SunTrust reeling from real estate boom risks

Boring may have been better.

Back in 2003, SunTrust Banks made a very un-SunTrust move: It launched an ad campaign featuring a Benjamin Franklin look-alike boogieing to the Human League’s 1980s synth-pop hit “Don’t You Want Me.”

The ad signaled a new era for the Atlanta-based bank known for its conservative culture. SunTrust was willing to shake things up and take greater risks.

In just three years, the bank doubled its home lending business in part by expanding beyond the Southeastern base it knows best. It also made riskier mortgages to creditworthy borrowers who didn’t fully document their income or ability to repay.

It fit what Wall Street wanted.

Analysts “were demanding more and more revenue,” said Christopher W. Marinac, an analyst at FIG Partners in Atlanta. “There was a demand to have greater earnings per share, greater profitability.”

Now, SunTrust, like many of the nation’s largest banks, is reeling from the risks it took during the real estate boom years.

The government has ordered the company to shore up its capital cushion by $2.2 billion to protect against potential future losses should the recession worsen. Last week, the bank — the nation’s seventh-largest financial institution, as ranked by assets — announced a number of steps including selling up to $1.25 billion in common stock and cutting its quarterly dividend from 10 cents to one penny per share.

In recent interviews, SunTrust executives acknowledged they were taking on more risk in their home lending portfolio. But they believed they were taking a rather prudent approach.

Loans backed by tangible assets, such as a borrower’s home, were less risky to the bank than unsecured debts such as credit cards, said Steve Shriner, SunTrust’s investor relations director.

“At the time, the business case was founded on very sound principles,” Shriner said.

The bank also was reacting to Wall Street pressure about profit growth.

“We felt that we were not growing revenue at a pace that was commensurate with some of our peers,” Shriner said.

Adding to SunTrust’s comfort level: Home loan demand remained robust through the middle part of the decade in its key metro Atlanta and Florida markets. Home values soared.

The good times didn’t last. The housing market began to falter, and many loan portfolios of some of the nation’s biggest banks, including SunTrust, went sour.

“What historically has been our growth engine and facilitator of better credit quality is actually causing more stress in this recession,” Shriner said.

Analysts cite SunTrust’s $9.5 billion acquisition of Richmond-based Crestar Financial Corp. in 1999 as the turning point for SunTrust’s risk tolerance. With that purchase came an executive team that included James M. Wells III, now SunTrust’s chairman and chief executive.

The Crestar transplants aggressively pushed SunTrust into becoming a national home lender with a focus on the lucrative “Alt-A” loans — which required little documentation — and home equity lines, said Marinac, the FIG analyst.

Indeed, SunTrust’s mortgage and home equity line portfolio roughly doubled from $29 billion in 2003 to $58.2 billion in 2006, Federal Deposit Insurance Corp. statistics show.

“Most of their issues are a function of loosening the credit spigot too far in the mortgage bank,” said Jeff Davis, a banking analyst at Howe Barnes. “All that’s coming home to roost.”

In past recessions, SunTrust had fared better because its primary market, the Southeast, withstood those downturns relatively well. And though investors grumbled the bank’s returns lagged behind that of its peers, the bank often boasted its stringent lending standards meant it wouldn’t do as poorly in a general banking downturn.

Not this time.

The bank didn’t fully appreciate the risks it was taking by going into markets it didn’t fully understand, Marinac said.

“It’s one thing to [make loans] in SunTrust branches and another to underwrite loans in California, Seattle and Portland, Ore.,” he said.

SunTrust’s history of conservative lending could serve it well, some analysts say.

“The good news for SunTrust is historically it has been a radically conservative commercial lender and should perform better than its peers in that category,” Davis said.

Others aren’t so sure. They note banks, including SunTrust, are exposed to the commercial real estate sector. Expectations are that commercial real estate — a major economic driver of Atlanta’s growth — will be the next problem to blow up on bank balance sheets.

“You can throw out the old ‘conservative bank’ business model,” said Ted Parrish, director of investments at Kennesaw-based Henssler Financial Group. “Their capital position is the only thing that matters.”

To regain investor confidence, SunTrust, whose share price has fallen more than 72 percent in the past 12 months, will have to be accurate on earnings guidance, he said.

The company also should raise more capital than the $2.2 billion the government says it needs, closer to $3 billion, Parrish said.

While moves such as offering more shares could lead to a decline in the price of the bank’s stock, widely held by both institutions and individuals, some short-term pain is necessary, he said.

“SunTrust is not as bad as some of the other habitual offenders. Their problems are solvable,” Parrish said. “They can come back from this. Shareholders need to be patient; we should expect progress in the next one to three quarters.”

How we got this story

The AJC interviewed bank analysts, institutional investment managers and SunTrust executives. The AJC also reviewed SunTrust’s lending data on the Federal Deposit Insurance Corp.’s Web site.