"Is It Safe?" is a daily feature by TheStreet.com Ratings that looks at a company's risk-and-reward potential. Find out if your stocks are safe each morning at 4.SunTrust Banks ( STI), one of 10 lenders told to raise more capital in May after the U.S. completed stress tests, appears stronger than many other regional holding companies, including Fifth Third Bancorp ( FITB) and Regions Financial ( RF). SunTrust looks like a good long-term bet. But making a quick killing on the shares will be more difficult. Investors were taken for a wild ride in the first week of June, when SunTrust shares rose 29% on an analyst's upgrade and a short squeeze. Others piled in amid talk of "green shoots" in the economy. Confidence in the economy was replaced by doom and gloom last week, as a dismal unemployment report pushed the S&P 500 Index down 2.5%. Banks fared worse, with the S&P 500 Financials Index dropping 4.2%. SunTrust rose 1.5%. After the Treasury and bank regulators completed their stress tests on the largest 19 domestic bank holding companies, SunTrust was instructed to raise another $2.2 billion in common equity, in addition to the $4.85 billion the company had already received when it sold preferred shares to the Treasury through the Troubled Asset Relief Program, or TARP. Other banks that raised common equity include Citigroup ( C), Bank of America ( BAC), Wells Fargo ( WFC) and Fifth Third. SunTrust quickly responded by selling common shares totaling $2.08 billion in early June, as well as repurchasing roughly $750 million in preferred and trust preferred shares in late June. Retiring the preferred shares will provide significant savings on dividend payouts, without affecting the tangible common equity ratio, which regulators and analysts are now fixated upon.
Even before all this, SunTrust's infusion of TARP money left it with strong regulatory capital ratios. The company's tier 1 leverage ratio was 10.1% and its total risk-based capital ratio was 14.2% as of March 31, much higher than the 5% and 10%, respectively, required for most banks and bank holding companies to be considered well-capitalized. While it's based in Atlanta, which has established itself as the capital for small banks failing from souring construction loans, SunTrust has a relatively small exposure to construction and commercial real estate loans. Together, those comprise less than 14% of the company's total assets as of March 31. Regions, Fifth Third and KeyCorp all had much more exposure. So all's well? With the shares having already returned 141% since a low of $6.70 on Feb. 19, and with more economic turmoil surely on the way, SunTrust isn't safe for short-term investors. However, there are many positive factors for investors who can hold the stock over the long haul. For starters, the prospect of further dilution of common shares is off the table for now, following SunTrust's recent success in raising capital and its high regulatory capital ratios. Looking at credit quality, the company has almost no credit card exposure. The rate of credit card loan losses has a historic tendency to match the unemployment rate, now at a 26-year high. In light of the company's capital strength and relatively low exposure to commercial construction and real estate lending in its home market, SunTrust could be a bargain for investors with a five-year horizon. TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.