Drip
Portfolio Report
SunTrust's Trust Business
by Dale Wettlaufer ([email protected])
Alexandria, VA (July 6, 1998) --Looking at SunTrust (NYSE: STI), it's easy to see that its trust and investment unit is growing most rapidly of all its non-lending units. Last year, the unit grew revenues by nearly 14.5% while discretionary trust assets reached $67.4 billion. That's a little under half the size of mutual fund powerhouse T. Rowe Price (Nasdaq: TROW), which has a market cap that is 28% the size of SunTrust's. Of course, these are two different business models, as an asset management and mutual fund advisory company can charge more as a percentage of assets than a company that is focused on trusts.
What is similar in both models is that they're both high return on investment (ROI) sorts of businesses, with excellent asset turns and margins, both of which obviate the need for lots of leverage to generate a high return on equity. I would imagine that the pre-tax profit contribution of the trust business is somewhat smaller than the percentage of overall revenues it generates. However, I know that such businesses don't need anywhere near the sort of capital that other business lines do. For instance, T. Rowe Price and asset management juggernaut Franklin Resources (NYSE: BEN) both generate a return on assets in excess of 20%. With margins that are likely smaller than these companies but asset turns somewhere in excess of once a year, I think it's a pretty good bet that SunTrust's trust business generates an ROA in excess of 10% per year. With ROA for the rest of the company in the 1.3% range, it makes sense that the trust and investment business is very actively recruiting new employees. It's a no-brainer to go after this business in the regions where its other businesses are known and marketed constantly.
One criticism that one could make of SunTrust is that it has been way too conservative. Had it moved on a mutual fund company earlier in the decade, it would have participated in the growth of the industry to a much larger extent than it has and it would have paid a much lower price that it would have to pay today to make a major entry into the national business. Right now, SunTrust pushes its own mutual funds on its website, which is all well and good from the perspective of what customers want. But that only works if your customers don't know they have a choice. No intelligent customer is going to limit their choice of mutual funds to just SunTrust's, so SunTrust's funds have to swim in a sea of thousands of other competing equity mutual funds out there.
Nonetheless, the trust and income business is attractive and this is where new investment should go. Last quarter, trust income increased 18.8% year-over-year and 12.8% sequentially. For the preceding four quarters, trust income has grown at increasingly large rates:
Q4 1997: 19.6%
Q3 1997: 16%
Q2 1997: 11.6%
Q1 1997: 10.9%
This is all with probably under $500 million in assets invested in the business, while it takes in the range of $60 billion in assets to create $3.1 billion in total revenues. That means asset turns for the trust business are somewhere in the range of 0.75 turns per year versus 0.05 to 0.06 for the other parts of SunTrust and for the rest of the industry. Remembering that ROA is the product of asset turns and margins, we have:
Trust: 0.75 turns x 17% net margin = 12.75% ROA
Rest of Bank: 0.055 turns x 23% net margin = 1.27 ROA
You can see why one business is more attractive than the other. It takes a much less leveraged set of assets to create a good return on equity in the trust business than lending activities demand.
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