DBRS Confirms SunTrust Banks, Inc.’s Senior Debt at A (low); Trend Remains Stable

DBRS, Inc. (DBRS) has today confirmed most ratings of SunTrust Banks, Inc. (SunTrust or the Company) and its related bank subsidiary, including the Company’s Issuer & Senior Debt rating at A (low). At the same time, DBRS has upgraded the Company’s Perpetual Preferred Stock rating to BB (high) from BB, which now reflects DBRS’s standard notching for rating preferred shares. The trend for all ratings remains Stable. The ratings action follows a detailed review of the Company’s operating results, financial fundamentals and future prospects.

SunTrust’s ratings reflect its powerful banking franchise in the demographically attractive Southeast and Mid-Atlantic regions, a diversified revenue stream, and improving balance sheet strength. Indeed, over the past year, capital, asset quality, funding, and earnings have all shown improvement. The ratings also consider the Company’s below-peer profitability and still elevated, albeit improving, asset quality metrics. While the legacy mortgage rep and warranty issue has cost the Company $2.2 billion of earnings since the housing bubble burst, DBRS believes that future costs related to the legacy residential mortgage issues should be more manageable.

The Stable trend reflects DBRS’s belief that SunTrust’s improvement in earnings is sustainable given solid expense controls, a robust mortgage business, expected loan growth and lower credit-related costs. As a result, DBRS sees the Company’s earnings metrics coming more in line with those of its similarly rated peers. If profitability does not rebound as anticipated, the ratings could come under pressure.

While SunTrust has made substantial progress de-risking and deleveraging its balance sheet by reducing higher-risk loans (down 17% from a year ago), working through asset quality problems and growing capital over the past year, these efforts were accelerated in 3Q12 when the Company sold its Coca-Cola (Coke) stock, which generated a $1.9 billion pre-tax gain. By realizing the gain, the Company was able to take numerous charges, while still adding $753 million to net income available to shareholders. Specifically, these actions included taking a $371 million mortgage repurchase provision to increase the reserve to an amount that the Company believes will cover all future losses related to pre-2009 vintage loans sold to Government Sponsored Enterprises, the movement of $2.4 billion of loans to held for sale (included $1.4 billion of student loans, $500 million of nonperforming mortgage and commercial real estate loans, and $500 million of delinquent Ginnie Mae loans) with an additional $600 million of student loans being transferred to held for sale in 4Q12, valuation losses on affordable housing investments, and a charitable donation. Despite SunTrust losing the financial flexibility of the substantial gains associated with its Coke holdings, DBRS views these various balance sheet moves positively.

Most recently, the Company reported net income available to common shareholders of $1.1 billion in 3Q12, up from $270 million in 2Q12 and from $211 million a year ago. Excluding the items related to the Coke sale, net income available to common shareholders would have been $313 million. DBRS expects lower credit-related costs, expense discipline and continued robust mortgage earnings to more than offset net interest income compression in 2013.

While asset quality has greatly improved relative to a few years ago, asset quality metrics remain above normalized historical standards and peers. Nonperforming loans (NPLs) have declined a substantial $1.5 billion, or 47%, over the past twelve months to $1.7 billion, or 1.42% of total loans at 3Q12. Meanwhile, net charge-offs (NCOs) increased to $511 million, or 1.64% of average loans (annualized), in 3Q12 driven by loan sales and a change in credit policy that speeds the timing of charge-offs related to junior lien loans. Excluding these two items, NCOs would have been $274 million, or a much improved 0.88% of average loans (annualized). Overall, the allowance for credit losses was a sufficient 1.84% of total loans, or approximately 2% excluding government guaranteed loans.

SunTrust’s liquidity profile continues to be robust. The Company manages its liquidity position to maintain multiple sources of funding, led by core deposits that provide an inexpensive source of funding. At September 30, 2012, average customer deposits (excluding brokered time and foreign deposits) funded the entire average loan portfolio. The Company also has access to the discount window, the Federal Home Loan Bank (FHLB), and its free and liquid securities, which together provide $43 billion (as of September 30, 2012) in additional contingent liquidity.

Overall, capital metrics remain solid and improved during the third quarter. Specifically, the Company’s tangible common equity to tangible assets ratio increased 16 basis points to 8.31%. Moreover, all regulatory capital metrics were bolstered during the quarter as well. SunTrust noted that its Basel III tier 1 common ratio remained relatively stable at 8.0% under its interpretation of the proposed rules.

SunTrust, a diversified financial services corporation headquartered in Atlanta, Georgia, reported $173.2 billion in consolidated assets as of September 30, 2012.

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 DBRS Criteria – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids. All can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Reserve, 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Driscoll
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 28 November 2005
Most Recent Rating Update: 8 August 2011

For additional information on this rating, please refer to the linking document under Related Research.