Thursday, Credit Suisse initiated coverage of SunTrust Banks, Inc. (STI) stock with a Neutral rating and a price target of $14. The brokerage established its 2009 loss per share estimate of $6.27, and its 2010 loss estimate of $2.48.
Analyst Siegenthaler noted that STI has experienced a large increase in credit costs, driven by the geography of its loan portfolio (Georgia and Florida), despite a better quality loan portfolio than its Southeast regional peers owing partly to a smaller construction portfolio.
Additionally, the analyst said that as construction losses should peak over the next few quarters, STI's loan portfolio composition would slow charge-offs compared to its commercial focused competitors.
The analyst noted that because of weak loan demand, STI's balance sheet might shrink over the next year, which will help to offset the impact of higher NCOs (net charge-offs) on capital levels. Additionally, STI may look to repurchase debt and hybrids, which would also have a positive impact on capital levels.
The analyst added that real estate construction loans have driven losses at STI over the past year, while STI has decreased the size of this portfolio by 41% year-over-year to $7.4 billion, helped by charge-offs and the natural run-off of loans. 7% of its loan portfolio is now construction, which is the lowest contribution among the large southeastern regional banks.
However, net charge-offs should continue to increase or at least remain elevated as early stage delinquencies are still rising, and net charge-offs increased by 47bps quarter-over-quarter. This portfolio is mostly pure construction properties and not development or land, while non-performing loans are much more frequent in the state of Florida.
The analyst said that construction delinquencies are still lower than STI's consumer direct business, which includes a $3 billion portfolio of federally guaranteed student loans, but due to the guarantee, this portfolio does not impact STI's net charge-off levels significantly.
Currently, STI is down $0.82 or 5.42% and trading at $14.30.
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