DBRS Upgrades SunTrust Banks, Inc. to ‘A’; Trend Stable

DBRS, Inc. (DBRS) upgraded most of the ratings of SunTrust Banks, Inc. (SunTrust or the Company), including its Long-Term Issuer Rating to ‘A’ from A (low). At the same time, DBRS upgraded the ratings of the Company’s banking subsidiary, SunTrust Bank (the Bank), to A (high) from ‘A’. The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is A (high), while the Support Assessment remains SA1. The Company’s Support Assessment is SA3 and SunTrust’s Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The rating upgrade reflects the substantial progress that SunTrust has realized improving its core level of profitability and its efficiency ratio, while at the same time growing revenues and keeping its risk profile modest. The Company has achieved solid loan and deposit growth, as well as increased investment banking income while keeping expenses in check. This has led to sizeable efficiency improvements over the last six years. Indeed, the adjusted tangible efficiency ratio improved from over 70% in 2012 to 61% in 2017 with further improvement expected. Additionally, DBRS believes that the Company will continue to benefit from ongoing investments in its franchise, higher interest rates, lower corporate income taxes, and a solid economic backdrop.

SunTrust’s ratings reflect its strong and diversified banking franchise, predominately focused in growing Southeastern and Mid-Atlantic states, augmented by some national business lines. Additionally, the Company’s balance sheet has strengthened with solid and improving asset quality, a low-cost, deposit-driven funding mix, and sound capital levels. The ratings also consider the potential for earnings volatility given the growing contribution of its investment banking business, as well as its large presence in Florida, a market that has seen relatively deeper cycles over time.

RATING DRIVERS
Further progress improving profitability metrics, without increasing the Company’s risk profile, could lead to positive rating momentum. Additionally, over the intermediate term, greater geographic diversity of the loan portfolio, especially stemming from successful franchise expansion efforts, could drive positive rating actions. Conversely, sustained negative operating leverage or a greater than peer weakening of credit metrics, especially resulting from a perceived increase in risk appetite, could result in negative rating implications.

RATING RATIONALE
SunTrust’s improving earnings growth trajectory continued in 2017. Net income available to common shareholders increased 20% to $2.2 billion as compared to the previous year, largely driven by the impact of the change in tax law legislation. Positively, year-over-year revenues increased by 4% and the provision for credit losses declined. These positives were offset by an increase in expenses as the Company continues to invest in its franchise, as well as fund efficiency initiatives. DBRS notes that SunTrust’s adjusted tangible efficiency ratio decreased 95 basis points during 2017 and the Company is on track to reach its goal of a sub-60% tangible efficiency ratio by 2019.

Asset quality metrics continue to strengthen with declining nonperforming assets and low levels of net charge-offs. Specifically, nonaccrual loans declined 20% from YE16, and represent just 0.47% of total loans. Meanwhile, net charge-offs were just 25 basis points in 2017. At year-end 2017, the allowance for loan and lease losses totaled a sound 1.21% of period-end loans held for investment. Given the strong economic backdrop, DBRS expects the maintenance of relatively stable asset quality in 2018 and notes that the Company’s exposure to commercial real estate lending is relatively low and CCAR loss rates remain at the low-end of regional bank peers.

Liquidity levels remain solid with cash, cash equivalents and investment securities accounting for approximately 20% of assets at YE17. Overall, core deposits readily fund the loan portfolio and the Company reported a loan to deposit ratio of 89% at YE17.

Capital levels are sound with a fully phased-in Basel III common equity tier 1 ratio of 9.74% at December 31, 2017, improved from 9.59% year-over-year, despite ongoing capital management activities. The Company returned 89% of 2017 net income to shareholders in 2017.

Headquartered in Atlanta, SunTrust, a diversified financial services corporation, reported $206.0 billion in consolidated assets, as of December 31, 2017.

The Grid Summary Grades for SunTrust are as follows: Franchise Strength – Strong; Earnings Power – Strong/Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on our website under 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.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 28 November 2005
Last Rating Date: 27 April 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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