In the midst of a frustrating week, have you ever stopped to look in the mirror and decided to start making some changes in your life? Perhaps the bad times were the catalyst you needed to start exercising more, organize your house, or cut back on bad habits. Regional bank SunTrust (NYSE:STI) seems to be having one of those moments. The resultant changes it's making aren't tangible now, but they could manifest in big ways three to five years from now.
External factors like the yield curve and the credit cycle lie beyond any single bank's control. But despite posting another slow quarter, I believe that SunTrust has done a great job focusing on the things it can control. Other banks would be smart to follow its lead.
It's hip to be E-squared
SunTrust's Excellence in Execution (or E2) initiative earmarks $400 million in cost savings by the end of 2009. SunTrust's quarterly net income runs at a bit more than $500 million, so we're talking big numbers here.
The E2 program has five areas of focus: supplier management, corporate real estate, process reengineering, offshoring and outsourcing, and organizational review. While companies like FedEx (NYSE:FDX) and Costco (NASDAQ:COST) are legendary for their ability to drive costs lower, banks seem notoriously inefficient.
As a result, I'm fascinated by SunTrust's E2 program, because even a well-run bank like SunTrust probably has a lot of fat to cut. For example, in real estate, the company is planning to cut at least 2 million square feet of office space. If I guesstimate that the company pays $25 per square foot per year, that's $50 million per year in savings from reducing office space alone.
In outsourcing, the company expects to save $45 million by 2009, and in supplier management -- which accounts for one-third of total expenses -- the company hopes to realize $115 million in savings. Since last September, the company has cut 900 full-time employees. SunTrust is aiming for total 2007 savings of $145 million.
Future implications
Since virtually every bank has cost-cutting programs in place, why am I excited about this one? I feel that SunTrust's program is uniquely nitty-gritty in its cost-cutting, an approach similar to that of Costco or other large discounters.
For example, some cost-cutting programs simply entail firing unneeded employees or closing unprofitable branches. That should be done anyway, and I feel that such measures do nothing to shrink a company's moat.
On the other hand, a cost-cutting program that focuses on eliminating tons of obscure and less obvious costs -- such as measuring the number of steps an employee has to take, then reorganizing the office to make walking pathways more efficient, as companies like LabCorp (NYSE:LH) actually do -- are much, much more difficult to replicate. These detailed, thoughtful changes can definitely contribute to a company's moat. When I hear SunTrust talking about curbing its energy costs with centrally controlled temperature and lighting standards, or exploring alternative workspace options, I feel these moves would be more difficult for competitors to mimic.
So far, E2 hasn't yet helped SunTrust's results; net income fell in the latest quarter. However, the real magic happens when the banking environment improves. When revenue starts to increase, E2 will help substantially increase operating leverage, allowing a heftier chunk of sales growth to fall to the bottom line. In addition, I feel SunTrust's cost-cutting efforts will make it more competitive, though that potential is currently obscured by the tough interest rate and credit environment, and by flat sales growth. SunTrust is planting some very promising seeds, and in a few years, they should result in a rich harvest.
Shine on, further Foolishness:
- Before the Call: Waiting for Wachovia
- Banking on Buyouts
- SunTrust + E2 = Efficiency?: Fool by Numbers
Costco, Fedex, and LabCorp are Motley Fool Stock Advisor picks. Washington Mutual is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days.
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.
