DBRS Confirms SunTrust Banks, Inc. at A (high); Trend Remains Stable

DBRS has today confirmed the ratings of SunTrust Banks, Inc. (STI or the Company) and its principal operating bank subsidiary – SunTrust Bank – as indicated in the table below. The rating action followed a detailed review of the Company’s operating results and credit fundamentals. The trend for all ratings remains Stable.

During 2006, STI posted healthy operating performance, driven by double-digit loan growth, higher fee-based revenues, and decelerating growth in operating expenses. Continuing margin compression resulting from the flat-to-inverted yield curve and rising funding costs, along with a modest increase in loan loss provisions, dampened earnings growth. Profitability indicators remained virtually unchanged and below the median for those of most similarly rated peers. During the year, however, STI initiated additional steps to improve core profitability. These steps included more active management of the balance sheet, concentrating on higher profit businesses, and selling additional loans that carry lower spreads. Moreover, in the second half of the year, STI introduced comprehensive efficiency and productivity initiatives to significantly reduce its cost base by 2009. These initiatives are likely to have minimal impact on profitability in the short run; in the longer term, however, they could potentially raise STI’s profitability measures closer to peer-median levels.

The credit risk profile remains solid. Both NPAs and NCOs (as percentages of loans) compare favorably with those of similarly rated peers and other large regional banks. The pickup in NPAs during the second half of the year was mainly a result of a single large borrower being placed on non-accrual status. There has been some deterioration in the residential loan portfolio mainly driven by Alt-A loan products, which represent less than 5% of the residential portfolio. The Company has a history of selling more Alt-A product than it retains. To further minimize risk, the Company has curtailed new originations of Alt-A mortgages. Further softening of asset quality in the residential portfolio is probable in 2007.

Capitalization remains adequate given STI’s strong and consistent earnings, low-risk profile, and relatively modest dividend payout and share repurchases. Capital ratios strengthened during the year as STI replaced existing hybrid capital with lower-cost, capital-efficient securities. Consequently, the Company’s regulatory capital is nearly back to pre-NCF acquisition levels. The reported capital Tier 1 ratio does not include the substantial unrealized value in STI’s holding of Coca Cola(1) stock which would provide additional bondholder protection in a distress environment.

The ratings are supported by STI’s powerful deposit franchise in high-growth markets located in the southeastern and mid-Atlantic United States, its stable and sustainable earnings arising from a diverse business mix, and its conservative risk profile. Fees and commissions accounted for a healthy 42% of net revenues in 2006. The strong deposit business, which is evidenced by leading or top-tier deposit market shares in many of the Company’s markets, contributes to STI’s good liquidity profile and stable earnings.

STI’s low-risk profile is reflected in a diversified and sufficiently granular loan portfolio that lacks material risk concentrations, conservative underwriting standards, ample capital, and attention to maintaining sound holding company financial fundamentals. Market risk is effectively managed within conservative limits and the Company, for the most part, avoids underwriting the riskiest mortgage products.

The principal challenge for STI is to attain and sustain good earnings growth and improve core profitability in a highly competitive footprint that includes much larger national banks (Bank of America and Wachovia) and major regional banks (such as BB&T and Regions). The success of the Company in this enterprise will largely depend on its ability to further improve its cost structure, harvest a larger share of its customers’ business, and continue building out the franchise without jeopardizing asset quality.

Sustained earnings growth accompanied by a material improvement in core profitability and reduced dependence on wholesale borrowings could lead to positive rating action. On the other hand, weakening profitability, credit fundamentals, and core funding could result in negative rating pressure.

SunTrust Banks, Inc., with headquarters in Atlanta, Georgia, is one of the nation’s largest banking organizations with assets of $182 billion at December 31, 2006.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The Trust Preferred Securities contain certain unique covenants that give them some equity-like characteristics.
(1) 48.2 million shares of Coca Cola are carried at book value, resulting in a $2.1 billion unrealized pre-tax gain (at March 1, 2007).