DBRS Downgrades SunTrust to A (low); Trend now Stable

DBRS has today downgraded the long-term ratings of SunTrust Banks, Inc. (SunTrust or the Company), including SunTrust’s Issuer & Senior Debt rating to A (low) from "A", and the long and short-term ratings of its operating bank subsidiary, SunTrust Bank to "A" from A (high) and short-term ratings from R-1 (middle) to R-1 (low). DBRS also confirmed the short-term R-1 (low) ratings of SunTrust Banks, Inc. and confirmed the FDIC-Guaranteed AAA debt ratings. At the same time, DBRS changed the trend for all Long- and Short-Term ratings to Stable.

Today’s rating action concludes a Review with Negative Implications initiated by DBRS in November 2009. The Stable trend on SunTrust’s ratings reflects improving credit trends in SunTrust's net charge-offs, non-performing loans and near-term delinquencies, while also acknowledging its substantial franchise and brand value. These factors somewhat mitigate the Company's relatively lower level of loan loss reserves and still constrained ability to produce loss absorbing earnings.

The downgrade reflects DBRS’s view that SunTrust has experienced net losses over the past five quarters, as it has struggled with steepening credit costs from deteriorating asset quality for the past 2 years coupled with constrained core income before provisions and taxes (IBPT). Importantly, the $4.1 billion of loan loss provisions taken in the past four quarters (including $974 million in 4Q09) was 1.7 times the Company’s adjusted IBPT of roughly $2.4 billion (including $546 million in 4Q09). DBRS believes that the organizational attention to managing credit and decline in net revenues reduce available resources to enhance their franchise. DBRS therefore sees SunTrust in a weakened position relative to competitors who have better weathered the financial crisis and have been able to more fully focus their resources on customers.

The Company has been proactive since early in the crisis in identifying loan portfolio issues, changing origination practices where necessary and deploying significant resources to tackle problems. Credit and collection expenses (other than actual credit losses) were $76 million in 4Q09 alone. Losses, represented by net charge-offs reflected an improvement in the fourth quarter, but were still $821 million, or 2.76% of average loans, and continue to be driven by SunTrust’s residential mortgage, commercial and residential construction portfolios. Sun Trust’s residential and commercial real estate loans in Florida continue to produce disproportional credit problems and losses for the Company. Moreover, the pace of mortgage repurchases accelerated in 2009 totaling $444 million, although there are signs that these also may be slowing. Additionally, SunTrust has modified over $2.5 billion in mortgages, of which, $1.6 billion are accruing interest.

DBRS notes that although signs of credit quality improvement are evident, it expects credit costs and provisions to remain elevated for fiscal year 2010 and will likely exceed IBPT for the year, thereby postponing profitability to 2011. Improvement in the IBPT/provision relationship could reach par by year-end 2010. The Company has significantly tightened its lending criteria and underwriting however, DBRS expects continuing elevated credit costs in the coming quarters primarily from legacy credit problems in the Company’s real estate construction, residential real estate (including home equity) and run-off portfolio loans.

The Company’s revenues, IBPT and earnings are likely to remain subdued throughout 2010 according to DBRS due to soft demand, paydowns, continued elevated provisioning needs and run-off in the Company's loan portfolios. Indeed, the total loan portfolio shrank over 10% to $113.7 billion during the year. Therefore, weak earning asset generation will likely constrain spread income in the current year, while fee income also awaits recovery.

SunTrust's ratings are supported by its powerful deposit franchise in higher growth markets located in the seven southeastern and mid-Atlantic states (and the District of Columbia) and its diverse business mix that has produced a historically recurrent earnings stream. SunTrust is currently repositioning its franchise to diversify away from residential mortgages into targeted areas of commercial lending and growth in some of its fee-generating businesses and has announced an organizational and leadership realignment to support these efforts. The Company currently has nearly 1,700 branches in its retail delivery network and also provides mortgage banking, credit-related insurance, asset management, securities brokerage, and capital markets services through its subsidiaries.

Positively, DBRS notes that the Company has materially improved its funding, liquidity and capital levels over the past 18 months. Capital ratios remained solid despite absorbing significant losses due to SunTrust’s successful efforts to enhance its capital through a combined $2.2 billion of capital transactions including $1.6 billion in common equity issuance. Continued capital market support is important given the likely additional losses to be absorbed. Tier 1 common capital ratio of 7.67%, Tier 1 capital of 12.96% and Total capital of 16.43% would be deemed satisfactory even after the redemption of $4.85 billion in TARP capital. Tangible common equity to tangible assets ratio (TCE) increased 91 basis points over the past three quarters to a stronger 6.73% at December 31, 2009 from the common equity capital issuance. The Company has substantial available liquidity as the inflows from the high quality deposits and longer term financing sources have been retained in cash and invested in government and government-backed securities.

SunTrust, a diversified financial services corporation headquartered in Atlanta, Georgia, reported $174 billion in consolidated assets as of December 31, 2009.

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

The applicable methodologies are Global Methodology for Rating Banks and Banking Organizations, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.