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 and a diversified revenue stream. Over the past year, SunTrust’s core earnings power has improved, but still lags those of similarly rated peers, which the Company continues to address through both cost controls and investments in the businesses to enhance revenues. Positively, the risk profile continues to improve with broad-based asset quality improvements, as well as the resolution of additional legacy mortgage matters completed in 3Q13. Lastly, funding and capital have remained relatively stable and remain sound.

The Stable trend reflects DBRS’s view that SunTrust’s focus on controlling expenses and an improving economic environment should allow the Company to continue to build on its positive core earnings momentum. Since the low interest rate environment and the significant slowdown in residential mortgage refinancing remain headwinds, the improvement is expected to be more gradual. Overall, the Company has targeted an adjusted efficiency ratio of below 64% for 2014 with a longer-term objective of below 60%. To put this goal into context, SunTrust’s adjusted efficiency ratio was 66.1% in FY13. DBRS notes that successful execution on the Company’s strategic priorities to improve profitability could have positive rating implications.

For 2013, SunTrust reported net income available to common shareholders of $1.3 billion, a decline of 33% from FY12. However, excluding non-core items, net income available to common shareholders would have increased 25% during the year to $1.5 billion. The improved results were driven by reduced costs and lower provision for credit losses. Nonetheless, core revenue pressure persisted with both net interest income and adjusted noninterest income declining resulting in a 6% total adjusted revenue decline. Positively, the Company did a good job of bringing down core expenses, which declined a solid 11% to $5.5 billion.

Most recently, 4Q13 evidenced solid momentum with broad-based loan growth, revenue growth, and continued improvements in asset quality. Overall, 4Q13 net income available to common shareholders was $413 million. DBRS notes that the results did benefit from an effective tax rate of 22%.

SunTrust’s attractive operating footprint in the Southeast and Mid-Atlantic regions is supported by strong market shares. Indeed, the Company has the number one deposit market share in Georgia, as well as the number three deposit market share in Florida. Population growth within SunTrust’s operating footprint should exceed the national average, which portends well for future growth. The Company also benefits from solid revenue diversification with adjusted noninterest income comprising approximately 40% of adjusted revenues. Moreover, SunTrust has some national businesses to further diversify its revenue base.

Positively, home price appreciation and rebounding employment figures within the Company’s footprint have exceeded the national averages, which have helped SunTrust work through problem loans with lower loss severities. Overall, asset quality improvements have been broad-based reducing the Company’s risk profile. Indeed, 4Q13 nonperforming loans, nonperforming assets, and net charge-offs are all at their lowest levels in over six years bolstered by the stronger housing market. At $2 billion, or 1.60% of total loans, the allowance for loan losses remains appropriate.

Capital remains sound including an estimated Basel III Tier 1 common equity ratio of 9.6%. DBRS notes that SunTrust completed its $200 million stock repurchase plan during 1Q14. With a stronger balance sheet and improving earnings, DBRS expects SunTrust to return more capital to shareholders subject to non-objection of its 2014 capital plan that has already been submitted to the Federal Reserve.

SunTrust, a diversified financial services corporation headquartered in Atlanta, Georgia, reported $173.8 billion in consolidated assets as of December 31, 2013.

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. Other methodologies used include the DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

The 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: Roger Lister
Initial Rating Date: 28 November 2005
Most Recent Rating Update: 17 December 2012

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