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Jonathan J. Smith

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STI AT A GLANCE

P/E ► -5.87   EV/EBITDA ► -484   ROA ► 0.4% AVG ROE ► -8.9% AVG Debt to Equity ► 6.54 LOW Current Ratio ► 0   Interest Coverage Ratio ► -0.0238 VERY LOW

 

 

 

 

 

 

SunTrust Banks, Inc. (NYSE: STI) is the ninth largest bank in the United States, with assets of approximately $183.1 billion. 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.^[1] STI's competitors range from local rival Regions Financial Corporation (RF) to national bank Bank of America (BAC).

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. STI must raise $2.2 billion and must present a formal plan to its regulators by June 8.^[2] 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]

Business Financials

From 2007 to 2008, STI interest income decreased 17.0%, net interest income decreased 2.1%, and net income decreased 51.3%.

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.

Retail and Commercial Banking (38.5% of Net Income)

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). From 2006 to 2006, net income to the retail segment decreased 15.9%.^[4] 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. From 2007 to 2008, net income to this segment decreased 61.2%.^[5]

Wholesale Banking (27.3% of Net Income)

The wholesale banking segment provides banking products to clients in mid and large corporate markets, from merger and acquisition consulting to financial risk management. This segment also From 2007 to 2008, net income for this segment increased 10.8%.^[5]

Mortgage ($561.8 million loss in net income)

The Mortgage segment offers residential mortgage products through its retail, broker and correspondent channels. The Mortgage segment has 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.^[5]

Wealth and Investment Management (34.2% of Net Income)

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 2007 to 2008, net income to this segment increased from $98.6 million to $186.9 million, mainly due to the following transactions:^[5]

• $38.4 million decrease due to holding Lehman Brothers (LEH) bonds.^[5]
• $18.4 million increase due to selling First Mercantile Trust in Q2 08.^[5]
• $55.4 million increase due to selling LightHouse Investment Partners in Q1 08.^[5]
• $155.3 million increase due to securities purchased from its Ridgeworth subsidiary.^[5]

Trends and Forces

Stress Test Asks STI To Raise $2.2B

In February, 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.^[6] 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.

The results of the test were hesitantly released in early May because of the potential impacts of the results on the finance industry's stock prices. STI has been asked to raise an additional $2.2 billion in capital and must present a plan to its regulators by June 8. STI ranked 7th in the amount of capital it has to raise to help buffer themselves for a continued difficult economic situation through 2010.^[7] The impact on STI of the Stress Test will become more transparent after it devises a plan to raise the capital required, whether it be through offering more stock or through government bailout money.

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.^[8] 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.^[9] 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).

STI raises its Tier 1 Capital Ratio%

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%.^[10] The Tier 1 Capital Ratio is a measurement of the strength of the balance sheet.^[11] Since May 2009, it has raised $2.2b in common equity to boost its Tier 1 Capital ratio from 5.83% in December 2008 to 7.34% in July 2009, and $1.8b of its fund raising efforts came from the issuance of 141.9mm new common shares.^[10] STI is focused on keeping its ratio well-above the minimum 4% suggested by SCAP.^[10]

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%.^[12] 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.^[13] STI raised capital in July 08 by selling its 90-year-old shares of Coca-Cola Company (KO), which were valued at $2 billion.^[14]

In response to the crisis, STI received $4.9 billion in preferred equity through the Troubled Assets Relief Program (TARP).^[15] STI plans to cut 2,400 jobs by the end of 2009, saving $530 million.^[3] This might not sit well with investors, considering STI also approved raising its CEO's 2008 compensation 75% to $8.1 million.^[16]

STI hindered by dismal Southeast market

STI operates nearly 1,700 full-service branches in the Southeast, which include the Carolinas, Georgia, and Florida. The Southeastern real estate market was particularly affected by the 2007 Credit Crunch. Florida and Georgia were two of the top five states that had the highest foreclosure totals in November.^[3] A large part of SunTrust’s loan portfolio and assets are linked to residential real estate. In addition, unemployment has been another negative factor because the 10% unemployment rate in the Southeast is higher than the national average of 9.5% (as of June 30).^[10]

STI's concentration in this region has hindered their performance because it is still posting heavy losses in household lending. It posted a $694mm loss through 2Q2009, compared to a $186mm loss over the same period in 2008.^[10] Overall, this unfavorable economic environment led STI to post a $1.0b net loss to shareholders over the first two quarters of 2009.^[10]

Competition

Financial Services

• SunTrust Banks (STI) -- STI is an Atlanta-based bank with 20% of outlets in retail centers.
• 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.^[17]
• Capital One Financial (COF) -- COF is the 11th largest bank in the nation, and unlike USB and STI, it has a credit card business.^[18]
• Regions Financial Corporation (RF) -- RF is another bank based in the Southeast U.S. and offers a similar product line as STI.^[19]
• BB&T (BBT) -- Like RF and STI, BBT is a bank based in the Southeast U.S. and has a similar product line.^[20]
• 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.^[21]

References

1. ↑ SunTrust Website, "Investor Relations"
2. ↑ MSNBC "Ten of the largest U.S. banks need $75 billion," May 8, 2009
3. ↑ ^{3.0 3.1 3.2} Reuters, "SunTrust Net Sinks 98 Percent on Real Estate, Writeoffs," 01/23/08
4. ↑ STI 2007 Annual Report
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6 5.7} Yahoo! Finance, "SunTrust Reports 2008 Profit of $2.13/share," 01/22/09
6. ↑ Board of Governors of the Federal Reserve System, "The Supervisory Capital Assessment Program:Design and Implementation," 04/24/09
7. ↑ MSNBC "Ten of the largest U.S. banks need $75 billion," 05/08/2009
8. ↑
9. ↑ Fox Business, "Behind the Numbers at Bank of America and Citigroup"
10. ↑ ^{10.0 10.1 10.2 10.3 10.4 10.5} STI 10-Q, 06/30/2009
11. ↑ Wall Street Journal, "Stress Tests: Government Using Little-Known Capital Measure," 05/07/2009
12. ↑ The Atlanta Journal Constitution, "Worries spread to shares of SunTrust," 02/18/09
13. ↑ Wikipedia, "Alternative A Loans"
14. ↑ USA Today, "SunTrust sells Coke stake," 07/22/09
15. ↑ Seeking Alpha, "Rating the Top 12 U.S. Banks from Hidden Gems to Zombies," 02/18/09
16. ↑ USA Today, "SunTrust board OK'd a 75% raise in CEO's compensation," 02/24/09
17. ↑ USB website, "About"
18. ↑ Capital One Website, "About"
19. ↑ Regions Financial website, "About"
20. ↑ BB&T Website, "Business"
21. ↑ Bank of America website, "About Bank of America"
22. ↑ Reuters, STI Income Statement
23. ↑ Reuters, USB
24. ↑ Reuters, COF
25. ↑ Reuters, RF
26. ↑ Reuters, BBT
27. ↑ Reuters, BAC