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

DBRS, Inc. (DBRS) has today confirmed the 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). 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 strong banking franchise in the demographically attractive Southeast and Mid-Atlantic regions that serves its clients with a broad product set contributing to a well-diversified revenue stream. Indeed, adjusted noninterest income comprised approximately 40% of adjusted total revenues in FY14. Meanwhile, the balance sheet continues to strengthen with considerable improvements in asset quality, an improved funding mix, and relatively stable capital metrics despite balance sheet growth and a higher total payout to shareholders. The ratings also consider below-peer profitability metrics and a still high efficiency ratio even with improvement during the year. Positively, more legacy mortgage issues were resolved in 4Q14, which should put the vast majority of SunTrust’s material legal issues behind them.

While the Company’s credit fundamentals continue to improve, the Stable trend reflects DBRS’s view that SunTrust still has work to do to improve its profitability. SunTrust is more focused on revenue growth in FY15 and expects to keep core expenses relatively stable. If SunTrust can grow revenues, while making more progress on its efficiency and therefore increase operating leverage, the ratings could be upgraded. DBRS does not see any short-term ratings pressure at present, but negative ratings pressure could result from unexpected reputational/operational missteps or charges, especially those indicative of franchise weakening.

Highlights of 2014 include solid loan and deposit growth, lower core expenses, a strong investment banking performance, higher wealth management fees, and continued improvement in asset quality. Mortgage banking and margin pressure remained headwinds. Overall, net income available to common shareholders increased 33% to $1.72 billion in 2014. Excluding one-time items, net income available to common shareholders was $1.73 billion, up from $1.48 billion in 2013.

At 63.3%, the Company achieved its 2014 adjusted tangible efficiency ratio goal of below 64%. The Company’s target for 2015 is slightly below 63%. The long-term target remains at below 60%. While significant progress has been made, the expense base remains high. 2015 headwinds include the low interest rate environment and lower commercial loan swap income. Specifically, swap income is expected to decline by $184 million in FY15, which equates to approximately 150 basis points of the efficiency ratio.

Asset quality metrics continue to strengthen with lower delinquencies, nonperforming loans, nonperforming assets, and net charge-offs. Specifically, nonperforming assets declined 33% during 2014 to $780 million, or just 0.59% of total loans plus OREO, other repossessed assets, and nonperforming loans held for sale. Meanwhile, net charge-offs declined a similar 34% to $445 million, or 0.34% of average total loans. At year-end, the allowance for loan and lease losses totaled 1.46% of period-end loans, or over 3x coverage for all nonperforming loans. Given the improvement in asset quality, the Company’s total provision for loan losses declined by $210 million to $338 million in 2014. DBRS expects modest improvements in asset quality in 2015.

Liquidity and funding improved during the year and SunTrust’s liquidity coverage ratio already exceeds 90%. During the year, average deposits increased 3.6% to $133.7 billion in 2014, as the Company continued to improve the mix of deposits by reducing time deposits. Overall, period-end core deposits totaled $139.2 billion, which completely funded total loans and leases.

Capital remains sound with a fully phased-in Basel III common equity tier 1 ratio of 9.69% at year-end. Positively, the Federal Reserve had no objections to the Company’s 2015 capital plan, which included raising the dividend to $0.24 per share from $0.20 per share, and the repurchase of up to $875 million of common shares from 2Q15 through 2Q16. DBRS notes that under the Fed’s severely stressed adverse scenario, SunTrust’s projected minimum tier 1 common ratio declined to 7.3%, which was at the median of the 31 BHCs that participated in the exercise.

SunTrust, a diversified financial services corporation headquartered in Atlanta, Georgia, reported $190.3 billion in consolidated assets as of December 31, 2014.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organizations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents 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: Elisabeth Rudman
Initial Rating Date: 28 November 2005
Most Recent Rating Update: 25 February 2014

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