Here's How SunTrust Fared in the Stress Tests

For SunTrust  (NYSE: STI  ) , what a difference a year makes.

During last year's stress tests, SunTrust got a bit of a black eye as its capital plans were rejected by the Federal Reserve. Fast forward to this year, and the bank looks like it's in a much better position.

Unlike the Fed's Comprehensive Capital Analysis and Review -- which comes out next week -- the Dodd-Frank stress tests do not determine whether or not the banks involved can pay higher dividend or pay out stock. But since they use essentially the same modeling and stress-case scenarios, they're a good way for investors to get a sense for how the banks will perform in the CCAR, and whether they'll be able to increase capital distributions.

Capital ratios
Perhaps the key metric that the Fed and investors are looking at in the results of the stress tests is the Tier 1 common capital ratio, and, in particular, how that low that ratio falls under the hypothetical stressed conditions. 

Here's a look at how that ratio looked for SunTrust -- both pre-test actual and under stressed conditions -- as compared to similar numbers during last year's CCAR tests.

Source: Federal Reserve.

The outcome of the tests is practically night and day when compared to last year. What accounts for the change? Part of it was the bank's lower projected loss. In last year's CCAR, the Fed projected that SunTrust would lose nearly $6 billion under the stress scenario. This year, that loss fell to just $4 billion.

But let's dig in a bit further on that loss projection.

Projected net loss
How do the regulators get to the stressed capital ratios? A big piece of the puzzle is using the stress-scenario inputs to estimate how much of a profit -- or, in most cases, a loss -- the bank will register over the nine-quarter test period.

In SunTrust's case, the answer is a $4 billion loss on $4.6 billion of pre-provision net revenue -- that is, revenue before loan-loss provisions less operating expenses. 

Source: Federal Reserve.

Compared to the CCAR results last year, SunTrust was projected to have both lower loan-loss provisions -- $7.9 billion versus $8.5 billion -- and markedly higher PPNR -- $4.6 billion versus $2.7 billion.

One step further...
Finally, if we break down those loan losses, we can see where the Fed projects that SunTrust would take the biggest balance-sheet hits in the hypothetical stressed scenario.

Source: Federal Reserve.

Thanks to SunTrust's asset mix -- which is lighter on some higher-loss loan types like credit cards -- its overall loss rate as a percentage of its loans was 6.4%, which was slightly below the median across all of the tested banks.

Now what?
With SunTrust's stock up close to 3% today, investors may be looking at the stress test results expecting redemption for last year when the CCAR rolls around next week. And I couldn't blame them for thinking that way. With notably high post-test capital ratios, SunTrust does look much better positioned this year to return capital to its shareholders.

But with the misfire of last year likely still ringing in management's ears, I can't help but wonder whether they're ready for a big capital request, or if they'll play it safe and put it off another year.

Another banking redemption story
Like SunTrust, fellow regional bank Regions Financial is a clear comeback story that performed well during the Dodd-Frank stress tests. But does that mean Regions Financial is a buy today? To find out, I invite you to read our premium research report on the company today. Click here now for instant access.

Editor's note: A previous version of this article misstated SunTrust's minimum Tier 1 common ratio.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2302833, ~/Articles/ArticleHandler.aspx, 10/2/2014 8:53:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 11 hours ago Sponsored by:
DOW 16,804.71 -238.19 0.00%
S&P 500 1,946.16 -26.13 0.00%
NASD 4,422.09 -71.31 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/1/2014 4:04 PM
STI $37.64 Down -0.39 +0.00%
SunTrust Banks, In… CAPS Rating: ***

Advertisement