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

DBRS has today confirmed the ratings of SunTrust Banks, Inc. (STI or the Company) and its principal operating bank subsidiary – SunTrust Bank – including STI’s Issuer & Senior Debt rating of A (high). The trend for all ratings remains Stable. The rating action followed a detailed review of the Company’s operating results and credit fundamentals.

The Company’s ratings are supported by STI’s powerful deposit franchise in higher growth markets located in the southeastern and mid-Atlantic United States and its sustainable earnings arising from a diverse business mix. Fees and commissions accounted for 43% of revenues in H1 2008. The 1,700 branch deposit franchise, which is characterized by top-tier or strong deposit market shares in many of the Company’s markets, contributes to STI’s satisfactory liquidity profile providing 71% core deposit funding of its net loans and stable earnings.

DBRS remains concerned, however, about the potential loss content in the Company’s sizable residential real estate, construction and consumer exposures ¬– both on and off balance sheet – along with the adequacy of loan loss reserve levels given the continuing turmoil in real estate markets and weakening economy. STI has materially reduced, but still has significant exposure to off-balance sheet financing vehicles that may produce losses or additional stress to the Company. STI has been diligent in working down trading assets (formerly off-balance sheet assets that were acquired over the past nine months) that are now a fraction of their original exposures. Given the performance in the past four quarters, however, DBRS has less tolerance for further deterioration in asset quality or increased delinquencies beyond the current expectations. The aforementioned or a sustained decline in revenue and operating leverage could therefore result in negative ratings pressure.

In the past 12 months, STI has struggled to get ahead of rising credit costs that have hindered revenue growth, increased expenses and pressured capital. Company management has responded with a multi-faceted approach to address its asset quality challenges and remediate problem loans. These efforts include a robust effort to take appropriate write-downs, enhance collections, bulk up the loan workout areas, change lending policy where appropriate and tighten underwriting guidelines. Although it is premature to pronounce a trend, early indications note positive effects from these efforts in moderating credit costs.

The Company has been able to maintain moderate loan growth with relatively flat performance in net interest income and fee income. Profitability indicators are muted but are in line with those of its similarly rated peers, which are also being pressured by current market conditions. During the year, STI continued to take steps to reduce risk and improve core profitability. These steps included more active management of the balance sheet, particularly improving its funding profile, reducing liquidity and refinancing risk and concentrating on originating better performing and yielding commercial loans. STI also increased targets for its successful efficiency and productivity initiatives to further reduce its cost base. These initiatives could potentially raise the Company’s profitability measures closer to peer-median levels.

Historically, STI’s lower profitability was rationalized in its rating level by a lower risk profile loan book balanced between consumer and commercial credits. Recent performance has disrupted that relationship, however, with assets related to residential housing (e.g., Alt-A, HELOC and residential construction exposures) experiencing considerable stress and producing outsized losses.

Capitalization substantially improved in 2008 due to the issuance of trust preferred securities, subordinated debt and the long-awaited monetization of its Coca-Cola shares; however, the monetization also removes the Coke shares as a source of financial flexibility. As a result, the Tier 1 capital ratio rose to a pro-forma 7.94% at July 1, 2008 compared to 6.93% at 2007 year-end and total risk-based capital increased 67 basis points to 10.97% in the same time frame. DBRS expects the current dividend payout level to be maintained, however share repurchases are expected to resume only when capital markets stabilize.

STI’s new funding plan has improved its financial and liquidity profile through a better overnight funding position, laddering of debt maturities and expanding funding sources. These steps will enhance an existing adequate liquidity profile that features good core deposit funding, average wholesale funding reliance and moderate rollover risk. Liquidity coverage at the parent holding company is below the peer range of one year coverage, however, including payment of share dividends.

The principal strategic challenge for STI is to achieve 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 other 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 while returning to its historically strong asset quality.

SunTrust Banks, Inc., with headquarters in Atlanta, Georgia, is one of the nation’s largest banking organizations with assets of $177 billion at June 30, 2008.

Note:
All figures are in U.S. dollars unless otherwise noted.