SunTrust Banks on Thursday said it will sell billions of dollars in bad loans and accelerate a plan to unload about $2 billion in Coca-Cola stock as part of a sweeping move to repair the damage to its balance sheet from the real estate bust.
The Atlanta-based bank - the largest by deposits in the metro area - also is stepping up efforts to cope with expected losses from mortgage loans it packaged and sold to investors during the housing boom, including government-backed Freddie Mac and Fannie Mae, that later soured when economy collapsed.
The moves, announced after the markets closed, reflect the bank’s continued struggles to extricate itself from the lingering effects of the housing market collapse.
They are aimed at making SunTrust’s balance sheet less risky by shedding bad assets. The sale of Coke stock also provides a boost to the bank without forcing it to sell new shares of its own stock, which can harm current shareholders.
SunTrust said the actions will result in a $750 million profit gain in the third quarter.
The maneuvers come six months after SunTrust failed part of a Federal Reserve “stress test.” The Fed rejected the bank’s plan to increase its dividend to shareholders and buy back more of its own shares. Last month, SunTrust resubmitted a plan that didn’t include a dividend increase or share repurchase.
SunTrust Chairman and CEO William Rogers Jr. told analysts that with the moves “SunTrust will be even better positioned for the future.”
The speedier sale of Coke stock, which was first announced in 2008, capitalizes on Coca-Cola’s improved stock performance since the recession started, Chris Marinac, a bank analyst with FIG Partners in Atlanta.
In 2007 and 2008, SunTrust explored selling its substantial Coca-Cola holdings to raise money. SunTrust sold a portion of its holdings in 2008, and entered into a deal with an unnamed party to sell its remaining holdings through 2015.
Now, SunTrust and the third party agreed to speed up the process, allowing the bank to avoid regulatory changes that would have hurt the way SunTrust could value the stock.
SunTrust, like many U.S. lenders, was deeply wounded by the collapse of the housing market and the subsequent descent into recession. The bank accepted, and later paid back, nearly $5 billion in crisis-era aid from the federal government.
The bank also has vigorously cut costs. The bank has been profitable now for nearly two years but continues to deal with bad loans, particularly residential loans made in Georgia and Florida.
SunTrust also has been dogged by soured mortgage loans it made during the boom and sold to investors including government-backed Freddie Mac and Fannie Mae, which are now demanding SunTrust buy them back.
SunTrust said Thursday it will reserve an additional $375 million for expected mortgage repurchases from Fannie and Freddie for mortgages made before 2009.
Marinac, the FIG bank analyst, said SunTrust is essentially “fast-forwarding” expected losses on those mortgages.
The bank also plans to sell $3 billion in distressed mortgage loans, commercial real estate loans and student loans. SunTrust expects a $250 million loss on those sales. So-called “vulture” investors typically buy such loans, betting they can buy low and make money as the market recovers.
SunTrust and Coca-Cola have been linked for nearly a century. Coca-Cola officials declined comment.
SunTrust predecessor, Trust Company of Georgia, had a lead role in taking Coca-Cola public in 1919, and the bank has remained one of Coke’s biggest shareholders.
Coca-Cola previously kept the secret formula for its namesake fizzy beverage in SunTrust’s vault until the beverage giant moved the formula to its World of Coca-Cola museum at Centennial Olympic Park late last year.
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