latest quarter. But, with respect to SunTrust, there were a few negatives as well that Fools should note.

The negatives
While non-interest income declined 4%, non-interest expenses went up by 3% from a year ago. The decrease in income was due to lower net gains on the sale of investment securities and lower service charges on deposit accounts. SunTrust's Tier 1 capital ratio weakened to 11.1% from 13.5% a year ago, reflecting a weaker capital position. However, it is still well above Basel's recommended level of 8%.

The Foolish bottom line
With strong improvements in most of its key metrics, things seem to be moving in the right direction for SunTrust. Agree? Disagree? Leave your comments below.