SunTrust Banks Inc's (STI.N) third-quarter profit surged on the sale of its shares in Coca-Cola Co (KO.N), but the lender forecast a weaker margin for the current quarter and said loan demand had slowed.
Shares of the Atlanta-based lender fell as much as 4 percent to $27.20 on Monday on the New York Stock Exchange.
As the U.S. Federal Reserve keeps interest rates low to boost the economy, bank margins are narrowing. SunTrust's third-quarter net interest margin - the difference between what it pays out on deposits and earns on loans - fell 11 basis points to 3.38 percent.
The bank said it expects further margin compression from the fourth quarter.
"We expect to see a reduction in the net interest margin on the order of mid-single-digit basis points, driven by additional reductions in asset yields that will partially be offset by lower liability costs," Chief Financial Officer Aleem Gillani said on a post-earnings conference call with analysts.
"In the fourth quarter, we expect a reduction to net interest income," Gillani added.
The lender said commercial and industrial loan demand was slowing as borrowers pulled back on "fiscal cliff" fears.
The fiscal cliff refers to the $500 billion or so of tax hikes and the more than $100 billion in government spending cuts that will automatically start on January 2 unless politicians agree on a budget deal.
SHARE SALE BOOSTS PROFIT
SunTrust's third-quarter profit was boosted by a $1.9 billion pre-tax gain related to the sale of its Coca-Cola shares.
Net income rose sharply to $1.07 billion, or $1.98 per share, from $211 million, or 39 cents per share, a year earlier.
Analysts on average were expecting the regional bank to earn $1.99 per share, according to Thomson Reuters I/B/E/S.
The lender accelerated the sale of the shares, originally set for 2014 and 2015, to reduce volatility in its capital adequacy ratios ahead of the implementation of the new Basel III rules.
SunTrust has owned shares in Coca-Cola since 1919 when a predecessor bank participated in the underwriting of the company's initial public offering and received the shares in lieu of fees.
The bank said in September that it would record the gain and a $375 million charge in the quarter to cover requests from Fannie Mae FNMA.OB and Freddie Mac FMCC.OB to buy back mortgages it sold to the regulators before 2009.
The bank's credit quality continued to improve. Non-performing loans were just 1.42 percent of its total loan book, down from 2.76 percent a year earlier.
SunTrust, which suffered large losses due to the financial crisis, was one of the four big U.S. banks whose capital plans, including raising dividends and buying back shares, were rejected by the Federal Reserve in March as part of its stress-test reviews.
The Fed did not object in August to SunTrust's revised capital plan, which did not include dividend increases or share buybacks.
(Reporting by Jochelle Mendonca in Bangalore. Additional reporting by Aman Shah; Editing by Supriya Kurane and Anil D'Silva)