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Is SunTrust Bank’s Stock Undervalued?

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Lower price-to-book ratio

At 0.99, the price-to-book ratio of SunTrust Bank (STI) is lower than the industry average, as represented by the diversified SPDR S&P Regional Banking ETF (KRE) and the SPDR S&P Bank ETF (KBE). The ratio for these two ETFs, as well as for STI’s peer group, is about 1.3. Thus, SunTrust’s price-to-book ratio is 31% lower than the industry average.

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Lower returns on equity

SunTrust’s return on equity (or ROE) is 8%, which is 18% lower than the industry average. This ROE is 8% lower than that of KRE and 22% lower than KBE’s. Because STI’s stock trades at a greater discount than its lower ROE implies, the stock seems to be slightly undervalued.

The graph above shows SunTrust’s price-to-book ratio relative to its ROE in comparison to those of the bank’s peers. KBE is more undervalued than KRE based solely on ROE. STI is slightly undervalued even relative to KBE. SunTrust’s ROE lies between 7% for Regions Financial (RF) and 10% for BB&T (BBT). STI forms roughly 5.5% of the iShares US Regional Banks ETF (IAT).

SunTrust’s focus going forward

One of SunTrust’s key goals is to deepen client relationships. The company saw negative deposit growth in 2013. Since then, STI has been focusing on building stronger relationships with current clients and attracting new clients. This partially contributed to positive deposit growth in 2014. The company intends to continue targeted efforts in this area.

Another equally important focus area for SunTrust is operational efficiency. The company has set a long-term, tangible efficiency ratio target of below 60%. The adjusted ratio for 2014 was 63%. Previously, STI was placing more of an emphasis on expense reduction to improve efficiency, but going forward, the company is planning to focus more on revenue growth as a means to improve the ratio. This will also bolster STI’s returns performance.

SunTrust has seen good loan growth, especially in the commercial segment. The company’s asset quality has improved, and it has one of the lowest charge-off rates in the industry.

STI is strengthening its weaknesses in the areas of deposit growth and operational efficiency. If the company makes progress in these areas, STI’s stock price will surely reflect this.

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