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Can SunTrust (STI) Maintain its Earnings Streak in Q3?


SunTrust Banks, Inc. STI is slated to announce its third-quarter 2016 results on Oct 21, before the opening bell.

Driven by a rise in revenues, SunTrust’s earnings had surpassed the Zacks Consensus Estimate in the second quarter. However, a jump in provision for credit losses and a slight increase in operating expenses were the downsides.

The earnings beat translated into improved stock price movement, as the company’s shares were up over 7.5%, for the three-month period ended Sep 30, 2016. Notably, analysts seem to have a neutral stance on SunTrust’s business activities in the just concluded quarter. The Zacks Consensus Estimate has remained stable over the last 30 days.

Additionally, SunTrust boasts a decent earnings surprise history, as evident from the chart below:

SUNTRUST BKS Price and EPS Surprise

SUNTRUST BKS Price and EPS Surprise | SUNTRUST BKS Quote

Factors to Influence Q3 Results

Will SunTrust be able to maintain its earnings streak in this quarter? Or will it succumb to industry-wide challenges? Let’s check the factors at play:

Rising Interest Income to Support Revenues: With improving domestic economy, demand for loans is on the rise. So, loan growth is likely to support interest income growth. Further, improved funding mix should lower interest bearing liability rates. So, all these factors should help increase the company’s net interest income during the quarter.

Non-interest Income Performance May Improve: Supported by impressive trading activities during the quarter, we believe that SunTrust will witness a rise in trading income. Further, management expects mortgage production income to improve in the third quarter on a year-over-year basis, on the back of positive momentum in pipelines and application activity.

Credit Quality to Support Results: Management expects provision for loan losses to decline sequentially during the quarter, primarily stemming from fall in energy charge-offs. Further, despite a rise in non-performing loans, net charge-offs are likely to decline sequentially. Hence, overall credit quality is anticipated to reflect improvement in the upcoming release.

NIM to Decline: Assuming a static interest rate environment, management expects net interest margin (NIM) to decline 4–5 bps in the quarter, owing to lower new production yields and higher expenses arising from the creation of the company’s securities portfolio.

Expenses Likely to Rise: The chances of expenses rising during the quarter are high as SunTrust focuses on improving fee income to offset margin pressure. Further, effective third quarter, the FDIC assessment fee will increase overall expenses by $10 million. Nevertheless, the company remains undeterred in its efforts to improve efficiency.

Earnings Whispers

Our proven model does not conclusively show that SunTrust is likely to beat the Zacks Consensus Estimate in the third quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold), for this to happen.

Unfortunately, this is not the case here as elaborated below.

Zacks ESP: The Earnings ESP for SunTrust is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 89 cents.

Zacks Rank: SunTrust’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat in their upcoming announcements.

State Street Corporation STT is scheduled to report results on Oct 26. The company has an Earnings ESP of +0.80% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

Lazard Ltd. LAZ, another Zacks Rank #2 stock, has an Earnings ESP of +3.90%. It is scheduled to report results on Oct 27.

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