Fitch Slashes SunTrust Ratings - Analyst Blog

With the concerns of continued weakness in mortgages and commercial loan losses, rating agency Fitch Ratings recently lowered the ratings of SunTrust Banks Inc. (STI).
 
The rating agency downgraded the long-term issuer default ratings (IDR) for SunTrust and its bank subsidiary to "BBB+" from "A-". Also, the short-term IDR was lowered to "F2" from "F1". There were several other rating downgrades. However, the rating outlooks remain stable.
 
SunTrust’s fourth quarter operating loss of 64 cents per share was lower than the Zacks Consensus Estimate of a loss of 75 cents. Last year, SunTrust reported a loss of $1.07.
 
The lower-than-expected loss was aided mainly by an improvement in revenue, which was supported by an expansion in net interest margin. However, as a result of continued market turmoil, credit quality metrics further deteriorated.
 
Despite operating in attractive demographic markets, top-line growth remained somewhat lackluster at SunTrust during the last several quarters. We do not expect any significant improvement with respect to revenue trends in the near term as the global economy will take some time to rebound to its historical highs.
 
We are also concerned about SunTrust’s exposure to Alt-A mortgage and construction loans, which have been facing headwinds over the last couple of years. Also, SunTrust's efficiency initiatives could translate to some revenue decline over time, as it has made significant headcount reductions in the near past.
 
Besides, higher mortgage rates and slow home sales will restrict the growth in mortgage income. However, cost containment measures have allowed SunTrust to increase investments and it is experiencing signs of stabilization in its credit metrics.
 
The rating agency is concerned about the ongoing economic turmoil in SunTrust's primary markets such as Florida and Georgia. The weakness in these markets could have a material negative impact on SunTrust's mortgages and this could result in significant loan losses.

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