SunTrust Banks Inc. will get another chance next week to prove it is serious about cutting costs, and some observers expect it to announce significant layoffs in the near future.
The $182.2 billion-asset Atlanta company is scheduled to report first-quarter results April 17. But its earnings may take a backseat to expenses; analysts expect SunTrust to put meat on the bones of a plan to lower annual expenses by $400 million by the end of next year.
"I have talked to a number of people … who said they have been interviewing for their own jobs," Robert Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., said in an interview Tuesday. "People are really concerned … that a major layoff is coming up, and that the company … will not carry dead weight any longer."
Christopher Marinac, an analyst at FIG Partners LLC, said in an interview Tuesday, "I hear internally that there has been some serious belt tightening. The groundwork has already been laid for more staff reductions."
Mr. Marinac, a former managing director at SunTrust Robinson Humphrey, said SunTrust has room to "get leaner and meaner" in its commercial banking operations, where there are "a lot of overlapping layers of management."
SunTrust already has cut about 10 positions in its trust division, and it will look at call centers and other support staff, he said. He does not expect cuts in the mortgage or asset-management businesses.
Michael McCoy, a SunTrust spokesman, said his company would not comment, citing a policy of not talking to the news media right before releasing earnings. James M. Wells 3rd has declined repeated interview requests since becoming the chief executive Jan. 1.
SunTrust unveiled its cost-cutting program in June but drew flak from Wall Street for not providing specific goals. Some details emerged in January, when Mr. Wells provided the $400 million figure, and SunTrust said $135 million of the cuts would occur this year as the company evaluates vendor relationships and considers more outsourcing and offshoring.
Executives also are looking at SunTrust's real estate holdings. In November it agreed to sell an office complex in downtown Atlanta for $52 million.
Fourth-quarter personnel expenses fell 2.6% from the third quarter and rose just 2.1% from a year earlier, to $1.2 billion. Mr. Wells said during an earnings call in January that a hiring freeze implemented in the third quarter had cut the work force by about 700 positions.
SunTrust has been criticized over the past year for being late to the cost-cutting game, and its earnings growth has slowed amid a difficult operating environment.
Mr. Wells would not provide a target for SunTrust's efficiency ratio, which was 59.67% at yearend.
He has said that current efforts should instill a stronger sense of efficiency throughout the company. "It was time to increase our focus on creating a culture of efficiency and productivity," he said in January. "This is not a one-time cost-cutting exercise."
Analysts say SunTrust faces bigger problems with its revenue as it battles industry headwinds and challenges tied to its business mix.
Last month it lowered its fourth-quarter earnings by 4.8%, to $498.6 million, after dealing with a distressed loan with a large corporate client. SunTrust said it still could have exposure to the borrower's customer contracts, because it agreed to finance their sale to a third party.
There are also concerns about SunTrust's alternative-A mortgage portfolio, in part as a result of M&T Bank Corp.'s disclosure last month that first-quarter earnings would miss the average estimate of analysts by as much as 36 cents a share. M&T said problems in the subprime residential mortgage market drove down prices for its alt-A loans.
Mark A. Chancy, SunTrust's chief financial officer, said during the fourth-quarter earnings call in January that his company had revised guidelines and stopped keeping a considerable amount of alt-A originations on its books. He also said that the issues in its mortgage portfolio largely involved such loans.
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, wrote in an April 3 note to clients that alt-A mortgages would get as much scrutiny as expense control during next week's conference call as investors track the pace of rising delinquencies and the liquidity for sales into the secondary market. (He cut his earnings estimates by 2 cents for this year, to $6.05 a share, and next year, to $6.56.)
On Tuesday, Mr. Patten cut his estimates by 15 cents for this year, to $6.05 a share, and by 10 cents for next year, to $6.55, on "lowered assumptions" for the net interest margin and loan growth. He wrote in a note to clients that the average full-year estimate for SunTrust has fallen 3.7%, to $6.04, since the CEO change was announced in November.
However, Mr. Patten said that alt-A concerns at SunTrust might be overblown.
"I'm sensing that the situation there is not as bad as everyone else seems to think," he said. "I don't see alt-A emerging as a major chargeoff event at SunTrust."
Mr. Marinac also downplayed the alt-A issue.
"Personally, I don't think that alt-A will be anything to write home about," he said. "You can't rule out an M&T-type issue, but we really won't know until they hold the earnings call."
