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The Federal Reserve has approved SunTrust Banks Inc.’s (STI - Analyst Report) capital deployment plan for the remainder of this year. The company had re-submitted its capital plan in June as a part of the Comprehensive Capital Analysis and Review (CCAR) process.

While re-submitting its capital plan, SunTrust did not ask for any additional capital actions. Hence, the company will continue paying a quarterly dividend of 5 cents per share and will not be repurchasing any shares.

In March, SunTrust’s plan to raise dividend and initiate a share buyback was rejected on the grounds of its Tier 1 common ratio (under hypothetical stressful scenarios) being lower than what was stipulated by the Fed. However, at the same time, the company’s plan to redeem certain trust preferred securities (TruPS) was permitted by the regulator.

Therefore in July, following the announcement of new capital proposal, SunTrust completed the redemption of TruPS worth approximately $1.2 billion. As per the new proposal, the TruPS issued prior to May 19, 2010 would no longer qualify for Tier 1 capital ratio calculations beginning 2013.

Fed’s Approval for Other Banks

Similar to SunTrust, Citigroup Inc. (C - Analyst Report), whose extra capital deployments were also rejected by the Fed, had announced that it would not request any additional capital deployment while re-submitting its capital plan to the Fed. Citigroup will continue to pay its current dividend of 1 cent per share.

Moreover, earlier this week, Fifth Third Bancorp (FITB - Analyst Report), whose capital plan was also rejected in March, received approval for its proposed capital plan through March 2013. This includes a possible increase in its dividend in the third quarter as well as share buybacks. Fifth Third, which currently pays a dividend of 8 cents per share, has proposed a raise in its dividend to 10 cents and approved a new share buyback authorization of 100 million shares.

Conclusion

SunTrust is expected to reconsider its capital deployment activities as part of the 2013 CCAR program. The company will be submitting its capital plan for 2013 in January next year. We believe that its stable capital ratios and consistent profitability over the last few quarters will enable the company to clear the next stress test, leading to enhancement of shareholder value.

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.

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