Wall Street's traditional view on SunTrust Banks Inc. holds that it outperforms when the economy is doing well but lags when times are uncertain.
It would follow that budding signs of a recovery would have analysts raising their expectations for the Atlanta company. That has not yet happened on a broad scale, however, and the latest indications are that the enthusiasm in some corners may actually be waning.
Last week Fitch Inc. adopted a "negative" outlook on SunTrust's debt ratings, citing earnings growth, net interest margin, and other figures below those of its peers. Fitch rates the long-term debt of SunTrust and its main subsidiary as AA-minus and said it is still a "very strong credit."
But other analysts have initiated coverage in recent weeks with "buy" ratings on the stock.
The clash of opinions reflects a broad uncertainty about SunTrust that has persisted among analysts and investors over the past two years, after it lost out to First Union Corp. in a battle to acquire the old Wachovia Corp. and as the economy soured.
SunTrust's earnings have suffered amid sluggish capital markets, the weak economy, and corporate reluctance to borrow despite historically low interest rates. The cost of mortgage prepayments, and the general downturn in the investment banking and management businesses, have also taken their toll.
Hurt by low rates and slack loan demand, the company's net interest margin in the first half fell 37 basis points from a year earlier, to 3.13%. Net income for the first half rose just 1.5%, to $658 million, and second-quarter net income fell 3.9% from the year before, to $330 million.
Other key numbers have slipped in recent quarters, such as SunTrust's return on assets and return on equity, which Ken Ritz, the director in Fitch's financial institutions group, views as worrisome. In the world of AA-minus bank stocks, he said, "they would be at the low end with regard to most of their performance measures."
A "negative" outlook means that Fitch would consider cutting ratings on SunTrust's debt if its performance does not improve. If it "returns to a more normalized level, more within its peer group," the agency would switch the outlook back to "stable," Mr. Ritz said.
A SunTrust spokesman would not comment Friday on the Fitch announcement.
Concerns about SunTrust's growth prospects have prompted occasional speculation that it would be forced to sell to a large competitor. But even some analysts who have a "hold" rating on the company say that is out of the question.
"It's the remaining independent [financial institution] in Atlanta. It's had a good reputation for many years, and it's the nexus of the Atlanta business community," said Nancy Bush, a native of the city and the founder of NAB Research LLC in Annandale, N.J.
Other signs are emerging that SunTrust may be poised to regain its status as a Wall Street favorite. At least two sell-side analysts, Thomas McCandless at Deutsche Bank Securities Inc. and Kevin Fitzsimmons at Sandler O'Neill & Partners LP, recently initiated coverage on SunTrust with "buy" ratings.
On Sept. 4, Mr. McCandless said it "appears well positioned to rebound back to historic growth patterns, [and] patient investors should be rewarded with further modest, upward revaluation of its shares." And on Aug. 27, Mr. Fitzsimmons said that its growth prospects are likely to improve as interest rates rise and the economy rebounds.
SunTrust's chairman and chief executive, L. Phillip Humann, said at a Lehman Brothers investor conference two weeks ago that he thinks the company is poised to grow again.
"If you look at our growth initiatives across each line of business, what you see is an opportunity over the long haul for SunTrust to get back to an 8% to 10% annual increase in net income and earnings per share," Mr. Humann said.
Mr. Ritz at Fitch said SunTrust's traditionally conservative fiscal approach has actually helped it keep quarterly earnings consistent. "In periods when you have had downturns in the economic or credit cycle, SunTrust rose to the top because of their consistency."
SunTrust was one of the first large banks to reposition its balance sheet to take advantage of rising interest rates. It has also introduced new sales efforts and built up its market-sensitive businesses, including investment banking and wealth management.
In his initial report, Mr. Fitzsimmons wrote that SunTrust shares have traded recently at about the same price-to-earnings ratio as that of many peer banks, compared with a historical premium of 14%. It will probably not reach that level again, he said, but it could eventually trade at a 5% premium when investors realize it is likely to get a boost from an economic upturn.
Mr. Fitzsimmons said Fitch's action was "looking backward" at SunTrust's performance instead of forward at its prospects.
"We're saying we think they are at an inflection point in terms of showing positive earnings and revenue growth," he said in an interview Friday. "We think they're a good play on leverage to a recovery."
