Shorting SunTrust Banks Before Earnings

After reaching a new 52 week low on Monday, SunTrust Banks (STI) jumped 10% along with all financials on Tuesday but returned to its selling pattern on Wednesday, falling 5%.

Construction Loans

An analyst for Friedman, Billings, Ramsey & Co spooked investors on Monday reporting that SunTrust will have to cut its dividend and raise additional capital. The risk to the bank is the residential construction loans that it holds which are not doing well and will create default situations soon.

Over 6% of the banks loan portfolio is residential construction loans in Florida and the Atlanta area where the company is headquartered. As recent as June 20^th the company claimed to not need additional funding or a cut in its dividend. But the stock price continues to decline and their loan portfolio continues to be questioned.

The Trade

You can go short SunTrust now that the bank rally has subsided and end the trade before their earnings are released on July 22^nd. If the company does cut its dividend or has to write down its loan portfolio prior to their earnings, you could get a nice opportunity to end your short position with a healthy gain.

Disclosure: none

 

Comments

[madcone:]

What a load. Suntrust is the most conservative big bank in the USA. Six percent of total loans in real estate in Atlanta & FL? if 25% goes bad and losses total 25%, the net loss is about four tenths of one percent of total loans outstanding. There is a lot of difference between servicing a mortgage and finding the current value of a minority interest in mortgage backed securities. Have fun with your short, but don't bet your house.

2008 Jul 16 07:34 AM

[zmt63:]

hope you covered your short on Monday or Tuesday dude. . . you're waaaaaay late on this trade.

2008 Jul 18 12:28 AM