SunTrust’s stock sale to Treasury may let it buy rivals

Suddenly flush with cash courtesy of Uncle Sam, Atlanta-based SunTrust Banks may soon go bargain-hunting for weaker competitors.

SunTrust, one of the Southeast’s biggest banks, said Monday that it plans to sell $3.5 billion in preferred stock to the U.S. government, a move designed to help the company weather the current economic storm, increase lending activity and potentially buy troubled banks.

The stock sale is part of the U.S. Treasury’s $250 billion effort to stabilize the nation’s banking system, which has been rocked by the collapse of the real estate market. More than a dozen regional banks have announced similar sales in recent days, with SunTrust tied for the third largest.

SunTrust on Monday also announced that it would be reducing its dividend by 30 percent, to 54 cents per share, to further shore up its capital.

The company has wide discretion in how to use the federal funds, though banking analysts said the government would like to promote a wave of consolidation to clean up the industry.

SunTrust Chairman James M. Wells III said he anticipated “prudent deployment” of the new capital, including an expansion of “careful lending.” But he also said the money will help the company strengthen its balance sheet.

“As long as the current uncertain and challenging economic environment persists, maintenance of capital at elevated levels is desirable,” he said in a news release.

SunTrust officials and banking analysts said the government’s decision to invest in the company was a positive sign.

“What the government is trying to do is put capital into stronger hands,” said Jeff Davis, a Tennessee-based banking analyst. “It’s a stamp of approval from the government that SunTrust is in a relatively strong position” and in a position to acquire distressed institutions.

Davis, a principal at the Wolf River Capital investment firm, said SunTrust could seize the chance to expand its market share throughout the region.

SunTrust “has the opportunity to pick up deposits, branches and written-down assets for a nominal price you wouldn’t have dreamed of two years ago,” he said.

As part of the $3.5 billion investment in SunTrust, the government has the option to buy roughly 15 million shares of common stock, which could dilute other investors’ holdings by up to 4 percent, the company said.

SunTrust’s stock price didn’t change much on the news, closing up less than 1 percent at $35.34.

The financial crisis has prodded the government to take the historic step of making direct ownership investments in U.S. banks as part of the Troubled Asset Relief Program, or TARP.

Earlier this month, Treasury Secretary Henry Paulson announced he was investing $125 billion in nine of the nation’s largest banks. The payment to SunTrust is part of a second $125 billion wave that initially has targeted regional lenders.

The economic woes have already claimed several high-profile national players, such as Wachovia and Washington Mutual, as well as a number of community banks saddled with real-estate related losses. Just last week, federal regulators closed Alpha Bank and Trust of Alpharetta, which had seen too many real estate construction loans go bad.

SunTrust, in contrast, appears relatively healthy. Last week, the bank reported a profitable third quarter, beating Wall Street’s earnings forecast. While SunTrust did dabble in risky subprime mortgages, the company has said it has less exposure than some of its peers.

As Georgia’s economy sputters, businesses large and small are struggling. Layoffs and bankruptcies are rising.

But it makes sense for the government to single out the banking industry for direct assistance, said Davis, the banking analyst. Banks are so fearful that most are hanging onto their cash rather than lending it out, causing the flow of credit that helps fuel the economy to freeze up.

“Banks are the center of the economy,” Davis said. “It’s the survival of this system that matters. It’s almost a life and death issue for the U.S. economy.”