3 Ways SunTrust Banks, Inc. Is Beating PNC and KeyCorp

Banks earnings quality continue to suffer.

May 10, 2014 at 7:29AM


If you thought things were only looking up when PNC (NYSE:PNC), KeyCorp (NYSE:KEY), and Suntrust Banks (NYSE:STI) all reported quarterly profits above estimates, think again.

Yet when focusing on how, rather than by how much, these institutions beat their respective estimates, it is clear the industry continues to face major headwinds.

After all, PNC. Key, and SunTrust each reported quarter over quarter revenue drops in the first quarter of 2014, thanks largely to tight interest rate spreads and lower mortgage refinancing activity.

While many factors collectively offset the revenue declines, including the slashing of payrolls and the shedding of peripheral businesses, banks like PNC, Key, and SunTrust continue to rely on the release of loan loss reserves accrued during the height of the financial crisis to bolster their bottom lines.

What are reserves?
A bank's reserves are money set aside to account for loans that ultimately are not repaid. The release of reserves therefore, indicates that a bank is optimistic that fewer loans will go bad in the future.

This can be a positive signal to the market because reserve releases typically coincide with economic expansion and lower unemployment, they also have the added benefit of bolstering a bank's earnings. In fact, the amount released flows straight to a bank's bottom line.

Unfortunately, the release of reserves is not a substitute for genuine growth. Sooner or later, a bank runs out of reserves to release, and further cuts cannot be made without reducing outstanding loans. In fact, the slashing of loan loss reserves may be near its end.

Since the end of 2008, PNC, Key, and SunTrust have reduced their loan loss reserves by 20%, 36%, and 15%, respectively.

While these reductions are undeniably attributable, in part, to the implementation of more conservative lending guidelines since the financial crisis, all three of these institutions have cut their respective reserves by at least 10% in the last 12 months alone. In consequence, they will need to find new avenues, namely top line growth, to boost future EPS figures.

SunTrust's outshines its peers
With that in mind, it's rather startling to note that the release of loan loss reserves accounted for 6.5% and 4.2% of PNC and Key's respective first quarter pre-tax incomes, compared to only 1.5% for SunTrust. More troubling for PNC and Key is the fact that SunTrust's 3% quarter over quarter decline in non-interest revenue, driven by lower mortgage servicing fees, compares favorably to the 12% and 4% declines reported by PNC and Key, respectively.  

Given their reliance on the release of loan loss reserves to bolster EPS, perhaps it's no surprise that PNC and Key were only able to grow their outstanding loan portfolios by 1.3% and 1.8% in the first three months of 2014, compared to the 2.1% loan growth reported by SunTrust.

Furthermore, SunTrust managed this loan growth without relaxing its underwriting standards, as non-performing loans totaled only 0.72% of its outstanding loan portfolio at the end of the first quarter. PNC's non-performing loans account for 1.49% of its outstanding loan portfolio, compared to 0.81% for Key.

These considerations raise legitimate concerns for investors who have been, and will likely remain, reluctant to channel money into banks that are unable to demonstrate meaningful growth through their core lending operations.

This is especially true given the recent release of sluggish economic growth data, which suggests that the Federal Reserve will continue to keep short-term interest rates low through at least 2014.

As banks and the financial industry as a whole continue to shift their focus from a defensive to offensive strategy, investors will similarly concern themselves with the quality of an institution's earnings, rather than simply the extent of those earnings.

Your bank's credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Erik Knight has no position in any stocks mentioned. The Motley Fool owns shares of KeyCorp and PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers