DBRS Comments on SunTrust Banks, Inc.’s 1Q11 Results – Senior at A (low) Unchanged

DBRS Inc. (DBRS) has today commented that the ratings for SunTrust Banks, Inc. (SunTrust or the Company), including its Issuer & Senior Debt rating of A (low), remain unchanged, following the release of its 1Q11 financial results. The trend on its ratings remains at Stable. DBRS views 1Q11 results as in line with expectations. Specifically, net income available to common shareholders was $112 million (adjusted for the $74 million TARP-related charge), which was modestly lower than the $114 million reported in 4Q10, but significantly improved from the net loss of $229 million recorded in 1Q10.

Noteworthy was the Company’s March repurchase of $4.85 billion in preferred shares held by the U.S. Treasury under the TARP Capital Purchase Program, which followed a $1.04 billion common stock issuance and a $1 billion senior debt offering. Post-TARP, DBRS notes that the Company’s capital metrics remain solid.

Favorably, SunTrust’s asset quality metrics reflected continued positive momentum with non-performing assets (NPAs), NPLs, NPL inflows, 90+ day delinquencies, and net charge-offs (NCOs) all declining over the quarter. Specifically, early stage delinquencies (excluding the guaranteed portfolios) were 80 basis points (bps), an improvement of 10 bps from 4Q10. Meanwhile, NPAs were 3.95% of total loans plus OREO, compared to 4.08% in the prior quarter. Lastly, NCOs declined 8% sequentially to 2.01% of total average loans, driven by lower losses in the commercial segment, specifically within the C&I and commercial real estate (CRE) portfolios. Management noted that NCOs for the early stage problem loans were lower than they expected. Positively, improvement occurred in most of the portfolios and was most notable in a 27 bps decline in its non-guaranteed residential mortgage early stage delinquencies. DBRS notes that the non-guaranteed residential mortgage problem loans represented 37% of total non-performing loans at 1Q11. Further improvements in the Company’s credit metrics are expected for 2Q11.

Reflecting the broad-based improvement in asset quality, the loan loss provision declined 12.7% QoQ to $447 million in 1Q11. Nonetheless, DBRS notes that reserve levels remain solid at 2.49% of total loans.

DBRS sees the first quarter earnings as indicative of the broader trends for banks within the economy, with tepid loan growth and the low rate environment pressuring revenues while expenses remain carefully managed. First quarter net interest income declined modestly QoQ by 1%, to $1.25 billion, but the decline was driven by fewer days in the quarter. DBRS notes that results did benefit from a modest growth in its average loan balances, despite continued run-offs in SunTrust’s higher-risk loans segments that have reduced the Company’s risk profile. Positively, the Company’s total deposits reached a record high. Moreover, an improving funding mix helped mark the 8th consecutive quarter of NIM expansion to 3.53% (up 9 bps since 4Q10). The margin also benefited from a repositioning of SunTrust’s securities portfolio in the first quarter that contributed to higher yields. The Company expects NIM to be relatively stable in 2Q11.

Fee revenues were in line with the Company’s expectations, although weaker than 4Q10 due to seasonality. The 11% or $99 million decline in sequential fee revenues to $825 million (adjusted $58 million for mark-to-market impact of valuation on securities) was largely driven by seasonally lower mortgage production and weaker investment banking income. Trading account profits and commissions also contributed to the decrease. Nonetheless, when adjusted for valuation-related losses net of hedges on the Company’s index-linked CDs and public debt, core capital markets-related trading income remained stable compared to the prior quarter and was up slightly Y-O-Y. Positively, trust income, retail investment income, and card fees climbed marginally over the prior quarter.

DBRS sees SunTrust maintaining its disciplined management of expenses in 1Q11. On a sequential quarter basis, non-interest expenses of $1.47 billion declined by 5% driven by improved credit-related, marketing and technology, and outside processing expenses. Specifically, credit-related costs declined $34 million sequentially, or 18%, in 1Q11, driven by other real estate expenses, and credit and collections expenses. Seasonal employee benefits cost increased modestly by $16 million or 2% from 4Q10. DBRS anticipates higher servicing costs in the coming quarters as the Company complies with requirements under the regulatory mortgage servicing consent order released on April 13, 2011.

Capital, funding and liquidity remain solid. In 1Q11, average customer deposits increased by $1 billion or 1% sequentially to $120.7 billion. The Company’s estimated Tier 1 common equity of 9.00% grew 92 bps over the quarter. Meanwhile, post-TARP repayment, Tier 1 risk-based and total capital ratios are expected to be 11.0% and 13.9%, respectively. Following the equity issuance, tangible common equity grew 62 bps to 7.77%. The Company expects organic capital generation to increase capital ratios further, but also noted the value of returning capital to its shareholders. In that regard, SunTrust will continue to evaluate its dividend level as the year progresses.

In conjunction with its earnings release, SunTrust announced its succession plan of Chairman and CEO James Wells III to hand over the role of CEO to COO William Rogers, Jr. Wells will become Executive Chairman, with the orderly transition of responsibilities and reporting relationships to start immediately.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Roger Lister
Initial Rating Date: 28 November 2005
Most Recent Rating Update: 26 March 2010

For additional information on this rating, please refer to the linking document below.