SunTrust, Fifth Third net rises but paths diverge

SunTrust, Fifth Third net rises but paths diverge

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(Global Markets) - A pair of regional U.S. banks reported double-digit gains in fourth-quarter earnings Friday on improving credit quality and higher loan demand, but shares of SunTrust Banks Inc (STI.N) soared while those of Fifth Third Bancorp (FITB.O) tumbled.

Atlanta-based SunTrust, the largest bank based in the southeastern United States, said a 3 percent rise in its business and corporate loan portfolio and a $60 million one-time benefit from freezing its company pension plan helped results.

SunTrust earned $152 million, or 28 cents a share, in the last quarter of 2011 compared with $114 million, or 23 cents a share, a year ago. It beat the 27 cent-per-share consensus estimate of analysts surveyed by Thomson Global Markets I/B/E/S, sending its stock price up 4.6 percent to $21.17 in afternoon trading.

The bank, which has been long battered by its Florida and Georgia home mortgage portfolios, set aside a much lower reserve for credit losses than a year ago and said net interest income rose 2 percent.

It set aside $215 million, however, to cover expected demands from government-sponsored mortgage companies Fannie Mae and Freddie Mac to repurchase loans whose credit quality the bank may have misrepresented. Such demands will continue at elevated levels in the first half of 2012, but should diminish as inventories of subprime loans related to the bottom-of-the-barrel 2006-2008 lending cycle are worked through, bank executives said.

SunTrust's backlog of underwater homes continues to hurt revenue due to insurance, maintenance and other foreclosure costs, and could escalate if the housing market recovery proves temporary, executives warned. "We don't know where this is going," SunTrust Chief Financial Officer Aleem Gillani said on a conference call with analysts. "We're leveraged to the economy."

Unlike larger rivals such as US Bancorp (USB.N) and PNC Financial Services Group (PNC.N), SunTrust did not set aside money to resolve claims of robo-signing and other mortgage-servicing abuses. Fourth-quarter losses related largely to servicing grew by $70 million from the prior year. The bank recently began discussions with state attorneys general on a settlement and said it will update shareholders on expected settlement charges in coming months.

SunTrust also spent $20 million to lay off employees in the quarter and reserved $27 million for additional severance costs. The bank said it is on target to meet its goal of cutting $300 million of annual expenses by the end of 2013, but analysts at Stifel Nicolaus said in a report that the company has a weak history of meeting its expense goals. They estimated that SunTrust earned only 17 cents a share in the quarter, excluding one-time items.

SunTrust Chief Executive William Rogers said the company's capital levels are strong enough to warrant more stock repurchases this year, pending approval of its stress-test scenario from banking regulators.

FIFTH THIRD's MISS

Fifth Third, a Cincinnati-based bank with operations in the Midwest and Southeast, said fourth-quarter net income rose 13 percent from a year earlier to $305 million, or 33 cents a share.

Analysts, who according to Thomson Global Markets I/B/E/S had an average forecast of 36 cents a share, said despite relatively strong loan growth the bank's expenses were high.

Shares of Fifth Third were trading down 4 percent at $13.02 on Friday afternoon.

In a conference call with analysts, Fifth Third Chief Executive Kevin Kabat attributed higher costs in part to seasonal factors such as higher federal unemployment insurance taxes and bonuses to mortgage bankers who have been increasing sales.

"We posted very strong loan growth for the quarter," Kabat said, noting that business, mortgage and auto lending is expected to continue growing this quarter.

Fifth Third said it hopes to use excess capital to expand within its current markets through mergers and acquisitions if prices sought by sellers fall by year-end. "We expect some M&A opportunity in 2012," Kabat said, "but don't expect it to happen in the near term."

Like many of their rivals, executives of SunTrust and Fifth Third said they may tweak consumer fees upward to mitigate the effects of low interest rates on loans and investments, and to offset new regulations that cap fees they can collect from merchants on debit card transactions.

"We are earning next to nothing on our deposits, which is a large source of value for a banking company," Fifth Third investor relations head Jeff Richardson said on the conference call.

(Reporting by Jed Horowitz and David Henry, editing by Matthew Lewis)