Regional banks are having a moment in the sun, as the larger U.S. financial institutons continue to make headlines for their failures and missteps. Regional banks make neither headlines nor trades—they just make loans, interest and money. Today’s Spotlight Stock is a bank chain based in Georgia, serving Florida, the Southeast and Mid-Atlantic.
“We are raising our rating on SunTrust Banks, Inc. (STI) to BUY from HOLD and establishing a 12-month target price of $30. We are also raising our EPS forecasts, which are now above consensus for this year and next. Make no mistake: SunTrust remains a work in progress. While the company has returned to profitability in recent quarters, its mid-single digit ROE is well below the mid-teens and higher ROEs of the top-tier regional banks and its valuation reflects this lower ROE. STI shares have also significantly underperformed the S&P 500 and an index of super-regional banks, even after the company’s return to profitability in mid-2010. We expect a handful of major catalysts to begin to reverse this lagging performance.
“First, investors may be underestimating the impact of improving conditions in Florida. SunTrust’s recent asset growth is an indicator of these better conditions, and about one-third of the company’s branches are located in the state. While SunTrust continues to work through a large backlog of problem loans in Florida, recent data show that home prices are rising again. Home loan foreclosures don’t go through the courts in Florida, so backlogs should clear faster than in other states, as well. SunTrust is also optimistic about the benefits of HARP 2.0, the latest version of the government’s program to aid underwater mortgage borrowers. At the recent Wells Fargo analyst day, we spoke with a Florida-based executive who expressed optimism about recent job creation and housing market activity in the state. While Florida remains intensely competitive, BofA is closing branches nationwide and Chase also appears to have slowed its plan to add branches in the state. We also believe that SunTrust is gaining market share in both Florida and Georgia. There have been dozens of bank failures in both states since the crisis began.”
This free preview is only a small portion of David Ritter’s full recommendation. Subscribe to the Investment Digest to read more about SunTrust Banks. Click here to learn more.
David Ritter, Argus Weekly Staff Report, June 18, 2012
