SunTrust to Redeem $1.19B TruPS


Following the announcement of new capital proposals by the Federal Reserve last week, SunTrust Banks Inc. (STI) stated that it will be redeeming trust preferred securities (TruPS) worth approximately $1.19 billion. As per the new capital proposal, the TruPS issued prior to May 19, 2010 would no longer qualify for Tier 1 capital ratio calculations beginning 2013.

The redemption includes SunTrust Capital VIII 6.1% TruPS with maturity date of December 15, 2036 and SunTrust Capital IX 7.875% TruPS maturing on March 15, 2068. The former was issued on December 6, 2006, while the latter on March 4, 2008.

Both the redemptions would be at par value and will also comprise of accrued and unpaid distributions until the redemption date. SunTrust further mentioned that it will use the existing available cash to fund these redemptions, which will take place on July 11.

In March, the Fed’s review demonstrated that SunTrust’s capital surpassed the requirements under the Comprehensive Capital Analysis and Review (CCARF) without any new capital deployment activity. Hence, at that time the company had announced that it will maintain its quarterly cash dividend of 5 cents per share and would redeem TruPS once they will not be eligible for Tier 1 capital.

Recently, SunTrust received a communication from the Fed regarding the re-submission process, which includes the new economic scenarios. The company is in the process of preparing an updated CCAR that must be re-submitted to the Fed by mid-June, with the expectation that the review process will be completed by the end of the third quarter.

Citigroup Inc. (C), whose extra capital deployments were also rejected by the Fed, announced that it would not request for any additional capital deployment while re-submitting its capital plan to the Fed. Citigroup would continue to pay its current dividend of 1 cent per share. Similar to SunTrust, Citigroup has announced the redemption of TruPS.

Redeeming TruPS will enable banks to bring down their interest expenses, as these securities demand higher rates than other securities. Moreover, according to Dodd-Frank Act, from 2013, banks will no longer be able to consider these securities as regulatory capital.

SunTrust currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.

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