BB&T Runs Past Zacks Estimate - Analyst Blog

BB&T Corporation's (BBT) fourth quarter 2010 earnings came in at 30 cents per share, ahead of the Zacks Consensus Estimate of 26 cents. The results also compared favorably with the prior-year quarter's earnings of 27 cents per share.

For full year 2010, the company reported earnings of $1.16 per share, ahead of the Zacks Consensus Estimate of $1.13 and a cent above the prior year's earnings of $1.15 per share.

BB&T's results reflected better-than expected revenue, which was in turn supported by higher net interest income. Interest margin expanded while non-interest income remained nearly flat with the comparable prior-year quarter. The company also achieved an improvement in the credit quality and provision expenses were down in the quarter. However, a rise in expenses slightly dampened the quarter's results.

The GAAP net income available to common shareholders for the fourth quarter was $208 million, up 12.4% from $185 million in the prior year quarter. For full year 2010, BB&T's GAAP net income available to common shareholders came in at $816 million, up 11.9% from $729 million in the prior year.

BB&T reported fourth quarter revenue of $2.3 billion, surpassing the Zacks Consensus Estimate of $2.2 billion. The revenue figure was, however, up slightly by 0.3% from the prior-year quarter, driven by higher interest income. For full year 2010, revenue came in at $9.4 billion, ahead of the Zacks Consensus Estimate of $9.1 billion and 5.8% over the prior-year number.

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 decreasing its construction and other real estate loan balances.

Quarter in Detail

Tax-equivalent net interest income for the quarter was $1.4 billion, up 1.0% from the prior-year quarter. The increase was driven by a 24 basis points expansion in the net interest margin to 4.04% from 3.80% experienced in the prior-year quarter. Higher yields on loans acquired in the Colonial acquisition and lower deposit costs attributed to this expansion.

However, non-interest income was down slightly by 0.6% to $964 million in the reported quarter. While the company experienced higher net securities gains of $100 million, it was offset by a decrease of $43 million in service charges on deposit accounts reflecting regulatory changes and $62 million of losses and write-downs on commercial loans held for sale.

On the other hand, non-interest expense at BB&T rose 4.4% from the prior-year quarter to $1.4 billion. Higher personnel expense, foreclosed property costs, professional services, regulatory charges and loan processing expenses contributed to the increase, partially offset by a fall in occupancy and equipment expense and lower amortization of intangibles.

Credit Quality

Credit metrics showed a sequential improvement. BB&T's strategic efforts to improve the overall credit outlook were encouraging with the company selling off approximately $600 million in problem assets in the reported quarter.

Provision for credit losses was $643 million, down 11.3% year over year. Net charge-offs were 2.02% of average loans and leases, down from 3.31% in the prior quarter but ahead of 1.83% in the year-ago quarter. Non-performing assets as a percentage of total assets came in at 2.73%, down from 2.81% as of September 30, 2010, but up from 2.61% as of December 31, 2009.

Overall, with an improvement in the level of nonperforming assets and loan delinquencies, we find the upbeat outlook for future credit losses encouraging.

Profitability and Capital Ratios

Profitability metrics deteriorated slightly from the prior quarter but improved year over year. The sequential result also reflects the impact of BB&T's strategic derisking of its investment securities portfolio during the fourth quarter.

BB&T reported return on average assets and return on average equity of a respective 0.54% and 4.88%, slightly down from 0.56% and 4.91%, reported in the prior quarter but ahead of 0.47% and 4.52% reported in the comparable prior-year quarter. Book value per share was $23.67, down from $24.11 in the prior quarter, but above $23.47 per share reported in the year-ago quarter.

Leverage ratio of 9.1% as of December 31, 2010, was down from 9.3% reported in the prior quarter but up from 8.5% achieved in the year-ago quarter. The sequential decline stemmed from an increase in average balance of securities during the fourth quarter as a result of derisking of the investment portfolio.

At December 31, 2010, the Tier 1 risk-based capital ratio and Tier 1 common equity to risk-weighted assets ratio were 11.8% and 9.1%, respectively, up from 11.7% and 9.0% as of September 30, 2010. BB&T's risk-based capital ratios remained well above the regulatory standards of well-capitalized banks.

Competitors

Similar to BB&T, credit metrics showed a significant improvement in the reported quarter at Fifth Third Bancorp (FITB) following its strategic credit risk reducing initiatives implemented during the third quarter of 2010. Fifth Third's fourth quarter came in better than expected with earnings of 33 cents per share, ahead of the Zacks Consensus Estimate of 25 cents.

Notably, although The Bank of New York Mellon Corporation's (BK) fourth-quarter earnings from continuing operations of 55 cents per share came in 2 cents below the Zacks Consensus Estimate on higher non-interest expenses, it experienced improved provision for credit losses.

Along with these companies, many of the Wall Street biggies enjoyed credit quality improvement, beaconing a positive sign about the overall health of the economy.

Our Take

The growth story at BB&T's is impressive following expansion both organically as well as through acquisitions. Efforts to reduce its credit risk and diversifying its loan portfolio are also a welcome note.

However, the company still has significant exposure to problem assets and with the current challenges related to housing market, we believe that substantial development still remains elusive on this front. The regulatory issues also remain an overhang. In addition, 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.

An earnings beat is definitely encouraging for investors and therefore BB&T shares rose over 3% in the pre-market trading session.

 
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