The inflows of new nonaccrual loans for the quarter totaled $1.3 billion. Real whopper. Most of it is related to commercial and adc portfolio. Looks like 25% of the adc stuff has gone "bad" in the last 6 months but I suspect it went bad long before this and King stuffed it into deep freeze until he figured out a way to fund it. 85% personal guaranteed. Std line fed to me by investor relations. Ha!!!! Only see a razor thin amount flowing into recoveries.
In keeping with recent tradition, King marked down oreo another $100 million or around 7% in the quarter even though he has said that pricing has improved and bbt bit the bullet on this subject last quarter. I think the oreo valuation adjustment cumulatively is somewhere in the $500 million range which is ridiculous. King reported that the "core chargeoffs" for the qtr. dropped to 180 bsp, down 26 pts from last qtr. The real chargeoff # including valuation adjustment was close to 400 bsp. King needs to drop this core thing from all of his presentations and present the real numbers with valuation adjustments.
Adc is driving about 2/3 of the losses and it's drying up fast. Their residential adc portfolio is down to $3.8 billion with a reserve of around $1 billion (peak of $8.7 billion). There's got to be some core level that won't go bad - my gut says $2 billion for residential adc. If true, the $1 billion ought to cover the remaining losses and no provisioning will be required but I'm sure we'll see a jumbo # in the 4th qtr. The builder adc is down to $1 billion from a peak of around $4 billion. The homebuilders like Toll may be a good buy given that a very large % of the small builders are effectively shutdown forever because they renigged on loans.
Bbt has done alot of things well. King put together a team to go after retail deposits 2 years ago and dividends are beginning to pay off with deposits increasing about 15% over last year. Transaction accounts up 100%. Loans excluding adc increased for the quarter - up 4%. The duration on their bond portfolio dropped in the qtr. from 4 years to 2.9 years which I think is smart regardless of their adc problem. Insurance biz revenues up 1% in last year while industry is down around 9%. Nice biz with fee income now over $1 billion annually. Nim is 4.09 and 3.83 without accretable yield from colonial. Exposure to foreclosure mess is not much of an issue.
At $22.60 I think bbt is a better buy than usb and pnc. I look for their eps to start to return to a "normalized level" in 2011 as adc bad stuff is sold off. Bought some more yesterday.
A big part of the problem with the share price is the following earnings estimates from Yahoo. It appears to be a continuing downward spiral.
EPS Trends Current Qtr.
Dec 10 Next Qtr.
Mar 11 Current Year
Dec 10 Next Year
Current Estimate 0.28 0.29 1.13 1.77
7 Days Ago 0.29 0.34 1.13 1.92
30 Days Ago 0.29 0.35 1.14 2.02
60 Days Ago 0.30 0.34 1.17 2.07
90 Days Ago 0.32 0.37 1.21 2.11
Thanks...there is something wrong here based on what I thought you posted previously. It would appear their average client deposits are down 13% from Q2 to Q3 and it looks like ave client deposits have fallen for 4 consecutive quarters. This is data I understand, as I have been told that in some markets BB&T has lost share to smaller community banks and its balance sheet is shrinking. Also noteworthy in the powerpoint was statement that "Managing cost and mix by reducing CD pricing and
balances." They have lost about 3.3B in CD balances which means very simply they are unwilling to offer the same rates as competing banks. At the same time they have increased non-interesting bearing deposits by about 2.5B...now that's good but eventually they will run out of customers who are willing to give BB&T their cash and get nothing for it but a "thank your for giving us your money for free." That is not a Super Bowl winning strategy. The banks success will not come from warehousing client deposits at no cost.
Reference the 10/21/10 bbt slide presentation found on their website. All information is in presentation. Imo, their program is gain deposit market share has been very successful and over time will continue to lower the cost of funds and improve loan market share.
I just started looking at BBT recently. So I am very happy to find this post from someone who understands BBT the way I would like to understand it some day. :-)
From my perspective, I do not care about BBT's short-term issues as long as they do not lead to shareholder dilution or an erosion of their long-term competitive advantages. Is it correct to say that all of the bad stuff you mention -- large inflow of nonaccrual loans, marking down of OREOs etc -- have little long-term impact?
What do you consider BBT's long-term advantages over the rest of the industry? Is it good management and a conservative culture? Are there particular parts of the business that you think they are very good at?
Looking at the numbers for the first three quarters of 2010, it seems that BBT had about 3 billion in pre-tax pre-provision income (or 4 billion annualized). Also, their average charge-off rate over the last fifteen years or so -- counting 2010 -- is about .65%. Assuming that 4 billion of PTPP income is sustainable and the normalized charge-off rate is 0.65%, I calculate that BBT is trading at a normalized P/E of less than 7. Am I way off base here?
I look forward to your comments.
"From my perspective, I do not care about BBT's short-term issues as long as they do not lead to shareholder dilution or an erosion of their long-term competitive advantages. Is it correct to say that all of the bad stuff you mention -- large inflow of nonaccrual loans, marking down of OREOs etc -- have little long-term impact?"
Correct. Probably 2 more qtrs. of pain and then I think loan losses will start to revert to their average pre-bubble.
"What do you consider BBT's long-term advantages over the rest of the industry? Is it good management and a conservative culture? Are there particular parts of the business that you think they are very good at?"
Good question. Outside of making alot of adc (acquisition, development and construction) loans for raw land, bbt did not screw up nearly as badly as rf,sti, snv and many other southeastern competitiors. They got hung on the raw land probably incurring mark downs of probably 50 to 60% of principal. Bbt is well capitalized, got a great insurance biz which eventually will increase non-interest income to offset non-interest expense, nice net interest margin (nim) of 3.83 without colonial or 4.09% with colonial,and has been gaining loan and deposit market share. At loan losses of 1.5% annualized, bbt should make about $3.00 share. If loan losses drop to level pre-bubble, bbt eps should be about $4. Alot of opportunties going forward - great loan and nim growth because securitization market has been permanently altered plus m&a. I think their culture has driven much of the above.
adc portfolio........what does this stand for? Sorry, I'm not in the banking profession.
oreo......I guess is other real estate owned.
What is nim?
Very good post if only I knew what the hell you were talking about!
nim = net interest margin
Whew! I guess that you have to start somewhere. ;) Dollarsearch, you may want to hold off investing in individual stocks for the time being. Good luck!
I did not hear anything from Kelly King that would translate to higher earnings over the next one or two quarters. He has said before that he wants to keep the dividend at 40 to 60% of earnings. If they earn 30 cents for each of the next two quarters then 50% of that keeps the dividend at 15 cents. Course he can do anything with reserves to lower or raise earnings.
Dividend increase imo probably one nickel per qtr. King wants to save equity for acquisitions. He said on cc modest dividend increase.
$3 billion of deposits at 450 bsp annually is $135 million in net interest income. At $100k per employee, breakeven is about 1350 employees. My guess is bbt has maybe 100 to 150 employees dedicated to this project. Other benefits besides deposits like new loans and fee income.
This is a page from wfc playbook.
Analyst community does not understand commercial and residential adc wind down. 1 to 2 qtrs to go and most of the bad stuff should be cleaned up. This is obvious from q&a sessions.
King screwed up again and did not specifically talk about adc is close to bottom of barrel and once it's purged watch out. He needs to take lessons from Jamie Dimon.
As usual, good comments. I think that the best number for the quarter was the 4% revenue increase. Have not yet added to my position. Am waiting for a small correction in the Dow. Might not come but we are up a ton over the past 6 weeks.