BB&T Corp.’s (BBT) third quarter 2011 earnings came in at 52 cents per share, three cents ahead of the Zacks Consensus Estimate. This also compares favorably with the prior-year earnings of 30 cents.
Net income available to common shareholders for the quarter was $366 million, up 74% from $210 million reported in the prior-year quarter.
Better-than-expected results were aided by higher net interest income and lower provision for covered loans. The quarter also witnessed improved credit quality and enhanced capital ratios. Moreover, growth rates in low-cost deposits and broad-based loans were impressive. However, a substantial decrease in non-interest income and higher non-interest expenses were the dampeners.
Quarter in Detail
BB&T reported third quarter revenue of $2.14 billion, down 2% sequentially and 13% year over year. The year-over-year downfall was due primarily to lower non-interest income, partially offset by higher net interest income. Total revenue however missed the Zacks Consensus Estimate of $2.17 billion.
Tax-equivalent net interest income (NII) grew 5% sequentially and 8% year over year to $1.5 billion. The year-over-year increase was due primarily to lower deposit costs and a more favorable funding mix. However, net interest margin stood at 4.09%, down 6 basis points (bps) sequentially but flat year over year.
Non-interest income however decreased 12% sequentially and 38% year over year to $690 million. The year-over-year decline was primarily the result of lower insurance income, net securities loss and inferior net FDIC loss share income.
Non-interest expense at BB&T surged 2% from the prior quarter and 1% year over year to $1.42 billion. The year-over-year increase mainly led by higher personnel expense and professional services cost.
However, there were no merger-related and restructuring charges during the quarter compared with $10 million in the year-ago quarter. The prior-year quarter included charges related to the acquisition of Colonial.
BB&T’s efficiency ratio stood at 54.6%, marking a decline from 55.8% in the prior quarter but an increase from 54.1% in the prior-year quarter. The decrease in efficiency ratio indicates improvement in profitability.
Credit Quality
BB&T’s credit quality continued to show improvements. As of September 30, 2011, total nonperforming assets (NPAs) declined 11% sequentially to $3.0 billion due to a 12.1% decrease of inflows into nonaccrual status. This marks the sixth consecutive quarterly decline in NPAs. As a percentage of total assets, NPAs came in at 1.83%, down from 2.18% as of June 30, 2011 and 2.76% as of September 30, 2010.
The provision for credit losses, excluding covered loans, declined 67% from the year-ago quarter, as improving credit quality resulted in lower provision expense.
Net charge-offs (NCOs) were 1.44% of average loans and leases, down from 1.80% in the prior quarter and 3.54% in the year-ago quarter. The reduction in NCOs reflected improvement in the loan portfolio and a lower level of problem assets.
Profitability and Capital Ratios
Profitability metrics improved during the quarter. As of September 30, 2011, return on average assets stood at 0.89% compared with 0.83% reported in the prior quarter and 0.56% reported in the prior-year quarter. Similarly, return on average common equity was reported at 8.30%, versus 7.25% in the prior quarter and 4.91% in the prior-year quarter.
At September 30, 2011, the Tier 1 risk-based capital ratio and tangible common equity ratio were 12.5% and 7.1% respectively, compared with 12.4% and 7.2% as of June 30, 2011. BB&T's Tier 1 common capital ratio under the currently proposed Basel III capital standards was estimated to be 8.8% at September 30, 2011 compared with 8.3% at June 30, 2011.
Our Viewpoint
The growth story at BB&T is impressive following its organic expansion as well as acquisitions. The efforts to diversify from a concentration in real estate lending continues to progress well, with BB&T reporting an increase in average commercial and industrial loans, while reducing its construction and other real estate loan balances.
However, the company has a wide exposure to problem assets. Moreover, in the current protracted economic recovery, any significant top-line development still remains elusive. We would like to see a significant top-line improvement before becoming extremely positive on the stock.
BB&T currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Considering the fundamentals, we are also maintaining our long-term “Neutral” recommendation on the shares. BB&T’s close competitor –– Fifth Third Bancorp (FITB) also retains a Zacks #3 Rank.
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