Fitch Affirms SunTrust Banks Inc. IDRs at 'A-/F1'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed SunTrust Banks Inc.'s. (STI) ratings at 'A-/F1'. The Rating Outlook is Stable. The affirmation reflects an improved earnings profile, good asset quality performance, and continual enhancements to the company's balanced and diverse business mix.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Finance Corporation (COF), Citizens Financial Group, Inc. (CFG), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holding Corporation (MUAH), PNC Financial Services Group (PNC), Regions Financial Corporation (RF), SunTrust Banks Inc. (STI), US Bancorp (USB), Wells Fargo & Company (WFC), and Zions Bancorporation (ZION).

Company-specific rating rationales for the other banks are published separately, and for further discussion of the large regional bank sector in general, refer to the special report titled 'Large Regional Bank Periodic Review,' to be published shortly.

KEY RATING DRIVERS

VR, IDRs and Senior Unsecured Debt

SunTrust Banks, Inc.'s (STI) earnings continue to exhibit improvement, and have since converged to large regional bank averages. Over the past 12 months, STI has reported an ROA of 1.02%, in line with peer medians, and an improvement from the prior 12 months. One of STI's overarching strategic objectives over the near-term is to improve its efficiency, which has also demonstrated improvement over the past 12 months. STI's earnings benefit from a solid level of non-interest income, with revenues from deposit service charges, investment banking, trading income, mortgage revenues, as well as trust and investment management income.

STI's ratings also reflect the company's balanced consumer and commercial banking franchise, as well as a national mortgage banking franchise and a sizable and strong middle-market-focused capital markets business. Since the financial crisis, STI has materially reduced its reliance on residential real estate, with more diversification between consumer and commercial loans, now comprising 45% and 55% of total loans, respectively, as of June 30, 2016.

STI has an attractive retail franchise with the No.1 share of deposits in Georgia, and the No.3 share in both Florida and Tennessee. The franchise includes many states with favorable demographic trends in the Southeast and Mid-Atlantic. STI has the second highest percentage of its deposits in states where its market share is ranked either first, second or third.

The company's good asset quality performance also supports its ratings. While STI's level of NPAs remains somewhat elevated, this includes a large balance of mortgage-related troubled debt restructurings (TDRs), of which, 97% of these accruing TDRs are current, mitigating the associated credit risk. Excluding the accruing TDRs from problem asset totals, STI's ratio of adjusted NPAs to total loans and foreclosed real estate falls to the third lowest of the large regional peer group. With NCOs in second quarter 2016 (2Q16) at 39bps, Fitch expects some credit deterioration for STI, as well as the industry, as credit losses are likely at unsustainably low levels.

STI's securities portfolio continues to present nominal credit risk with approximately 97% of its holdings related to either agency mortgage-backed securities or U.S. Treasuries/agency debt, one of the highest levels among the large regional banks. Further, STI's energy book appears to have less risk than peers given the least exposure to the E&P and oilfield services sectors.

STI's transitional Common Equity Tier 1 ratio under Basel III was 9.8% at June 30, 2016. This is around 100bps below the peer median, though well above the requirement of 7%. The bank's ratio of Fitch Core Capital to risk-weighted assets is also below peer medians. Despite this, Fitch views STI's capital ratios as appropriate for its risk profile. Further, Fitch notes that STI once again performed well under the regulatory stress tests, and received no objection to its capital plan this year. Fitch also notes that STI has reported good capital generation over the past 12 months, and its coverage of capital and reserves to stress test losses is on the higher end of the peer group.

STI's liquidity profile remains stable. Compared with large regional peers, STI's loan to deposit LTD) ratio is on the higher end, although other liquidity metrics, percentage of liquid assets and wholesale funding, are better or at the peer median. STI disclosed that its LCR continues to exceed the Jan. 1, 2016 requirement of 90%.

STI has access to diversified sources of funding, including deposits, FHLB advances, and access to the capital markets. In addition, STI completed its first indirect automobile securitization in eight years in 2Q15, taking around $1bn of relatively low returning assets off the balance sheet. STI has also sold government guaranteed student loans in the past.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

STI's subordinated debt is notched one level below its VR of 'a-' for loss severity. STI's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while STI's trust preferred securities are notched two times from the VR for loss severity and two times for non-performance. These ratings are in accordance with Fitch's criteria and assessment of the instruments non-performance and loss severity risk profiles and have thus been upgraded due to the upgrade of the VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The uninsured deposit ratings of SunTrust Bank are rated one notch higher than STI's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default.

HOLDING COMPANY

STI's IDR and VR are equalized with those of its bank, reflecting its role as the bank holding company which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities.

SUPPORT RATING AND SUPPORT RATING FLOOR

STI has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, STI is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES

VR, IDRs, AND SENIOR DEBT

Fitch envisions limited near-term upward ratings momentum for STI at current levels. The company's ratings incorporate expectations of gradual improvement in earnings over time, especially under a higher rate environment, and that capital will be deployed over time. If capital is maintained at appropriate levels, asset quality remains good, and STI's earnings performance consistently improves to levels above the peer average, there could be further upside to STI's ratings, though this would likely only occur over the medium- to long-term. Fitch anticipates that if there were any upwards rating potential, it would likely be capped to a one-notch upgrade.

Conversely, a material deterioration in capital or asset quality may prompt negative rating action, though Fitch expects some level of mean reversion in loan losses, as well as a reduction in capital ratios over time. Long-term capital targets are expected to remain between 8% and 9.5% for the large regional bank peer group. For those banks whose long-term capital targets fall to the lower end of that range, Fitch expects they will also have a superior earnings profile that provides for adequate capital generation capabilities. Absent that, there could be negative rating actions.

While not anticipated, greater reliance on more volatile capital markets revenues may be a constraint to further upside in the company's ratings. On average, STI's investment banking and trading income accounts for around 7% of revenues. A sustained reliance of greater than 20% to 25% or being on a trajectory to doing so may constrain further upside ratings momentum.

Fitch views STI as one of the few large regional banks that is in the position to do bank-level M&A. STI has not completed a significant bank acquisition since 2004. Fitch would evaluate any transaction on its individual merits. As such, rating implications are dependent on the financial implication, strategic rationale, and execution risks inherent in any transaction.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings for STI and its operating companies' subordinated debt and preferred stock are sensitive to any change to STI's VR.

LONG- AND SHORT-TERM DEPOSIT RATINGS

The long- and short-term deposit ratings are sensitive to any change to STI's long- and short-term IDR.

HOLDING COMPANY

Should STI's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. This is viewed as unlikely for STI, though, given the strength of the holding company liquidity profile.

SUPPORT AND SUPPORT RATING FLOOR

Since STI's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

The rating actions are as follows:

Fitch has affirmed the following ratings:

SunTrust Banks, Inc.

--Long-Term IDR at 'A-'; Outlook Stable;

--Short-Term IDR at 'F1';

--Viability Rating at 'a-';

--Preferred stock at 'BB';

--Senior debt at 'A-';

--Subordinated debt at 'BBB+';

--Short-term debt at 'F1';

--Support at 5;

--Support Floor at 'NF'.

SunTrust Bank

--Long-Term IDR at 'A-'; Outlook Stable;

--Short-Term IDR at 'F1';

--Viability Rating at 'a-';

--Long-term deposits at 'A';

--Market-linked securities at 'Aemr';

--Senior notes at 'A-';

--Short-term deposits at 'F1';

--Subordinated debt at 'BBB+';

--Short-term debt at 'F1';

--Support at 5;

--Support Floor at 'NF'.

SunTrust Capital I

SunTrust Capital III

National Commerce Capital Trust I

--Preferred stock at 'BB+'.

SunTrust Preferred Capital I

--Preferred stock at 'BB'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012648

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012648

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Bain Rumohr
Director
+1-312-368-3153
or
Committee Chairperson
Christopher Wolfe
Managing Director
+1-212-908-0771
or
Media Relations:
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com