When SunTrust Banks Inc. posted first-quarter profits Thursday that topped analysts' estimates, most analysts welcomed the numbers, but some questioned the company's ability to continue increasing revenues.
Though an increase in fee income boosted the Atlanta company's earnings, it also got help from a lower tax rate, which it said is unlikely to be repeated this year.
Meanwhile, the $124 billion-asset company, the first of the nation's large banking companies to report earnings this season, said the eagerly awaited recovery in corporate borrowing has yet to materialize.
Analysts said they will be studying other companies' reports as they come in over the next two weeks for confirmation of the trend, but several agreed last week that sluggish corporate borrowing remains the biggest challenge facing most large banks.
The big question is when things might turn around.
"The lack of corporate loan demand" at SunTrust "is not surprising, given what we've heard from everybody, although I would be surprised if that continues into the second and third quarters," Nancy Bush, the independent analyst who runs NAB Research LLC of Annandale, N.J., said in an interview Thursday.
Lori Appelbaum, an analyst at Goldman, Sachs & Co., said SunTrust and other large banking companies may have to continue watching expenses closely until the revenue and loan picture brightens.
"With modest top-line growth on the heels of little movement in securities and modest corporate loan demand, expense discipline" by SunTrust "and the rest of the sector will be critical," she wrote in a research note Thursday.
In a conference call with investors Thursday morning, L. Phillip Humann, SunTrust's chairman, chief executive, and president, called the first-quarter results "positive and encouraging" but said the sluggish revenue growth was "frustrating."
Revenue grew 5.7% from the first quarter of last year, to $1.46 billion, but was flat from the fourth quarter.
"While slightly frustrating, this is not really a surprise," Mr. Humann said. "One issue here - and I think you know we're not the only ones dealing with this issue - is that loan growth among large corporate borrowers remains stagnant."
He pledged to hold down expenses at least until there is improvement in corporate lending and revenue growth, which are still concerns.
SunTrust said its first-quarter net income rose 9% from a year earlier, to $358.5 million. Earnings per share of $1.26 were 3 cents better than the average estimate among analysts polled by Thomson First Call.
At least some of that earnings surprise was the result of a lower-than-expected tax rate. SunTrust said a state tax settlement during the quarter cut the rate to 28%, but said it expects a return to a normal level of 30% to 31% for the full year. (It would not reveal any further details of the settlement.)
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP said the lower tax rate contributed a few cents per share to SunTrust's earnings and effectively replaced securities gains, which fell "dramatically" during the quarter.
Securities gains, which SunTrust and other banking companies have used in the past to pad profits, were an unexpectedly low $4.9 million in the first quarter, down sharply from $19.5 million in the fourth quarter.
But analysts said that even without the lower tax rate, SunTrust likely would have met expectations. "The quality of overall results is getting better," Ms. Appelbaum wrote in her research note.
Excluding securities gains, fee income rose 17% from a year earlier, to $590 million, on growth in trust and investment management income, investment banking fees, and service charges.
Credit costs also fell; SunTrust's provision for bad loans fell 15.7% from the fourth quarter, to $59 million.
Its profit margin from lending expanded 4 basis points from the fourth-quarter, to 3.13%. Part of that increase was the result of the deconsolidation of a commercial paper conduit called Three Pillars, which SunTrust had brought on to its balance sheet last year because of an accounting rule change.
But SunTrust also has been steadily improving the yields on its investment portfolio, which had been below those of many other banks, and analysts expect its margin to continue expanding this year.
Despite the continued slump in borrowing among large corporate customers, SunTrust said it is continuing to make loans to small and midsize companies.
But Mr. Fitzsimmons said that until the corporate loan outlook improves, that growth is likely to remain invisible.
Compared to other Southeast regional banks, "these guys have a larger component of their loan portfolio in corporate loans, which still have not turned around," he said.
Other trends at the company imply "that their earnings are going to turn around … but they need the commercial loans, and they need the corporate paydowns to stop," Mr. Fitzsimmons said. "Once that happens, that will unmask all the decent loan growth you have in the other portfolios."
Mr. Humann remained cautious as he described the outlook.
"We're not looking for sudden, dramatic quarter-over-quarter increases this year, nor are we fixated on sharp jumps in each and every earnings component each and every quarter," he said. "Rather, our priority is on delivering steady, balanced, business-driven results that support our overall goal of delivering consistent, sustainable earnings growth over time."
Investors appeared a bit more optimistic than Mr. Humann; they pushed SunTrust's shares up as much as 1.8% during trading on Thursday, a day when most bank stocks fell. However, for the day the stock rose just 0.4%.
Analysts said recent economic data may have fueled a belief that the economic recovery is gaining steam and that the Federal Reserve may finally hike interest rates that have squeezed lending margins at SunTrust and other banking companies.
"This is a company that is pretty well positioned for rising rates, and all of a sudden it looks like that's the case," Ms. Bush said.
