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SunTrust Cleans House (Update 1)

On Aug. 22, SunTrust announced that the Federal Reserve had approved the company's revised capital plan, although the company "did not request an increase in its common stock dividend or the repurchase of shares of its common stock in 2012." The company's initial 2012 capital plan was partially rejected by the Fed back in March, with the regulator agreeing to the company's plan to redeem trust preferred shares, but objecting to any common share buybacks or an increase in the dividend on common shares.

SunTrust's shares closed at $26.68 Thursday, returning 52% year-to-date, following a 40% decline during 2011. The shares trade for 10 times the consensus 2013 earnings estimate of $2.63 a share, among analysts polled by Thomson Reuters.

FBR analyst Paul Miller on Friday reiterated his "Market Perform" rating for SunTrust, saying "we applaud management's actions as this should reduce the potential for volatility in SunTrust's securities portfolio, accelerate credit improvement, and more aggressively reserve for mortgage repurchase claims."

Miller said that the $375 million mortgage putback provision was likely to cover any loan repurchase losses over the near term and "eliminate the overhang on the company's strong mortgage banking operations," but the analyst also said "the real question is, Will this solve the company's long-term GSE and private-label repurchase liabilities problems? We believe that it is too early to tell as reps and warrants are a long-term liability that is not yet fully understood."

While maintaining his neutral rating, Miller raised his price target for SunTrust by four dollars, to $27, or roughly 1.1 times the analyst's estimated Sept. 30 tangible book value of $25.41.

Miller now estimates that SunTrust will report earnings of $2.06 a share for the third quarter, with an operating loss of 16 cents a share. For all of 2012, the analyst estimates EPS of $3.71, with operating EPS of $1.45. For 2013, Miller raised his EPS estimate to $3.10 from $2.65, because of an estimated reduction in mortgage repurchase losses "going forward, but we would note that we still forecast approximately $250 million of repurchase losses for FY13."

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