SunTrust Banks Inc., the lender that invested in Coca-Cola Co. in 1919, sold most of that stake for a $1.2 billion gain to help cover the costs of bad loans and put other lingering effects of the financial crisis behind the firm.
The transaction will boost third-quarter net income by about $750 million, or $1.40 a share, the Atlanta-based bank said yesterday in a statement. Proceeds of the sale will help the lender set aside $375 million to fund the repurchase of faulty mortgages and absorb a $250 million pretax charge tied to the writedown of soured loans.
SunTrust, led by Chief Executive Officer William Rogers, is cashing in a more than $2 billion Coca-Cola stake that was valued at $100,000 when a predecessor of the bank aided the beverage firm with its initial public offering. The crisis that struck almost a century later spurred the lender to seek ways to boost capital as losses from bad loans mounted, and the bank is using the share sale to purge that mess from its balance sheet.
“This is a big leap,” Gerard Cassidy, an RBC Capital Markets analyst, said in a phone interview. “All of the major regional banks and money-center banks have been on the road to recovery, some have moved down that road more quickly than others. SunTrust was a laggard. This action accelerates the recovery process.”
SunTrust, the second-best performer this year in the 24-company KBW Bank Index, advanced 4.8 percent in New York yesterday and has surged 51 percent this year. The shares added 1.2 percent in extended trading after the announcement. If the stock continues to climb, the company may have a stronger currency for making deals and still could be deemed an acquisition target, Cassidy said.
“Management has no intention of selling at this time, in our view,” said Cassidy, who rates the shares outperform.
Coca-Cola, which counts billionaire Warren Buffett’s Berkshire Hathaway Inc. as its largest shareholder, has climbed 9.1 percent this year and returned 88 percent, including dividends, since the end of 2008. SunTrust said the sale of Coke shares will cut net interest income next year by $40 million as it will no longer benefit from those dividends.
A SunTrust predecessor bank, Trust Company of Georgia, took stock instead of cash when helping Atlanta-based Coke with its IPO. The lender kept a copy of the original formula for Coca-Cola in a vault until December.
In 2008, SunTrust crafted plans to raise capital through its stake in Coca-Cola. At the time, neither company’s stock was “where it wanted to be,” Chief Risk Officer Thomas Freeman said on the conference call.
“If you go back to that as a premise and say, gosh, we used that asset to help solidify our capital position at what was unprecedented times, you actually have to feel OK about it from a shareholder perspective, the use of that asset,” he said.
SunTrust, which employed about 28,300 people as of June 30 and operates 1,641 branches, was forced to resubmit its proposal for managing capital levels after the firm failed part of a Federal Reserve stress test in March. Last month, the lender said the Fed didn’t object to a capital plan that excluded payout increases and share repurchases this year.
The $375 million provision to repurchase faulty mortgages was prompted by talks with Fannie Mae and Freddie Mac, SunTrust said in the statement. Total reserves now are expected to cover remaining demands on loans sold to those so-called government-sponsored enterprises, the bank said.
Fannie Mae and Freddie Mac expanded efforts to get refunds on soured loans. The biggest U.S. banks have seen costs from faulty home loans and foreclosures rise to at least $84 billion since the start of 2007 through the middle of this year, data compiled by Bloomberg show.
SunTrust Chief Financial Officer Aleem Gillani said the provision was a result of the firm’s “improved relationship” with Fannie Mae and Freddie Mac.
“We’re both becoming increasingly comfortable with each other and sharing more information,” Gillani said on a conference call yesterday.
PNC Financial Services Group Inc., the seventh-biggest U.S. bank by deposits, said in June it will boost reserves by $350 million to cover demands for refunds on faulty mortgages after one of the GSEs requested and reviewed a larger number of files. First Horizon National Corp., based in Memphis, Tennessee, said that month it took a $272 million pretax charge related to mortgage putback requests and litigation reserves.
SunTrust expects to book a $1.2 billion gain from the Coca-Cola stake sale. The bank will shift $3 billion in loans to its available-for-sale holdings, resulting in the $250 million pretax charge, the company said. The lender also will sell about $200 million of affordable housing investments, causing an additional pretax loss of $100 million. The firm sold 59 million shares and is contributing 1 million to charity.