SunTrust Banks Inc. made headlines last week by failing the Federal Reserve Board’s “stress test” of major banks.
Beyond the headlines, is this really something to worry about?
Probably not.
The only real fallout from this is that the banking company won’t be raising its dividend any time soon.
In the stress test, the Fed looked at the capitalization of the 19 largest U.S. banking companies and what would happen to them in a financial crisis.
The Fed determined that SunTrust and three other companies — Citigroup Inc., Ally Financial Inc. and MetLife Inc. — failed the test. That means only that their capital levels would fall below the regulatory minimums, not that the banks would fail under that scenario.
The stress scenario the Fed used in its calculations is extreme, including a 13 percent unemployment rate, a 50 percent drop in stock prices and a 21 percent drop in housing prices.
Under that scenario, the 19 banks combined would amass $534 billion in losses over a nine-quarter period, dropping their tier 1 common capital ratio from 10.1 percent in the third quarter of 2011 to 6.3 percent in the fourth quarter of 2013, the Fed determined.
The tier 1 ratio is the bank’s high-quality capital divided by its risk-weighted assets. These banks are required to keep that ratio above 5 percent, but SunTrust would fall to 4.8 percent under the stress scenario, the Fed said.
SunTrust issued a news release after the Fed reported the results of the study late Tuesday saying that it has increased its capital “over multiple consecutive quarters.” It disputed the Fed’s analysis.
“The Federal Reserve noted that their estimates were for a ‘hypothetical, severely adverse’ scenario that employed ‘conservative’ and ‘simplifying’ assumptions. Using our own modeling techniques — which have shown to have a high level of predictability — SunTrust’s estimates for loan losses and pre-provision net revenue in the supervisory stress scenario are significantly more favorable than those made by the Federal Reserve,” SunTrust Chief Financial Officer Aleem Gillani said in the news release.
SunTrust also said its “improved earnings momentum has continued in the first quarter of 2012” and it expects to report earnings that exceed analysts’ estimates.
That earnings forecast was enough to send SunTrust’s stock higher Wednesday despite the failed test and despite the company saying that “it will not be increasing its return of capital to shareholders at this time.”
It will leave its quarterly cash dividend at 5 cents per share, which is down from 77 cents a share in September 2008 when the nationwide banking crisis intensified.
SunTrust’s stock rose $1.03 to $23.61 on Wednesday.
Atlanta-based SunTrust has the third largest branch network of any bank in the Jacksonville metropolitan area, behind two other banks that passed the Fed’s stress test, Bank of America Corp. and Wells Fargo & Co.
Wells Fargo celebrated its passing grade by announcing a 10-cent increase in its quarterly dividend to 22 cents a share.
Three other banks with branch networks in Northeast Florida also passed the test: BB&T Corp., Fifth Third Bancorp and Regions Financial Corp.
Another company with local ties that passed was JPMorgan Chase & Co., which has a big mortgage operations center but no branch network in Jacksonville.
Citicorp does not have a local branch network but it is a large employer in Jacksonville with a major credit card operations center.
Analyst sees LPS turnaround
Speaking of negative headlines, Lender Processing Services Inc. has seen a lot of those for the past two years.
The Jacksonville-based company, which provides technology services for mortgage lenders, has been under fire for its role in the nationwide foreclosure mess, with federal and state authorities investigating allegations that an LPS subsidiary falsified documents for lenders.
LPS’ stock has dropped from above $40 two years ago to a low of $12.91 last fall. But the stock has been on an upswing so far in 2012 and one analyst thinks it will continue to improve.
Barclays Capital analyst Darrin Peller last week raised his rating on LPS from “equal weight” to “overweight” after meeting with the company’s top management.
“For a number of months, regulatory concerns have overshadowed the investment positives, particularly the company’s resilient cash generation and potential for material long-term upside to earnings power as/when the housing market normalizes,” Peller said in his research report.
“However, we believe shares have reached an inflection point: given what we now consider a materially lower probability of a dire scenario for settlement of outstanding legal issues, we believe investors should be able to focus more on the positive fundamental drivers of the story, including (1) the gap between current and normalized earnings levels, and (2) real potential for evolving trends in the industry (including regulatory compliance) to drive share gains for LPS over the medium- and long-term,” he said.
With the stock trading in the low $20s early last week, Peller set a price target of $29.
Oil another concern for CSX, analyst says
For CSX Corp. stockholders concerned that low demand for coal will hurt the company’s earnings, here’s more to fret over: oil.
UBS Securities market strategist Jonathan Golub named CSX as one of 20 stocks on his “oil supply shock list” in a recent report. These are stocks “that may be most adversely impacted by an oil supply disruption,” he said in the report.
Golub said five industry groups would be most negatively impacted by an oil shock: automobiles, transportation, materials, banks and diversified financials.
“This is consistent with fundamentals given oil is inversely correlated with auto demand; an input for transports and materials; and a source of financial market volatility. Other groups (including consumer stocks) are less directly impacted,” he said.
“While these stocks should lag in the event of a supply shock, energy and defensive sectors should outperform on a relative basis,” Golub said.
Analysts had already been speculating in recent weeks that reduced coal demand will hurt Jacksonville-based CSX’s earnings. Coal shipments accounted for nearly a third of the railroad company’s revenue last year.
At least shareholders received some positive news Thursday from Chief Financial Officer Fredrik Eliasson. According to news reports, Eliasson told an investment conference in New York that CSX expects to report record first-quarter earnings despite all the concerns. He said higher shipments of other materials are offsetting declines in coal demand.
CSX’s stock jumped by $1.71 to $21.92 Thursday on that news.
Florida East Coast reports 2011 net loss
Florida East Coast Holdings Corp. had revenue of $213.3 million and a net loss of $37.3 million in 2011, according to its annual report filed with the Securities and Exchange Commission last week.
The company operates a 351-mile railroad from Jacksonville to Miami. It was once a public company but was bought out in 2007 by funds affiliated with Fortress Investment Group.
Florida East Coast has reported an operating profit but a final net loss after interest expenses in every year since it was acquired by Fortress.
International Baler increases earnings
International Baler Inc. last week recorded a big jump in sales and earnings in the first quarter ended Jan. 31, according to its quarterly report filed with the SEC.
Total sales of $4.3 million more than doubled the $1.8 million in sales in the first quarter of fiscal 2011.
Net income was $355,823, or 7 cents a share, up from $42,097, or 1 cent a share, the previous year.
International Baler is a Jacksonville company that produces baling equipment, which is used to compress waste materials for recycling or disposal.
The company said in the SEC filing that the first-quarter results reflected “improved market conditions and higher commodity prices for recycled materials” this year.
“Also, the company began expanding its dealer network by adding several new dealers and improving coverage of market areas in the United States,” it said.
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