Now that the big banks have all reported earnings, it's time for smaller, regional banks to do the same. Regional banks could be a particularly interesting group to watch in the coming years, especially banks like SunTrust (NYSE:STI) and Regions Financial (NYSE:RF), both of which just reported strong first-quarter numbers.
Here's a rundown of these banks' first-quarter results and a potential catalyst that could give these stocks an edge going forward.
SunTrust Banks delivered strong earnings and improved efficiency
Regional bank SunTrust reported earnings of $1.29 per share, handily beating estimates of $1.11, although revenue was slightly below expectations. The bank's earnings represent 42% year-over-year growth, thanks to tax reform, efficiency improvements, buybacks, and more.
For starters, SunTrust's effective tax rate dropped to 19%, while historically it had been in the upper 20s. And while revenue was flat year over year, the bank managed to trim non-interest expenses by 3%, producing a much more efficient operation. In fact, SunTrust's efficiency ratio dropped to 62.8% from 65.2% a year ago, and the bank's return on equity (ROE) of 11.2% and return on assets (ROA) of 1.28% easily surpassed the 10% and 1% respective industry benchmarks.
Furthermore, asset quality was also much improved, with the bank's net charge off ratio down seven basis points. And finally, the bank's net interest margin improved by 15 basis points year over year, thanks to the rising rate environment.
One big negative aspect of SunTrust's earnings was the revelation that a former employee of the bank may have stolen data on 1.5 million customers, including names and account balances, but not Social Security numbers, account numbers, or passwords. The bank is offering free identity protection to its customers and say it hasn't noticed significant fraudulent activity on the affected accounts.
Regions Financial had even better year-over-year earnings growth
Like SunTrust, Regions Financial beat on the bottom line, while revenue slightly missed expectations. The bank's first-quarter EPS of $0.35 per share was four cents better than expectations and represented a 52% improvement from a year ago.
Also like SunTrust, Regions' strong earnings were a result of a few factors, such as tax reform, improved efficiency and asset quality, and higher profit margin.
The bank's 23.6% effective tax rate isn't quite as low as SunTrust's, but it is still a big improvement compared with 30.2% in the same quarter last year. Efficiency-wise, Regions' non-interest expenses grew by 2.9% on an adjusted basis, but this was significantly less than the bank's 6% revenue growth. Efficiency, ROE, and ROA of 61.9%, 10.8%, and 1.32%, respectively, were all significant improvements.
On the topic of asset quality, Regions' net charge-off ratio decreased by nine basis points, and its non-performing loans dropped by an impressive 40%. Additionally, Regions' net interest margin increased by an impressive 19 basis points from a year ago.
To sum it up, SunTrust and Regions both reported similarly strong quarters, and both showed substantial improvements in key areas of their businesses.
Why these two banks could be big winners in 2018 and beyond
First off, all banks should benefit from certain tailwinds over the next few years such as continued margin expansion as the Federal Reserve raises interest rates.
However, there's a more specific reason these two banks in particular could do well: their size. SunTrust is the 12th largest U.S. bank with $205 billion in total assets, while Regions is significantly smaller but still in the top 25 with about $122 billion in assets.
Here's why this is important. In March, the Senate passed a bill that, among other changes, would raise the definition of a systemically important financial institution, or SIFI, from $50 billion to $250 billion. If this becomes law, both banks could potentially get out of the regulatory headaches and expenses that come with being over the SIFI threshold.
To be clear, the banking de-regulation bill certainly has an uphill battle ahead of it. And there are thousands of other banks that already aren't subject to SIFI requirements. However, SunTrust and Regions could find themselves among the largest non-SIFI banks in the United States. In other words, they could have the advantages of scale that come with being a large operation, but without the regulatory expenses and restrictions that come with being too large.