SunTrust Setting on TARP Loan

The Chief Executive Officer (CEO) of SunTrust Banks Inc. (STI - Analyst Report) said on Tuesday that the bank will repay the fund it received for its participation in the Troubled Asset Relief Program (TARP) as soon as it gets the regulator’s permission. The CEO also added that the credit condition of the bank is achieving stability.

SunTrust has received $4.9 billion as part of the government's $700 billion bailout program. The bank now sees the bailout money as expensive debt rather than equity as it pays an 8% dividend on the preferred shares it sold to the U.S. government.

Government regulators will probably want to see the credit condition of the bank before permitting it to repay the bailout money as the stress test projected that SunTrust's loan losses could reach $11.8 billion under a worst-case scenario for 2009 and 2010. However, the CEO said that the bank's credit condition has started stabilizing and the loan loss reserve growth is expected to stabilize in the third quarter of 2009. During the second quarter of 2009, the loan loss reserve grew 5.3% sequentially to $2.9 billion.

SunTrust raised more than $2 billion toward Tier 1 capital in a stock offering earlier this year. The bank does not expect to raise additional capital through stock offerings to repay the bailout money. As an alternative, the bank intends to build capital through earnings.

Though the management is optimistic about the performance of its commercial real estate portfolio, further losses are expected in its residential real estate loans into 2010 as values continue to fall. Considering its current financial condition, we don’t think that the capital building would be very easy for the company only through earnings.

However, the repayment of bailout money would enable SunTrust to reduce government involvement in its affairs. It would also be a relief with respect to the compulsion of high rate preferred dividend payments.
 
Many of the financial institutions that have already repaid bailout money include JPMorgan Chase (JPM - Analyst Report), American Express (AXP - Analyst Report), Goldman Sachs (GS - Analyst Report), Morgan Stanley (MS - Analyst Report), Capital One (COF - Analyst Report), BB&T Corporation (BBT - Analyst Report) and US Bancorp (USB - Analyst Report). Also, banks like Bank of America (BAC - Analyst Report), Wells Fargo (WFC - Analyst Report) and Citigroup (C - Analyst Report) are expected to exit from TARP over the next 12 to 18 months.

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