SunTrust Shares Fall on Divesture News

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The stock price of SunTrust Banks, Inc. (STI) fell marginally following the company’s declaration of the sale of its asset management subsidiary, RidgeWorth Capital Management, Inc., on Dec 11. The divested unit will be purchased by the unit’s employees in collaboration with a private equity firm, Lightyear Capital LLC.

The deal is worth up to $265 million, out of which SunTrust will receive $245 million at the time of closing. The remaining amount of up to $20 million is to be paid depending on the value of assets to be retained. The deal is expected to close in second-quarter 2014 and is subject to customary closing conditions.

At present, SunTrust continues with its efforts to improve revenues and curtail expenses. Notably, the company completed its PPG Expense Initiative in 2012, almost a year ahead of the scheduled date. The aforementioned divesture by SunTrust is part of the initiatives to streamline its business so as to enable the company to shift focus to investment banking from asset management.

RidgeWorth was a profitable part of SunTrust, generating net income of $25 million in the first nine months of 2013. The decline in the latter’s stock price is probably the outcome of its divestiture news.

However, we expect the divestiture’s positive impact to be felt sometime after the deal closes. Apart from generating a $50 million after tax gain (as estimated by SunTrust) the move will have other long-term benefits as well.

SunTrust expects to achieve an efficiency ratio of 65% by the end of 2013 and less than 60% in the long run. The divesture, as part of the company remodeling activities, will expectedly enable the company to meet its efficiency target.

For RidgeWorth, the deal serves as an opportunity to operate independently as an asset management company, and in process capitalize on Lightyear Capital’s expertise. This will help it expand its third party asset base. Further, SunTrust expects to keep up its business relation with the divested unit.

Among other investment managers, Invesco Ltd. (IVZ), in April, 2013, announced that it had entered into a definitive agreement to divest Atlantic Trust Private Wealth Management to Canadian Imperial Bank of Commerce (CM) for $210 million. The deal is expected to close in fourth-quarter 2013.

Currently, SunTrust carries a Zacks Rank #3 (Hold). Another major regional banks worth considering is Wells Fargo & Company (WFC), which carries a Zacks Rank #2 (Buy).

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