Magazine article American Banker

SunTrust's Need to Defend Spending Shows Investor Focus on Costs

Magazine article American Banker

SunTrust's Need to Defend Spending Shows Investor Focus on Costs

Article excerpt

Byline: Andy Peters

It's funny how one little bump in the road can send bank executives scrambling to defend themselves and their strategic plans.

When SunTrust Banks (STI) reported first-quarter results on Monday, the Atlanta company highlighted its 16% year-over-year rise in earnings. It touted growth in commercial lending and in fee-based businesses like wealth management.

Yet what analysts focused on was a rise in expenses. In the low interest-rate environment, cost-cutting is one of the few sure-fire ways to generate more revenue.

Some institutions this quarter, from Hancock Holding (HBHC) to Comerica (CMA), have reported higher profits through declines in operating costs. But more of their regional peers -- including Huntington Bancshares (HBAN), Fifth Third Bancorp (FITB) and BB&T (BBT) -- said efficiency ratios worsened in the first quarter compared with a year earlier.

The $180 billion-asset SunTrust's chairman and chief executive, Bill Rogers, and its chief financial officer, Aleem Gillani, have for months talked about cutting costs, by eliminating jobs, closing branches and more. The ultimate goal is to lower its efficiency ratio below 64% this year, and 60% in the long term; the figure has gradually moved in that direction since hitting 71% at the end of 2012. The efficiency ratio measures noninterest expenses as a percentage of the combination of net interest income and fee income; the lower the figure, the more efficient the bank is considered.

But SunTrust's efficiency ratio rose 286 basis points to 66.83%, compared with a year earlier. Naturally, Rogers and Gillani were peppered with questions and forced to explain the situation.

"If I look at year-over-year year trends it doesn't look so good," Mike Mayo, an analyst at CLSA, said during a Monday morning conference call. "What gives you confidence that you will meet your efficiency target ... this year?"

Gillani responded that SunTrust has "been very focused on expense management" and that "trying to extrapolate out of a single quarter or even a single year may not give you a really good indication" of the company's progress.

"We are a good size company," Gillani said. "This is a complex business."

Rogers backed up Gillani by saying, "this quarter's efficiency ratio is ahead of where we thought we would be internally on our path to 64%."

Marty Mosby, an analyst at Guggenheim Securities, came to Gillani's and Rogers' rescue. Mosby pointed out that, in the first quarter of 2013, SunTrust had booked a $41 million incentive accrual reversal. SunTrust did not adjust its first-quarter efficiency ratio to reflect that reversal. If it had, then SunTrust's first quarter 2014 efficiency ratio actually would have improved from the prior-year period. …

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