You are pretty smart. Targeted fed funds rate reduction is not the answer to BBT's problems. Those of us who know this company know that it finances the bank's assets with more long term longer wieghted average duration liabilities. Its the conservative (i.e. easy and simple) way to finance the assets. Kind of like taking out a 30 yr mortgage on your home with big down payment, rather than using a vriable rate mortgage in the hopes LIBOR goes down. These guys would say they don't play the curve, but its not that, they just can't stomach risk. So when the curve begins to steepen, they are caught funding long while everyone else funds short (when being short makes more $$$). Several years ago, when LIBOR was 1.75% and the curve was steep and everybody was funding with CP, BB&T couldn't make margins to save their butts, the only way they did it was by making the same old tired retail mortage and car loans....and guess what, those borrowers are now all broke because their homes that BB&T has the liens on are worth s***. There is still something left to play out with this stock. proceed with caution.
About 20% of bbt's interest paying liabilities are long term debt paying 5.6%. True, it's higher than current c/p by about 120 bsp. This difference will undoubtedly increase as fed fund rates drop to say 3%.
Let's say the spread increases to 200 bsp. The weighted increase on the cost of bbt funds at a 200 bsp spread is only 40 bsp. Not a bad premium to pay to have a fixed cost on a good chunk of your interest paying liabilities over the long term.
If you had a choice of taking out a 30 year fixed rate mortgage at 5.6% vs taking out an 2 year arm at 3.6% which one would you choose?
Assuming you don't intend on selling your house in the next year or so, most folks would pick the 5.6% loan. Something to be said about knowing your costs particulaly given a wide swing in the interest rate cycle.
Also, this biz about bbt holding a bunch of bad car and mortgage loans imo is pure hogwash. If you have info to back up your assertion, let's hear it.
I didn't say the loans are bad now...just wait 9 months and then we'll see. Its no longer a supply issue, its a DEMAND issue. Average retail customer is tapped out. Any job losses or inability to pay will manifest itself in delinquencies, late payments, or foreclosures/repos. None of that is good for a lender, because guess what...when all that happens and the equity dries up, the lender gets stuck with the bill. And also 20% of $130 billion is a big number. Do you want to get stuck paying 5.6% when LIBOR is at two and a quarter?
All you have to do is remember all the predictions numbie made in the past that never came true, and add this one to the list. It is well known that BBandT was very small in residential and mostly in commercial, small biz customers that are doing well, unlike the biggies, who have and STIL are writing off billions. Not long ago he predicted a Canadian Bank would be eyeballing BbandT. He always gives himself a cushion hoping all will forget his words. I always wonder who helps him with big words.