DBRS Places SunTrust’s Ratings Under Review with Negative Implications

DBRS has today placed the ratings of SunTrust Banks, Inc. (SunTrust or the Company), including SunTrust’s Issuer & Senior Debt rating of A, and the ratings of its operating bank subsidiary, SunTrust Bank, Under Review with Negative Implications. At the same time, FDIC-Guaranteed debt ratings have been confirmed with a Stable trend.

The review reflects DBRS’s view that SunTrust has experienced net losses over the past four quarters as it has struggled with steepening credit costs from deteriorating asset quality for the past 2 years coupled with weaker core income before provisions and taxes (IBPT). Importantly, the $4.1 billion of loan loss provision taken in the past four quarters (including $1.133 billion in Q3 2009) was over 2 times the Company’s adjusted income before taxes and provisions of roughly $2 billion. Rising losses, as reflected in net charge-offs of $1.006 billion in Q3 2009, continue to be driven by SunTrust’s residential mortgage, commercial and residential construction portfolios.

The $5.4 billion in non-performing loans (NPLs) declined 1.1% in the quarter, but do not include $1.34 billion of troubled debt restructured loans, up 45% from $925 million in 2Q 2009. NPLs continue to be dominated by residential mortgages and Florida in particular. Residential mortgages comprise 49% of all NPLs of which Florida represents an outsized 51% although Florida represents only 30% of the portfolio assets. Construction at $1.58 billion and commercial loans at $596 million represent the next largest components of NPLs after residential mortgages.

While SunTrust has already charged off a substantial amount of loans in this credit cycle, DBRS is concerned that significant amounts of potential losses remain embedded in its portfolios, especially given the current macroeconomic challenges, particularly rising unemployment and pressure on real estate valuations. Moreover, DBRS is also aware that the difficult operating environment for financial institutions is likely to continue to constrain revenue growth and produce elevated expenses and charges in the near-term for the Company. Additionally, DBRS considers the 57% reserve coverage of non-performing loans to be below peer level. Partially offsetting that view however, is the fact that SunTrust has substantial capitalization levels both on a tangible and regulatory basis that should enable it to absorb additional losses.

DBRS is also mindful that SunTrust has built capital, increased liquidity, grown deposits, reduced debt, and improved its funding profile over the past year. The capital increase has included a second quarter net $1.8 billion common equity raise, a $121 million increase to Tier 1 common equity from preferred stock and junior subordinated note repurchases, and an approximate $70 million increase in Tier 1 common equity from the sale Visa shares. Tier 1 Common Equity rose to 7.49%, Tier 1 to 12.58%, Leverage to 11.08% and tangible common equity to tangible assets to 6.85% at September 30, 2009. DBRS notes that the regulatory capital ratios include $4.85 billion in TARP Capital.

DBRS’s review will focus on SunTrust’s asset quality, financial performance and franchise value. The review will also consider the Company’s plans and projections for the near to medium-term including IBPT, credit costs, reserve and capital levels. DBRS notes that the review could potentially result in a one notch downgrade, if the review of current performance and near to medium-term trends reveals performance and metrics more appropriate for the next lower rating range: A (low). Conversely, confirmation of the current ratings could result, if the performance is expected to stabilize and return to profitability in the near- term.

SunTrust, a diversified financial services corporation headquartered in Atlanta, Georgia, reported $173 billion in consolidated assets as of September 30, 2009.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, 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.