SunTrust Banks (STI)

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SunTrust Banks, Inc. (NYSE: STI) is the ninth largest bank in the United States, with assets of approximately $174.1 billion.^[1] SunTrust operates approximately 1,700 branches through out the US, but mostly concentrated in the Southeast. Over 20% of SunTrust's branches are located within retail outlets, including over 100 within Wal-Marts.^[2] STI's competitors range from local rival Regions Financial Corporation (RF) to national bank Bank of America (BAC).

In 2008, STI participated in a "Stress Test" to determine how much capital the bank needs, or if the bank should be nationalized. The test determined that of the 19 banks that participated, ten must raise $75 billion. As of July 2010, SunTrust has yet to repay its $4.5 billion in Tarp loans. Analysts have stated that the bank may be forced to raise cash to repay the loans through the sale of stock; however, the bank has yet to establish a clear plan for repayment. In terms of the metrics involved in the stress test, such as write-downs and loan loss provision, STI ranks average compared to its regional peers and is in far better financial health than national competitor BAC. STI's main loss of income was due to poor real estate markets in the Southeast. Florida and Georgia, two of STI's top real estate markets, were ranked in the top 5 nationally in terms of November foreclosures.^[3]

In 2009, SunTrust faced a loss of $1.73 billion, a 334% decrease from a profit of $741 million in 2008. Such losses were primarily due to higher provisions for loan losses, lower non-interest income, and the repayment of federal bailout money to the U.S. Treasury.^[4]

Business Overview

SunTrust Banks experienced a net loss of $1.73 billion in 2009^[5][1]

The loan loss provision for a bank is how much the bank budgets in anticipation for bad loans. STI's loan loss provision skyrocketed in 2008 due to holding toxic assets and continued to increase to $4,063 million in 2009^[5][1]

Retail and Commercial Banking ($481 Million net income in 2009)

The Retail segment offers loans, deposits, and other fee-based financial services for consumers and business clients with less than $5 million in sales (up to $10 million in sales in larger metropolitan markets). The Commercial business offers commercial lending, financial risk management, and treasury and payment solutions including commercial card services. The client markets served by the Commercial segment include “Diversified Commercial” ($5 million to $50 million in annual revenue), “Middle Market” ($50 million to $250 million in annual revenue), “Commercial Real Estate” (entities that specialize in commercial real estate activities), and “Government/Not-for-Profit” entities.^[5] On March 23, 2010, SunTrust Banks Inc announced that it will create a consumer unit detached from its Retail and Commercial Banking segment. This unit will handle the bank's deposit and lending products, including mortgages and credit cards. ^[6] Net income for the segment in the first quarter of 2010 amounted to $27.46 million, a $307.8 million increase over the $280.38 million loss in the first quarter of 2009. The improved performance was due to an increase in deposits as significant growth in lower cost deposits was partially offset by a decline in higher cost time deposits, which lowered overall funding cost and contributed to expanded net interest margin.^[7]

Corporate and Investment Banking ($144.59 Million net income in 2009)

The Corporate and Investment Banking segment provides banking products to clients in mid and large corporate markets with $100 million and above in revenue, from merger and acquisition consulting to financial risk management. Corporate Banking is focused on selected industry sectors: consumer and retail, financial services and technology, energy, healthcare and diversified.^[5] Net income for this segment increased by 123% to $37 million in 1Q2010 from $16.63 million in 1Q2009.^[7]

Mortgage ($1,370.9 Million net loss in 2009)

The Mortgage segment offers residential mortgage products through its retail, broker and correspondent channels. The Mortgage segment had been hit hard by the U.S. Housing Market decline, especially the housing drought in the Southeast United States. From 2007 to 2008, net income in this segment declined $567.2 million.^[8] Subsequently, income decline continued with a net loss of $1,370.9 million in 2009. This loss was a result of higher mortgage loan repurchase costs and losses due to increased repurchases of loans that were previously sold to third parties.^[1] Losses for the segment continued in 1Q2010 with a loss of $353.63 million, 29% less than the $497.64 million loss in 1Q2009.^[7]

Wealth and Investment Management ($67.9 Million net income in 2009)

The Wealth and Investment Management segment includes brokerage and individual wealth management, and loan and deposit products to individuals. This segment also offers accounting, investing, and estate planning products to families to manage and sustain their wealth across multiple generations. From 2008 to 2009, net income decreased by 61.1% from $174.4 million to $67.9 million as a result of a decline in trust and investment management fees of 17.9% as the market value of average assets under management was lower in 2009.^[1] Net income for 1Q2010 increased by 100% to $33.84 million from $16.9 million in 1Q2009.^[7]

Trends and Forces

Stress Test Asks STI To Raise $2.2B

In February 2009, Secretary of Treasury Timothy Geithner announced that banks with more than $100 billion in assets will be required to participate in a "stress test" -- a series of financial assessments to determine the health of the bank and if the bank needs additional capital.^[9] The results were released in early May and it was determined that STI, along with nine other banks, is required to raise approximately $75 billion in capital to help buffer the potential substantial losses in 2009-2010. STI ranked 7th in the amount of capital it has to raise to help buffer themselves for a continued difficult economic situation through 2010.^[10]

The Fed's criteria for the Stress Test included measures such as, GDP, unemployment rates, and housing prices. These measures were used to simulate two economic scenarios: one similar to what has been predicted and one that is worse-than-expected. To measure how the bank could withstand such scenarios, the banks were asked to report estimated numbers, such as the amount of write-downs and the bank's loan loss provision.^[11] In 2008, STI wrote down $555 million. Write downs occur when the bank's assets are overvalued compared to market value, so a high write-down number brings uncertainty in the true value of a bank's balance sheets. Comparatively, Bank of America (BAC) wrote down $10.47 billion in Q4 08 alone.^[12] As "bad loans" were a key driver of the crisis, a bank's loan loss provision (LLP) provides information as to how many "bad loans" the bank has. From 2007 to 2008, STI's LLP jumped from $664.9 million to $2,474.2 million, including $962.5 million in Q4 alone. Unlike its competitors, a majority of STI's LLP came from a miserable regional real estate market. Comparatively, BAC's LLP jumped from $8,385.0 million to $26,825 million. In short, TCE measures how much public shareholders would receive if the bank were nearing bankruptcy and had to sell most of its portfolio for cash (liquidation).

In accordance with its capital plan stemmed from its Stress Test results and requirements, STI has been continually raising equity to boost its Tier 1 Capital Ratio%.^[13] The Tier 1 Capital Ratio is a measurement of the strength of the balance sheet.^[14] As of July 2010. SunTrust has raised its Tier 1 Capital ratio to 13.4%, a substantial increase over the 5.83% figure in 2008. STI is focused on keeping its ratio well-above the minimum 4% suggested by SCAP.^[13]

Subprime Meltdown

Unlike many of its competitors Sun Trust is characterized by conservative lending and underwriting policies. However, while many had hoped that this would protect SunTrust from the subprime mortgage shutdown, that has not been the case. In 2008, STI share value decreased 88%.^[15] Many of SunTrust’s loan problems come not from the subprime market, but from another type of loan known as “Alternative A” loans. While Alternative A loans are significantly less risky than subprime loans, they are loans are for borrowers with poor credit histories and thus are more risky than prime loans. Alt-A loans receive scrutiny for their ambiguous requirements -- one does not need the proof or documentation necessary to receive a standard loan.^[16] STI raised capital in July 08 by selling its 90-year-old shares of Coca-Cola Company (KO), which were valued at $2 billion.^[17]

In response to the crisis, STI received $4.9 billion in preferred equity through the Troubled Assets Relief Program (TARP).^[18] STI cut 2,400 jobs by the end of 2009, saving $530 million.^[3] As of July 2010. the bank has yet to repay the TARP loan.

Competition

STI competes with other companies in the financial services industry.

• U.S. Bancorp (USB) -- USB is the nation's 10th largest bank (one spot lower than STI) and offers a similar product line of Consumer and Wholesale Banking.^[19]
• Capital One Financial (COF) -- COF is the 11th largest bank in the nation, and unlike USB and STI, it has a credit card business.^[20]
• Regions Financial Corporation (RF) -- RF is another bank based in the Southeast U.S. and offers a similar product line as STI.^[21]
• BB&T (BBT) -- Like RF and STI, BBT is a bank based in the Southeast U.S. and has a similar product line.^[22]
• Bank of America (BAC) -- A national competitor, BAC has about half of all the wealthy households in the U.S. as customers, and holds the leading share of the market for small business banking.^[23]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} STI 2009 4th Quarterly Report, Selected Financial Data
2. ↑ SunTrust Website, "Investor Relations"
3. ↑ ^{3.0 3.1} Reuters, "SunTrust Net Sinks 98 Percent on Real Estate, Writeoffs," 01/23/08
4. ↑ MSN Money, "SunTrust narrows 4Q loss, beat Street expectations"
5. ↑ ^{5.0 5.1 5.2 5.3} STI 2008 Annual Report
6. ↑ Seattle Pi AP: Business, "SunTrust Banks creates consumer banking unit," 3/23/2010
7. ↑ ^{7.0 7.1 7.2 7.3} STI 2010 First Quarterly Report Press Release
8. ↑
9. ↑ Board of Governors of the Federal Reserve System, "The Supervisory Capital Assessment Program:Design and Implementation," 04/24/09
10. ↑ MSNBC "Ten of the largest U.S. banks need $75 billion," 05/08/2009
11. ↑
12. ↑ Fox Business, "Behind the Numbers at Bank of America and Citigroup"
13. ↑ ^{13.0 13.1}
14. ↑ Wall Street Journal, "Stress Tests: Government Using Little-Known Capital Measure," 05/07/2009
15. ↑ The Atlanta Journal Constitution, "Worries spread to shares of SunTrust," 02/18/09
16. ↑ Wikipedia, "Alternative A Loans"
17. ↑ USA Today, "SunTrust sells Coke stake," 07/22/09
18. ↑ Seeking Alpha, "Rating the Top 12 U.S. Banks from Hidden Gems to Zombies," 02/18/09
19. ↑ USB website, "About"
20. ↑ Capital One Website, "About"
21. ↑ Regions Financial website, "About"
22. ↑ BB&T Website, "Business"
23. ↑ Bank of America website, "About Bank of America"