Driven by lower expenses, BB&T Corporation (BBT) delivered a positive earnings surprise in fourth-quarter 2014. Earnings per share of 76 cents surpassed the Zacks Consensus Estimate of 73 cents. Moreover, earnings came in a penny higher than the year-ago quarter figure.
Our proven model predicted that BB&T may post an earnings beat as it did have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank of #3 (Hold) or better. It had a Zacks Rank #3 (Hold) and an Earnings ESP of +1.37%.
For full-year 2014, earnings per share stood at $2.75, up 25.6% year over year. It also outpaced the Zacks Consensus Estimate of $2.72.
Reduction in expenses along with a rise in non-interest income contributed to the better-than-expected results. Improvement in credit quality as well as growth in average loans and deposits continued to be the company’s strengths. However, a decline in net interest income weighed on the results.
Net income available to common shareholders totaled $557 million, up 3.7% from the prior-year figure. For 2014, net income available to common shareholders rose 28.2% year over year to $2.0 billion.
Performance in Detail
Total revenue amounted to $2.38 billion, almost in line with the year-ago quarter figure. However, it compared favorably with the Zacks Consensus Estimate of $2.33 billion.
For 2014, total revenue decreased 4.1% year over year to $9.30 billion. However, it marginally beat the Zacks Consensus Estimate of $9.26 billion.
Tax-equivalent net interest income fell 1.9% year over year to $1.37 billion. The decline was owing to a reduction in interest income, partially offset by lower interest expense.
Moreover, net interest margin (NIM) descended 20 basis points (bps) year over year to 3.36%. The strain on NIM continued mostly due to lower yields on the total loan portfolio, partly offset by higher average earnings assets.
Non-interest income rose 1.9% year over year to $1.00 billion. The increase was primarily triggered by higher mortgage banking income, investment banking and brokerage fees and commissions as well as insurance income. However, these were partly mitigated by lower net securities gain, other income as well as income from bank-owned life insurance.
Non-interest expense dropped 3.1% year over year to $1.41 billion. The fall in expenses was mainly driven by a reduction in regulatory charges, professional services, amortization of intangibles costs and foreclosed property expense. These were, however, slightly offset by a rise in loan-related expense, net merger-related and restructuring charges as well as software expense.
BB&T’s efficiency ratio came in at 56.7%, down from 59.9% in the prior-year quarter. A decrease in efficiency ratio indicates higher profitability.
Average deposits grew 3.5% year over year to $130.3 billion. Moreover, average loans and leases held for investment totaled $119.9 billion, up 2.5% year over year.
Credit Quality
BB&T’s credit quality continued to exhibit improvement. As of Dec 31, 2014, total non-performing assets (NPAs) fell 33.4% year over year to $782 million. As a percentage of total assets, NPAs came in at 0.42%, down 22 bps year over year.
Similarly, excluding covered loans and government guaranteed loans, net charge-offs stood at 0.39% of average loans and leases, down 10 bps from the year-ago quarter. Further, allowance for loan and lease losses came in at 1.23% of total loans and leases held for investment, down 26 bps year over year.
Profitability and Capital Ratios
Profitability metrics reflected weakness in the quarter. As of Dec 31, 2014, return on average assets stood at 1.30%, at par with the prior-year quarter return. Moreover, return on average common equity decreased to 10.08% from 10.85% as of Dec 31, 2013.
BB&T's capital ratios displayed strength. As of Dec 31, 2014, Tier 1 risk-based capital ratio and tangible common equity ratio stood at 12.4% and 8.0%, respectively, compared with 11.8% and 7.3% as of Dec 31, 2013.
BB&T's estimated common equity Tier 1 ratio under Basel III was approximately 10.3% at Dec 31, 2014, based on management's interpretation of the final rules adopted on Jul 2, 2013 by the Federal Reserve Board, which established a new comprehensive capital framework for U.S. banking organizations.
Our Take
BB&T’s robust capital position, improved credit quality and steady capital deployment activities continue to supplement growth. Moreover, the company’s consistent efforts to curb costs paid off in the quarter in the form of better expense management and boosted profitability.
However, slow economic recovery, a persistent low interest rate environment and continuous margin compression will likely pose a challenge for the company in the near term.
Currently, BB&T carries a Zacks Rank #3 (Hold).
Performance of Other Major Regional Banks
Comerica Incorporated’s (CMA) fourth-quarter 2014 adjusted earnings per share outpaced the Zacks Consensus Estimate. Better-than-expected results were driven by growth in the top line and lower provisions. However, fall in net interest income weighed on the results.
Moreover, M&T Bank Corporation’s (MTB) fourth-quarter 2014 net operating earnings marginally beat the Zacks Consensus Estimate. Results were aided by an improved top line and lower expenses.
The Bank of New York Mellon Corporation (BK) is scheduled to report its fourth-quarter 2014 earnings results on Jan 23.
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