DBRS Places SunTrust Banks, Inc. Ratings Under Review with Negative Implications

DBRS has today placed the long- and short-term ratings of SunTrust Banks, Inc. (SunTrust or the Company), including SunTrust’s Issuer & Senior Debt rating of A (high), and the long-term ratings of its operating bank subsidiary, SunTrust Bank, Under Review with Negative Implications. At the same time, the short-term R-1 (middle) rating of SunTrust Bank and its FDIC-Guaranteed debt rating have been confirmed with a Stable trend.

The review reflects DBRS’s view that SunTrust has struggled with steepening credit costs from deteriorating asset quality for the past year. The $2.5 billion of loan loss provisions taken in 2008 ($962 million in Q4 2008 alone) were nearly 1.4 times the Company’s adjusted income before taxes and provisions of roughly $1.8 billion. The weakening in loan quality continues to stem primarily from residential consumer mortgage products, mainly driven by the Florida market, while homebuilder and residential development loans along with higher-risk home equity lines have contributed to the highest losses. Charge-offs, non-performers and roll rates in the stressed loan portfolios worsened significantly beyond DBRS’s expectations in Q4 2008, triggering the review. Commercial loans, a potential future concern, also deteriorated in the quarter but started from a much lower base.

Positively, SunTrust has been proactive in building its capital over the past year via issuance, monetizing its Coca-Cola stake and, most recently, in obtaining $4.9 billion through the U.S. Department of the Treasury’s (the Treasury) Capital Purchase Program, pushing its Tier 1 Capital ratio to 10.85%. Its tangible common equity-to-tangible assets ratio, however, declined to 5.53%. Moreover, the Company has improved its funding through enhancing its core deposit base and issuing debt via the Treasury’s Liquidity Guarantee Program. SunTrust has also strengthened and structured its liquidity position prudently for the difficult operating environment. DBRS has confirmed the short-term ratings at SunTrust Bank on account of its ample liquidity as well as it being consistent with its long-term rating range. An additional factor is the Federal Reserve and FDIC’s explicit support in providing liquidity to U.S. banks.

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. Furthermore, the extremely difficult operating environment for financial institutions is likely to continue to constrain revenue growth and produce elevated expenses and charges in the near term.

DBRS’s review will focus on SunTrust’s asset quality, financial performance and franchise value. In addition, the review will also consider the Company’s plans to manage reserves and preserve capital, as well as prospective financial performance in the near to medium term.

The likely outcome of the DBRS review is a downgrade of the long-term debt ratings of not more than one notch or a confirmation of the existing ratings with a Negative trend.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.