Saturday, May 16, 2009

Some bankers dismiss it as a half-hearted approach

TO BE NOTED:

Update | 11:13 a.m.

SunTrust, one of the 10 large banks found wanting in the government’s recent stress tests, said Friday that it would take a number of actions to raise and conserve capital, including issuing new stock and slashing its dividend.

Regulators said last week that SunTrust, an Atlanta-based regional bank, needed more capital to absorb future losses in case the economic downturn is worse than expected.

SunTrust said it “plans to adjust the composition of its overall Tier 1 capital resources to increase the common equity portion by $2.2 billion,” which is equal to the amount the government said the bank will need to raise by fall to be in compliance with the capital levels under the federal stress tests’ “more adverse” economic scenario.

Under Suntrust’s plan, which it said was not final or formally approved, more than half of the capital would be raised through the sale of $1.25 billion in new stock, diluting current shareholders. The company said it would sell the stock from time to time through an at-the-market, or A.T.M., offering, in which a company sells stock periodically at various prices instead of all at once. Morgan Stanley would be the sales agent for the offering.

To conserve capital, the company will also cut its quarterly dividend from its current payout of 10 cents per share to 1 cent per share.

SunTrust is the latest bank to announce an A.T.M. stock offering, which allows it to dribble out shares to investors over time. Bank of America began a similar effort last week, following on the heels of smaller lenders like Zions Bancorp and Wilmington Trust.

A.T.M. stock deals are frowned upon on Wall Street for many reasons. For one, bankers collect fewer fees for underwriting the offering. Investors may see it as a sign of weakness, since the banks forgo the opportunity to pitch their business strategy, and a signal they are worried that an ordinary offering could fall short. Some bankers dismiss it as a half-hearted approach.

For Bank of America, some longtime advisers suggested that the deal was a way for the bank to placate regulators that it was trying to raise equity, even if it was unable to raise the full amount. The hope is that the economy will improve enough that it can avoid selling new shares. That would minimize any dilution to existing investors.

SunTrust may be in an even weaker position, and it will be interesting to see how its offering fares. The bank has been hit hard by the housing crisis, and many analysts expect it to suffer even bigger losses on commercial real estate loans.

As part of its capital plan, SunTrust also said Friday it would sell some securities and other assets that are expected to generate about $300 million in common equity. The company also said it had $3.3 billion of preferred stock and other securities on hand for which it could exchange for common stock, a move that would further dilute existing shareholders.

“We are fortunate to have many ways to address the common buffer required under the government’s More Adverse scenario,” James M. Wells III, SunTrust’s chairman and chief executive officer, said in a statement announcing the plan. “We will be prudent and proactive in evaluating and executing aspects of the plan prior to the November 9th deadline.”

The government found that SunTrust needed the additional capital after the stress test showed it could face losses for 2009 and 2010 of $11.8 billion, or 8.3 percent of its total loans. The company received $4.9 billion under the Treasury’s Troubled Asset Relief Program.

Cyrus Sanati and Eric Dash"

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