This Bank Stock Has Extra Growth Potential

An analyst on CNBC recently stated certain bank stocks could double over the next few years, which caught my attention. 

The analyst was saying how undervalued the usual, popular names such as Citigroup , Bank of America , and Morgan Stanley are, but one of the other names the analyst was raving about surprised me: SunTrust Banks . After doing a little bit of digging and comparing it to its larger siblings, I couldn't agree more.

A little bit about SunTrust and its recent history
While it is certainly much smaller than all of the other institutions mentioned in terms of market cap, revenue, and pretty much every other measure, SunTrust belongs in the same category simply because of the value it offers. For instance, other banks of similar size and makeup are trading for much higher valuations. 

SunTrust has operations in 11 states but is concentrated in Florida (hence the company's name), Georgia, Virginia, and Tennessee. The company operates almost 1,700 branches, which have a combined $130.5 billion in deposits.

After the financial crisis, the Federal Reserve allowed SunTrust to pay back the $4.8 billion in TARP funds it had received and approved the company's capital plan. Since then, the company has passed several stress tests. After its most recent capital planning process, it was given the authorization to double its quarterly dividend to $0.10 per share and to repurchase up to $200 million of its stock (a little more than 1% of the total float).  

Comparing the numbers
When comparing the numbers to the other banks mentioned, SunTrust simply looks like the best value for potential growth. In terms of each company's price to book value, SunTrust actually looks a bit on the high side, currently trading at 0.87 times book value. 

While this is still a "discount," Citigroup trades at 0.78 times book value, and Bank of America trades at an even more deeply discounted 0.69 times book. Bear in mind that one of the key points of the article referenced earlier is that a year from now, none of these banks will trade below book.

However, when examining each company's return on equity over the past year, we see quite a different story. A company's return on equity essentially measures that company's efficiency at creating profits from the equity of their shareholders, and it is calculated by dividing a company's income by the total equity of its shareholders. 

As expected, these figures go in reverse order of discount to book value, but the differences are wider than you may think. Bank of America's return on equity is 2.31%, Citigroup's is 5.07%, and SunTrust's is more than double that, at 10.45% (including a one-time gain). So, even though the other two appear "cheaper" at first glance, SunTrust has done a much better job of creating profits for its shareholders.

One of the best opportunities for growth involves increasing lending activity to take advantage of rising interest rates and the steepening yield curve. During the company's latest earnings call, it said that higher loan rates would improve interest income by around $8 million per quarter.

Perhaps the best area of opportunity unique to SunTrust is its investment and wealth management business. Not only is the average investor gravitating more toward stock and other equity investments as the economy improves, but the company's investment services business is simply not as "built up" as that of the other two banks mentioned. 

Bank of America has added to its investment business over the past decade or so, with major acquisitions such as U.S. Trust in 2007, and Merrill Lynch during the financial crisis. Citigroup also has a large retail investment business, even after recently unloading the Smith Barney segment. SunTrust simply has much more room to capitalize on an impending influx into equities than either of the other banks mentioned

Looking ahead
Without a doubt, all three of the banking companies mentioned have a great deal of upside potential. SunTrust provides a unique opportunity, because instead of just the low valuation that all three have in common, it also has the greatest potential for expansion. The company has lots of room for physical expansion (only in 11 states), as well as expansion within its existing business segments. So, of the three banks, SunTrust offers several pathways to growth and deserves consideration for any portfolio.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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