Fitch Affs SunTrust Banks L-T IDR at 'BBB+' Following Large Regional Bank Review; Outlook Positive

CHICAGO--()--Fitch Ratings has affirmed SunTrust Banks Inc.'s (STI) ratings at 'BBB+'. The Rating Outlook remains Positive. The affirmation and Positive Outlook reflect the company's balanced and diverse business mix, improving asset quality, and good capital profile. Further, although STI's earnings still lag peer averages, they reflect a generally improving trend.

The rating action follows a periodic review of the large regional banking group, which includes BB&T Corporation (BBT), Capital One Financial Corporation (COF), Comerica Incorporated (CMA), Fifth Third Bancorp (FITB), Huntington Bancshares Inc. (HBAN), Keycorp (KEY), M&T Bank Corporation (MTB), MUFG Americas Holdings Corporation (MUFG), PNC Financial Services Group, Inc. (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 - IDR, VR and Senior Debt

STI's ratings were affirmed and the Positive Outlook maintained reflecting the company's balanced and diverse business mix, improving asset quality, and good capital profile. Further, although STI's earnings still lag peer averages, they reflect a generally improving trend. STI also appears to have addressed a great deal of legacy mortgage-related litigation risk.

STI's balanced risk profile incorporates a diverse business mix, and a good degree of noninterest income. The risk appetite is a key rating attribute underlying the company's outlook. The company has a balanced consumer and commercial banking franchise, as well as a national mortgage banking franchise and a sizable wealth and investment management business. STI has an attractive franchise with the number one share of deposits in Georgia, and the number three share in both Florida and Tennessee. The franchise includes many states with favorable demographic trends in the Southeast and Mid-Atlantic.

Credit quality metrics continue to improve from their peak in mid- to late 2009. Similar to others in the industry, STI has reported improvement in non-performing assets (NPAs), net charge-offs (NCOs), non-performing loan (NPL) inflows and delinquencies for quite some time now. Although STI's NPAs remain elevated from historical levels, Fitch observes that the vast majority of STI's NPAs are accruing troubled debt restructurings (TDRs) with over 95% current, the highest level amongst the peer group. A large percentage of these TDRs are residential mortgage-related loans that will remain as such for the lifetime of the loan. Lastly, there is very little credit risk in the securities portfolio.

The company's capital ratios are considered appropriate, with an estimated Common Equity Tier 1 under Basel III of 9.7% on a fully phased-in basis at June 30, 2014, just slightly below the large regional bank peer average, although well above the 7% threshold (absent any D-SIFI buffer). STI is targeting a capital ratio in the 8% range over the long term, which appears acceptable in light of its balanced business profile. Other measures of capital, including Fitch Core Capital and tangible capital, also lag peer averages, though are still considered acceptable given the diversity in the company's business mix.

STI's earnings performance remains below large regional bank peer averages, though it does reflect an improving trend over the past several years. The improvement in reported earnings has come largely from lower provision expenses. While earnings have benefitted from reserve releases, the level for STI has been below peer averages. Fitch views STI's modest reserve release favorably given heightened regulatory scrutiny regarding reserve releases, loan growth and NCOs that are likely at a cyclical low and will likely increase over the near to intermediate term.

It would also appear as though STI has now addressed a great deal of mortgage-related risk with several settlements with the government; however, though there is little visibility into ultimate legal risk for STI or the industry, as the government appears to be increasing its vigor with regard to pursuing crisis-related activities. STI appears to have addressed repurchase risk from the GSEs and issues emanating from FHA lending and HAMP modification programs, though STI could still be exposed to some residual repurchase risk from private-label securitizations or sales. Fitch has limited visibility into legal risk for STI or the industry, although with approximately $15 billion in CET1 under Basel III, Fitch expects any related fine or PLS repurchase risk would be manageable in the context of capital.

STI's liquidity profile remains stable, despite an increase in the loan to deposit ratio over the last few years. Compared with large regional peers, STI's LTD ratio is the highest. Fitch views this somewhat negatively given less relative reliance on deposits to fund loan growth. As the economy recovers and loan growth returns to more normalized levels, STI may face higher relative funding costs with this funding profile. However, Fitch notes that other liquidity metrics, such as the amount of liquid assets and reliance on wholesale borrowings, are roughly in line with peer averages.

RATING SENSITIVITIES - IDR, VR and Senior Debt

Continued improvement in STI's earnings profile, combined with the maintenance of capital at current levels, may support a rating upgrade over the next 12 months. In addition, additional enhancements to its risk management program along with continued refinements to the company's risk appetite may support upward ratings momentum.

Conversely, a meaningful deterioration in asset quality may prompt negative rating action, though this is viewed as a low likelihood. Fitch notes that loan growth over the past 12 months has been measured at 6%. However, growth in C&I and non-owner-occupied CRE has exceeded peer averages. STI has sought to reduce its concentration to residential mortgage with growth in C&I and CRE. Increased loan diversification is generally viewed favorably, but Fitch will continue to monitor the loan growth and performance of newly originated C&I and CRE loans for any asset deterioration after greater seasoning.

Given 30% of STI's loans are residential mortgages or home equity products, Fitch notes STI is levered to any meaningful declines or sustained improvements in the residential housing market. Although home prices are expected to modestly improve on average across the country, Fitch believes home prices in certain regions are at risk of potential declines given the recent rate of price increases is not supported by underlying economic fundamentals in some areas. As such, this bears monitoring for any credit rating implications if there are meaningful declines in STI's portfolio.

STI's ratings would also be sensitive to any additional charges related to legacy mortgage lending, given Fitch's view that STI has already addressed a great deal of legacy mortgage-related risk. An outsized charge that impairs capital may negatively impact the company's ratings. Though as previously stated, this is viewed as a low likelihood given the capital base.

KEY RATING DRIVERS - HOLDING COMPANY

STI's IDR and VR are equalized with those of its operating companies and banks, 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 default probabilities.

RATING SENSITIVITIES - 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 though for STI given the strength of the holding company liquidity profile.

Fitch is now considering introducing a rating differential between the holding company and bank in the U.S. due to structural changes in the sector and the evolving regulatory landscape, as described in the special report 'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles', dated March 27, 2014. Given Fitch's views that STI may not receive a long-term debt requirement, its ratings may not be impacted as a result of Fitch's evolving review regarding notching.

KEY RATING DRIVERS - 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 SENSITVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR

STI's Support Rating and Support Rating Floor are sensitive to Fitch's assumption around capacity to procure extraordinary support in case of need.

KEY RATING DRIVERS - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Subordinated debt and other hybrid capital issued by STI and by various issuing vehicles are all notched down from STI or its bank subsidiaries' VRs in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles.

RATING SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of subordinated debt and other hybrid capital issued by STI and its subsidiaries are primarily sensitive to any change in STI's VR.

KEY RATING DRIVERS - LONG- AND SHORT-TERM DEPOSIT RATINGS

STI's uninsured deposit ratings are rated one notch higher than the company'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.

KEY RATING SENSITIVITIES - LONG- AND SHORT-TERM DEPOSIT RATINGS

The ratings of long- and short-term deposits issued by STI and its subsidiaries are primarily sensitive to any change in STI's long- and short-term IDRs.

Fitch has taken the following rating actions:

The following ratings are affirmed:

SunTrust Banks, Inc.

Long-term IDR at 'BBB+'; Outlook Positive;

Short-term IDR at 'F2';

Viability Rating at 'bbb+';

Preferred stock at 'BB-';

Senior debt at 'BBB+';

Subordinated debt at 'BBB';

Short-term debt at 'F2';

Support at 5;

Support Floor at 'NF'.

SunTrust Bank

Long-term IDR at 'BBB+'; Outlook Positive;

Short-term IDR at 'F2';

Viability Rating at 'bbb+';

Long-term deposits at 'A-';

Market-linked securities at 'A-emr';

Senior notes at 'BBB+';

Short-term deposits at 'F2';

Subordinated debt at 'BBB';

Short-term debt at 'F2';

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 and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Rating FI Subsidiaries and Holding Companies' (Aug. 10, 2012);

--'Assessing and Rating Bank Subordinated and Hybrid Securities Criteria' (Jan. 31, 2014);

--'U.S. Bank HoldCos & OpCos: Evolving Risk Profiles' (March 27, 2014);

--'U.S. Banking Quarterly Comment: 2Q14' (July 23, 2014);

--'Index Trend Analysis - 2Q14 (Fitch Fundamentals Index Falls to Neutral)' (July 15, 2014);

--'Risk Radar Global 3Q14' (Sept. 15, 2014).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Rating FI Subsidiaries and Holding Companies

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=679209

Assessing and Rating Bank Subordinated and Hybrid Securities Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732137

U.S. Bank HoldCos & OpCos: Evolving Risk Profiles

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096

U.S. Banking Quarterly Comment: 2Q14 (Environment Constraining Earnings)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753107

Index Trend Analysis -- 2Q14 (Fitch Fundamentals Index Falls To Neutral)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752428

Risk Radar Global 3Q14

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=773568

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=891994

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Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Doriana Gamboa
Director
+1-212-908-0865
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Julie Solar
Senior Director
+1-312-368-5472
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Doriana Gamboa
Director
+1-212-908-0865
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com