Down almost 3%. I did not see another bank as bad. Kelly King said that he thinks that things will be better after the election (interview on cnbc the day after 3rd quarter results were reported). I certainly hope that he knows what he is talking about.
Our View - BB&T Aggressive Credit Remediation Strategy Is The right Strategy (Note attached)
· We would be buyers of BBT at current levels based on our view that management's ongoing aggressive actions to get ahead of its credit issues positions BB&T to drive above average earnings growth while allowing management to capitalize on potential M&A opportunities coming out of this cycle.
· While we anticipate another couple of quarters of elevated credit issues, we believe credit trends will begin to look materially better during 1H11 given that inflows into watch list loans have seen steady improvement recently. Unlike many of its peers BB&T does not have to deal with TARP repayment issues, removing a major source of uncertainty for long term investors to step-in as visibility on the macro-economic outlook improves.
· We are raising our 4Q10 EPS estimate to $0.31 from $0.22 on stronger mortgage production and lower guided tax rate. We are trimming our FY11 and FY12 EPS estimates to $2.05 from $2.40 and $2.85 from $3.00 respectively driven by lower net interest income.
Despite its near term credit challenges, we believe it is important that investors not lose sight of the fact that BB&T, led by an experienced management team that has ably navigated the bank through the credit crisis (did not report a single loss making quarter), remains one of the best positioned regional banks in terms of capitalizing on organic and M&A related growth opportunities in the Southeast. The Colonial Bank acquisition, completed in Aug 2009, in addition to strengthening BB&T's position in the Southeast markets should also lead to superior growth as the economy picks up some steam over the next 6-12 months. During the earnings conference call management discussed the ongoing build-out of its corporate banking business in Houston (entered TX with the Colonial acquisition) with an emphasis on the energy industry. Additionally, BB&T's insurance business which generates about $1 billion in annual revenues and constitutes approximately 1/3rd of fee revenues has also been a steady revenue generator for the bank. BB&T now ranks as the sixth largest insurance broker in the world.
The following comment is made from 30 years of personal experience...15+ as a commercial banker through the '80s and '90s credit cycles and 14+ years on the sell side...that we continue to believe that the change in asset disposition strategy at BBT is the right strategy. Our view is that over the next couple of quarters investor confidence should increase on the charge off and reserving methodology. The company continues to add detail as to how valuation marks and loan sales are being used as well as balance sheet re-positioning to stabilize NIM and excess liquidity.
The bear story is that this change in strategy validates that BBT hasn't taken aggressive enough marks and will continue to lag peers in coming out of this cycle. In our view, it is really about timing..now or later and the market always wants immediate gratification so accelerating the recognition puts it behind BBT.
We view this action as a progressive and correct move...to better position BBT in a rapidly changing environment, taking advantage of this quarter's balance sheet repositioning and current earnings power with one of the strongest PTPP ROAs among the larger regional banks.
Net-net, two quarters into this process we believe that credit is very manageable and position BBT to capitalize on organic as well as strategic acquisition opportunities within SE/Mid-Atlantic footprint. We also believe that BBT will likely be among the first banks that the regulators allow to increase its dividend.