SunTrust sells big Coke stake, profit falls 21 percent

NEW YORK (Reuters) - SunTrust Banks Inc (STI.N) said on Tuesday it will bolster capital by unloading a big Coca-Cola Co (KO.N) stake it has held for nearly 90 years, as higher credit losses tied mainly to real estate led to a 21 percent drop in quarterly profit.

By disposing of its 43.6 million share stake, the large U.S. southeast regional bank will break some ties with the world's largest soft drink maker. Both companies are based in Atlanta.

SunTrust has held Coke shares since 1919, when predecessor bank Trust Co of Georgia helped take the soft drink maker public. It also has a copy of the formula to make Coke.

"The impetus for the transactions announced today was exclusively related to SunTrust's own capital optimization goals," SunTrust Chief Executive James Wells said in a statement. "We retain the highest degree of institutional respect for The Coca-Cola Company as one of the world's leading companies with whom SunTrust has enjoyed a long, positive and productive relationship."

Coca-Cola did not immediately return a call for comment.

SunTrust said it sold 10 million Coke shares in June, and in July arranged to dispose of another 30 million shares over time. Also in July, SunTrust contributed another 3.6 million shares to charity.

The bank said the transactions boost its Tier 1 capital ratio, which measures its ability to cover losses, by 0.68 of a percentage point to 7.95 percent on a pro forma basis as of June 30. Regulators consider 6 percent sufficient. The pro forma ratio assumes the transactions were completed in June.

SunTrust also said it plans to maintain its 77 cents per share quarterly dividend. Wells on a conference call said the bank's 9 percent dividend is high relative to earnings, but said pressure on earnings is short-term in nature.

The bank's shares rose 61 cents to $34.80 in pre-market trading.

LOAN LOSSES RISE

Second-quarter net income available to common stockholders fell to $535.3 million, or $1.53 per share, from $673.9 million, or $1.89, a year earlier.

Excluding the Coke transactions and other items, profit was 78 cents per share, topping the average Wall Street forecast of 64 cents, Reuters Estimates said. Year-earlier profit was $1.48 per share excluding a separate Coke stock sale.

Revenue increased 9 percent to $2.6 billion, compared with the average forecast for $2.13 billion. SunTrust said it generated $135 million of savings in the quarter as part of its multiyear program to cut costs.

SunTrust more than quadrupled the amount it set aside for loan losses to $448 million from $104.7 million. Net charge-offs soared $323 million from $88 million.

"The operating environment certainly continues to be challenging," Wells said on the conference call. "Based on what we know today, we believe the actions we have taken to manage risk, increase the reserve, bolster capital and improve core earnings will be sufficient to see us through."

Lending income fell 3 percent from a year earlier to $1.19 billion, though net interest margin edged up to 3.13 percent from 3.10 percent, and from the first quarter's 3.07 percent.

Fee income rose 22 percent to $1.41 billion, helped by the Coke sales and by double-digit increases in deposit service charges and card fees. Expenses rose 10 percent.

SunTrust operates about 1,699 branches in 11 U.S. states and Washington, D.C. Through Monday, its shares had fallen 45 percent this year, versus a 30 percent drop in the KBW Bank Index .BKX.

(Additional reporting by Aarthi Sivaraman; Editing by Derek Caney)