From the Cliff to the Ceiling
Investors who celebrated the budget agreement in Congress late Tuesday to avert the Fiscal Cliff may have been looking ahead to what is likely to be another last-minute game of brinksmanship between President Obama, his allies among the Democratic leadership of the Senate and the Republican leadership of the House of Representatives, as the United States is likely to come up against its legal debt limit in February. KBW Washington analyst Brian Gardner wrote in a report on Thursday that "the playing field for the fiscal cliff debate was tilted in President Obama's favor, and Republicans had a weak hand. However, in the debt ceiling debate the playing field will be more level and we believe Republicans will have more leverage." Reluctance among Republicans to agree to further tax increases, along with resistance of entitlement cuts by Democrats "leaves the situation over raising the debt ceiling more bitter and partisan than the fiscal cliff debate or the 2011 debt ceiling debate."
SunTrust's shares on Thursday backtracked from a 5% rally over the previous two trading sessions. The shares returned 61% during 2012, following a 40% decline during 2011. SunTrust trades for 1.1 times tangible book value, according to Thomson Reuters Bank insight, and for 10.6 times the consensus 2013 earnings estimate of $2.71 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $3.00. The company's investors are looking ahead to the next round of Federal Reserve stress tests which will be completed in March, after which the company seems likely to announce an increased return of capital to shareholders. SunTrust during the third quarter made several moves to strengthen its balance sheet and address its risk from mortgage repurchase demands, including the sale of its stake in Coca-Cola ( KO) shares, which resulted in a pre-tax gain of $1.9 billion. The company also reported a $371 million provision for mortgage repurchase claims during the third quarter, saying that the move had ""increased the mortgage repurchase reserve to a level that is expected to cover the estimated losses on loans sold to Government Sponsored Enterprises (GSEs) prior to 2009." The company also sold "$0.5 billion of nonperforming mortgage and commercial real estate loans," while transferring "$1.4 billion of delinquent and current student loans and $0.5 billion of delinquent Ginnie Mae loans to loans held for sale." SunTrust's estimated Sept. 30 Basel I Tier 1 common equity ratio was 9.8%, increasing from 9.4% the previous quarter. Bank of America Merrill Lynch analyst Erika Penala in November estimated that following the 2013 stress tests, SunTrust would be approved by the Fed to increase its quarterly dividend from a nickel a share to 15 cents, while also repurchasing $565 million in common shares during 2013.
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