Stress test: SunTrust told to raise $2.2 billion
Federal regulators say Georgia's biggest bank must raise $2.2 billion to cover possible losses if the recession deepens.
Atlanta-based SunTrust Banks, struggling with losses tied to the collapsed real estate market, has 30 days to develop a plan to bolster its capital cushion and until Nov. 8 to carry it out.
SunTrust officials said the bank already has the capital to "withstand expected and even more severe economic pressures" and is in good shape to continue serving its customers.
As part of its effort to shore up the battered financial system, the federal government conducted stress tests on the nation's 19 largest banks, including SunTrust, to gauge how they'd fare under a worsening economic scenario. Results were released late Thursday.
Ten of 19 banks were told to boost capital levels by a total of $75 billion. They include several with a large presence in metro Atlanta. Bank of America faces a $33.9 billion shortfall. Wells Fargo, which acquired Wachovia last year, must add $13.7 billion. Regions Financial must raise $2.5 billion, while BB&T was among those not required to add capital.
The results don't mean the banks with capital shortfalls are in serious trouble. The Federal Reserve last week said none of the 19 banks is in danger of failing. And the shortfalls are smaller than some investors feared.
The results "suggest that banks are healthier than people feared," said Larry Benveniste, dean of Emory University's Goizueta Business School.
Regulators said SunTrust could lose $11.8 billion in 2009 and 2010 should economic conditions grow worse, nearly half from soured mortgages. The government's scenario envisioned home values sliding another 22 percent this year and unemployment rising to 10.3 percent in 2010.
In a news release, SunTrust said it is confident it can meet the capital requirement without any new government funds. SunTrust has several options, none very attractive.
The bank could sell common shares, a move existing shareholders often don't like because it dilutes per-share earnings and can dampen share prices. SunTrust could also sell prized assets, such as its money management arm or even parts of its retail banking business.
One way SunTrust could satisfy regulators without raising new funds is by converting existing preferred shares -- privately held or government-owned -- into common shares. That would also dilute existing common shareholders and potentially give the government a large voting stake in the company.
"Looking beyond the current recession, we are well positioned for the opportunities that will come with a resumption of economic growth," Chief Executive James Wells said in the news release.
SunTrust's loan losses mounted over the past year as the economy worsened. Saddled with bad real estate loans in Florida and Atlanta, it has lost money the past two quarters.
SunTrust's problems, Davis said, stem from moves in the middle part of the decade to ease lending standards for mortgages and construction loans. That was a marked change for SunTrust, which has a reputation for being conservative in its lending.
The U.S. Treasury previously bought $4.8 billion of SunTrust preferred stock as part of the government's efforts to shore up the banking system.
Benveniste, the Emory business school dean, said the stress tests were intended to shore up confidence in the nation's banking system. Should that happen, he said, investors may be emboldened to sink money into banks, helping banks increase the amount of money they're able to lend and potentially kick-starting the economy.
The real test result could come when banks go to private capital markets to raise funds, Benveniste said.
"Will the confidence carry over into investors putting new money into the banks? We don't know that yet," he said.