Sun Trust has passed the FED’s stress test to see if it was adequately capitalized, but regulators said it needed $2.2 billion to be adequately capitalized. You have to wonder what kind of test it was when all 19 insolvent banks passed it, some even needing more capital. So, if you pay no attention to the $2.2 billion, SunTrust passes it’s stress test.
SunTrust Banks‘ profit fell 21 percent in the second quarter due to high credit costs, even after it sold a big stake in the Coca-Cola Co.
The Atlanta-based bank holding company had net income of $535.3 million and earnings of $1.53 a share, compared with net income of $673.9 million and earnings of $1.89 a share in the second quarter of 2007. Second quarter revenue rose 2.6 percent, to $2.6 billion.
In what could be deemed a cash raising-event, the bank sold 10M shares of Coke stock and wrote down to zero or had charge-offs of $323M. According to the bank’s 1Q 2008 10Q, Sun Trust has just shy of $48M of Level 3 waste on its balance sheet along with a healthy $343.3M increase in loan loss reserves, $448 M from $104.7 million in the second quarter of 2007. There was no capital raised other than the stock sale. Don’t worry, that goes straight to the tally.
- Tally for Write-Downs/Charge-Offs: $718.7M + $323M = $1.41B
- Tally for cash raised: $0.0
- Current level of Level III assets at $47.966M
- Current level of loan loss reserves at $448M
We now total all the distresses to get Sun Trust’s current Misery Index of $1.967B
The credit crunch caught up to SunTrust in last year’s second quarter; since then, the bank has reported three quarterly profit declines. So, without skipping a beat, SunTrust wrote down another $163.7M for first quarter 2008:
SunTrust also had $163.7 million in net valuation losses during the first quarter, mostly from mark-to-market valuation adjustments on trading assets and loan warehouses, and certain asset-backed securities classified as available for sale.
With the value of of residential real estate eroding from underneath itself, the bank increased its loan loss provisions:
SunTrust set aside $560 million for credit losses, up. Net charge-offs nearly quintupled to $297.2 million,
Then the bank beefed up its ability to take a punch by ratcheting up its Tier-1 capital ratio, which measures its ability to cover losses:
… rose to 7.25 percent from the fourth quarter’s 6.93 percent, but remains below its 7.50 percent target. Regulators say 6 percent reflects a “well-capitalized” bank.
We recorded $555M in write-downs and distresses for them in all of 2007. For first quarter 2008 we add
- Write-downs of $163.7M
- Net charge-offs of $297.2M
- Loan loss provisions of $560M
This brings the write-down total to $718.7M and the total including all new distress to $718.7M + $297.2M + $560M = $1.5B
SunTrust wrote down an additional $555M in its fiscal fourth quarter, brining full year 2007 write-downs to $777M. Most of the fourth quarter write-downs were actually accounted for in the third quarter, but as the credit crunch set in and asset values crumbled, the money gap widened. So, in the fourth quarter, Sun Trust more than doubled its write-downs and related funding.
According to the bank’s fourth quarter presentation, the write-downs are due to an off-balance sheet, multi-seller asset-backed commercial paper (ABCP) program established in 1999: “Three Pillars” ($145M), “Affiliated Mutual Fund” ($250M) and a Private Placement ($116M), plus a few odds and ends.
SunTrust wrote down a tiny $13M related to subprime loans in the second quarter of 2007, seeming to get away fairly unscathed. However, in the third quarter this figure jumped to $209M. While still small compared to the hits mega-banks have been taking, the sum is relatively large for mid-sized SunTrust (whose annual net income in 2006 was just over $2B).
Deutsche Bank estimates that SunTrust has another $1.7B in direct subprime lending exposure that has not been written down (Jan 2008 figures).