(The following was released by the rating agency)\
-- SunTrust's asset quality has improved more quickly than we expected and is now approaching that of its peers. In addition, the bank's capital and profitability have improved significantly over the past several quarters.
-- Therefore, we are revising the outlook on SunTrust to positive from stable. We are also affirming the issuer credit rating of SunTrust Banks Inc. at 'BBB' and its main banking subsidiary at 'BBB+'.
-- We believe that further improvements in the bank's asset quality may be rapid enough to bring the bank's metrics in line with its larger regional banking peers'. If this happened, we could raise the bank's risk position assessment to "adequate" from "moderate," and subsequently raise the rating by one notch.
On Dec. 10, 2012, Standard & Poor's Ratings Services revised the outlook on SunTrust Banks Inc. and its banking subsidiaries to positive from stable. At the same time, we affirmed the issuer credit rating of SunTrust Banks Inc. at 'BBB' and its main banking subsidiary at 'BBB+'.
Over the past several quarters, SunTrust has significantly improved its asset quality, loan mix, and profitability. The bank's asset quality metrics are now approaching those of its regional banking peers, and the bank has reduced its concentration of residential real estate by shifting its loan mix toward other consumer and commercial and industrial loans. However, the bank lags peers in profitability and is still highly exposed to residential mortgages in some of the most troubled housing regions, potentially leading to larger losses if home prices fall, or general economic conditions worsen. Therefore, we are maintaining our "moderate," or slightly below peers (as our criteria describe the term), assessment of the bank's risk position. But, we now believe the probability has risen such that we could raise our assessment to "adequate" in the next 12-24 months if asset quality and profitability continues to improve.
The bank's outsize exposure to residential real estate and geographies with steep home price declines led to high loan losses from 2008-2011. As of year-end 2009, roughly 50% of the bank's loan portfolio was real estate-related (for example, residential mortgages, home equity, commercial real estate and construction). Its net charge-offs--as a percentage of average loans--rose to 2.6% in 2009 from only 0.3% in 2007, and the bank posted a loss of more than $1.5 billion for the year. Over the past few years, SunTrust has lowered its exposure to real estate-related loans (37% of total loans as of Sept. 30, 2012); annualized net charge-offs fell to 1.14% of total loans; and the bank generated pretax profits of over $700 million in the first half of 2012. (For comparison purposes, we are using figures for the first half of 2012 because of the distorting effects of actions that the bank took in the third quarter.) Nonetheless, the bank's adjusted pretax preprovision net revenue (PPNR) is relatively weak at roughly 1.5% of average assets for the first half of 2012, although this is an improvement from 1.3% in 2011. Despite the bank's efforts to grow its fee-based businesses, we see its low loan margins and softening mortgage originations as headwinds to further profitability growth.
In the third quarter, SunTrust took a number of actions to bolster its capital ratios, increase loss reserves, and reduce nonperforming assets. These actions included the sale of Coke stock and nonperforming assets, as well as an outsize provision that the bank hopes will cover future losses on repurchases of pre-2009 GSE loan sales. Although the actions did not alter the underlying fundamental capital and asset quality of the bank, they did make it clearer for us to assess the bank's capital and reduced future loss potential, thereby improving the bank's profitability. SunTrust's risk adjusted capital (RAC) ratio rose to 8.2% from 7.3% in the quarter, and nonperforming assets (including accruing restructured and 90-day delinquent loans) fell to 3.86% of total loans and other real estate owned from 4.43%. When controlled for significant restructured loans--most of which is related to residential mortgages and have performed better than other nonperforming loans--NPAs have fallen to 1.8%. On a negative note, the bank did take a 35% mark on loans sold that were already classified as delinquent or nonperforming.
Our positive outlook reflects the significant improvements in SunTrust's asset quality, loan mix, and profitability over the past several quarters. In addition, we believe that further improvements in the bank's asset quality may be rapid enough to bring the bank into line with its larger regional banking peers. If this were to happen, we could raise the bank's risk position assessment to "adequate" from "moderate" and subsequently raise the rating by one notch. The bank's nonperforming assets and net charge-offs would need to fall, on a sustainable basis, to approximately 3.25% and 1%, respectively, of total loans over the next 12 months. In addition, we would also need to see a gradual improvement in profitability to approximately 1.75% PPNR and maintenance of the bank's RAC ratio between 8%-9%.
Although we believe it is much less likely, we could lower the bank's risk position assessment and rating if its asset quality deteriorated significantly, and nonperformers and net charge-offs climbed significantly higher than 4% and 2%, respectively. We could also lower its capital assessment and rating if the bank took substantial losses or aggressively returned capital to shareholders, and we revised our RAC forecast below 7% and believed the bank's capital would remain low for the foreseeable future.
Ratings Score Snapshot
Issuer Credit Rating BBB+/Positive/A-2
Bank Holding Company Rating BBB/Positive/A-2
Business Position Strong (+1)
Capital and Earnings Adequate (0)
Risk Position Moderate (-1)
Funding and Liquidity Average and Adequate (0)
GRE Support 0
Group Support 0
Sovereign Support 0
Additional Factors 0
Related Criteria And Research
Banks: Rating Methodology And Assumptions, Nov. 9, 2011
Ratings Affirmed; Outlook Action
SunTrust Banks Inc.
Issuer Credit Rating BBB/Positive/A-2 BBB/Stable/A-2
Issuer Credit Rating BBB+/Positive/A-2 BBB+/Stable/A-2
SunTrust Bank Holding Co.
Issuer Credit Rating BBB/Positive/-- BBB/Stable/--
Certificate Of Deposit
Local Currency BBB+/A-2
Senior Unsecured BBB+
SunTrust Banks Inc.
Senior Unsecured BBB
Preferred Stock BB+
Commercial Paper A-2
SunTrust Capital I
SunTrust Capital III
SunTrust Preferred Capital I
Preferred Stock BB+
Suntrust Real Estate Investment Corp.
Preferred Stock BBB-