SunTrust Banks, Inc.
) has announced a set of restructuring initiatives in order to
fortify its balance sheet, improvise on the risk profile and
maintain the regulatory capital ratios. All these initiatives will
have significant financial impact on the third quarter results.
SunTrust hastened up the termination of the two Variable Forward
Purchase Agreements (VFPAs), inked in 2008, involving the shares of
The Coca-Cola Company
) with an unaffiliated third party. According to the terms of the
agreement, SunTrust needed to sell the Coca-Cola shares to the
third party in the 2014-15 settlement dates. For this, the third
party was supposed to pay a sum not lower than $19 per KO share and
not exceeding $33 per KO share.
However, after assessing the deal under the new regulatory
requirements of the Basel III guidelines, SunTrust discovered that
the deal was augmenting its risk-weighted assets and bought
possible volatility to regulatory capital ratios through variations
in other comprehensive income. Consequently, SunTrust hastened the
termination of the VPFAs and vended off all the Coca-Cola shares,
keeping aside 1 million shares to be transferred to the SunTrust
This contribution to the SunTrust foundation will result in an
estimated $37 million rise in non-interest expenses in the third
quarter, partially offset by a pre-tax gain of approximately $1.9
billion, arising from the termination. The termination will also
boost SunTrust's Tier 1 common equity by around $490 million, but
reduce the annual net interest income (NII) by approximately $40
million due to the relinquished dividend income from the Coca-Cola
Further, SunTrust is looking forward to register nearly $375
million worth of mortgage repurchase losses provision during the
current quarter, stemming from the continued discussions with
) and keeping in mind the company's general trends regarding
Therefore, the company would be able to boost the mortgage
repurchase reserve to a level that will be adequate to cover the
remaining demands on loans sold to these two Government Sponsored
Enterprises (GSEs) before 2009.
Moreover, SunTrust anticipates transferring nearly $3 billion of
loans to loans held for sale. These loans comprise of nonperforming
mortgage loans, nonperforming commercial real estate loans,
delinquent Ginnie Mae loans along with delinquent and current
student loans. This is expected to lead to nearly $250 million in
pre-tax charges, mainly driven by market valuation modifications.
In addition, sales of the student and delinquent Ginnie Mae loans
would lower NII, while the sales of delinquent and nonperforming
loans will result in a fall in credit-related non-interest
expenses. The sale would also help in re-aligning the loan
portfolio according to the long-term balance sheet goals. The
disposal of loans will be carried out in the remaining half of
Furthermore, SunTrust also intends to sell properties worth $200
million in its housing subsidiary Transom Development, Inc. The
company expects $100 million of pre-tax loss stemming from this
FANNIE MAE (FNMA): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
SUNTRUST BKS (STI): Free Stock Analysis Report
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SunTrust expects the cumulative effect of all these initiatives to
increase the net income by $750 million or $1.40 per share in the
third quarter. Moreover, the initiative would be marginally
accretive to the Tier 1 common equity ratio as it was already
benefited by the Federal Reserve's capital grant pertaining to the
Coca-Cola shares. Further, SunTrust expects its regulatory capital
ratios to have minimal impact from these initiatives.
The stringent regulatory landscape prompted SunTrust to restructure
its balance sheet and enhance capital ratios. By selling off loans,
the company would be able to reduce interest expense burden,
fueling NII growth. The restructuring initiatives will also assist
in limiting the margin pressure, thereby providing more financial
flexibility. We believe all these initiatives to favor overall
growth going forward.
SunTrust currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we also
maintain a long-term Neutral recommendation on the stock.