Analysts: SunTrust should survive federal ‘stress test’

How will SunTrust bank fare when it goes under the federal microscope?

For now, it’s anyone’s guess. Few details have emerged about the Obama administration’s “stress test,” which is designed to gauge how well banks could weather an even sharper economic downturn.

The Treasury Department will begin evaluating the nation’s 20 biggest banks, including SunTrust, on Wednesday. The government could buy shares in any bank considered vulnerable — possibly large enough stakes to take over, or nationalize, some companies.

On the one hand, SunTrust appears to be in a pretty good shape as it prepares to ride out the recession. The company has a relatively large pool of cash on hand to cover losses and holds few of the toxic securities that are crushing some of its competitors, experts said.

But the bank is exposed to the deteriorating real estate markets in Atlanta and Florida. Mounting losses pushed the company deep into the red in the fourth quarter.

John Douglas, a banking attorney at Paul Hastings in Atlanta, said SunTrust should do well.

“SunTrust is a very well-capitalized, conservatively managed company,” said Douglas, a former general counsel at the Federal Deposit Insurance Corp. “It’s obviously not perfect, but they’ve got a strong balance sheet. One would anticipate that when the government runs this test that SunTrust will come out fine.”

Chris Marinac, a bank analyst at Atlanta-based FIG Partners, said SunTrust is in a much stronger position than Bank of America and Citigroup, two of the nation’s biggest banks, which have been widely mentioned as potential nationalization targets.

Citigroup is reeling from bad bets on home mortgage securities, while Bank of America is struggling to integrate its recent purchases of mortgage lender Countrywide and brokerage house Merrill Lynch.

Marinac pointed to a key statistic known as the tangible common equity ratio, a measure of a bank’s financial strength. SunTrust stands at a relatively robust 5.3 percent, compared to 2.8 percent at Bank of America and 1.5 percent at Citigroup.

“By our math, SunTrust’s liquidity is pretty decent,” Marinac said. “They are in a very good spot.”

Still, the lack of information about how the stress test will work means analysts can only speculate about SunTrust’s chances. For the banks, it’s like preparing for an exam without knowing what’s on the test or what score is needed to pass.

“The concern with the stress test is the analysis will be so severe that the banks are going to be forced to take very difficult marks on their loan portfolios and some securities,” said Jeff Davis, a banking analyst with Howe Barnes.

“SunTrust, at least in theory, is in relatively good shape,” he said. “The question then becomes if SunTrust is subject to this stress test and subsequent government ownership, the situation is even more dire than the collective we appreciate.”