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Fitch Affirms SunTrust Banks, Inc. at 'A-/F1'; Outlook Stable
October 3, 2017 / 8:56 PM / 2 months ago

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

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has affirmed SunTrust Banks Inc.'s (STI) long-term and short-term Issuer Default Ratings (IDRs) at 'A-/F1', respectively. The Rating Outlook is Stable. The affirmation reflects its balanced and diverse business profile, generally improving trends in earnings, and still benign asset quality. A full list of rating actions is at the end of this rating action commentary. 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), and Wells Fargo & Company (WFC). 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 IDRs, VRs, AND SENIOR DEBT SunTrust Banks, Inc.'s (STI) ratings have been affirmed reflecting its diverse business profile, generally improving trends in earnings, and still benign asset quality. STI's ratings 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. STI's earnings benefit from a solid level of non-interest income, with revenues from deposit service charges, investment banking, trading income, mortgage revenues, CRE-related income, as well as trust and investment management income. During 1H17, STI earned a 0.98% ROA, as compared to the peer median of approximately 1.05%, and 1bp better than a year ago. STI is targeting a medium-term tangible efficiency ratio of below 60%, both of which Fitch views as attainable, especially under a higher interest rate environment. The company's 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, 89%% of TDRs are accruing, and of those, 98% are current, mitigating the associated credit risk. Excluding the accruing TDRs, STI's ratio of nonaccrual loans to total loans falls to the third lowest of the large regional peer group at June 30, 2017. With NCOs in second quarter 2017 (2Q17) at just 20bps, Fitch expects some credit deterioration for STI, as well as the industry, as credit losses are likely at unsustainably low levels. Fitch notes that STI's Common Equity Tier 1 and Fitch Core Capitals both fall below peer medians. Despite this, Fitch views STI's capital ratios as appropriate for its risk profile. Further, we expect many peers will manage capital lower over time. During 2Q17, STI issued $750 million of 5.05% preferred stock, contributing to Tier 1 capital. STI indicated it hopes to get its CET1 ratio below 9% over the next couple of years. We expect most large regionals will manage with long-term CET1 between 8% and 9.5%. STI's liquidity profile remains stable. However, compared with large regional peers, STI's loan to deposit LTD ratio is on the higher end. Nonetheless, we view STI's liquidity profile as in line with others. STI has access to diversified sources of funding, including deposits, FHLB advances, and access to the capital markets. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES STI's subordinated debt is notched one level below its VR 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 affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of SunTrust Bank are rated one notch higher than the bank'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 VR is 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 failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR STI has a Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'NF'. In Fitch's view, 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. 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 stable, 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 9% of revenues, slightly more elevated than in the past. A sustained reliance of greater than 20% to 25% or being on a trajectory to doing will likely 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, trust preferred securities, and preferred stock are sensitive to any change to the 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 potential that Fitch could notch the holding company VR from the ratings of the operating companies. SUPPORT RATING 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. 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'. Contact: Primary Analyst Julie Solar Senior Director +1-312-368-5472 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Bain Rumohr Director +1-312-368-3153 Committee Chairperson Joo-Yung Lee Managing Director +1-212-908-0560 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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