Norm has given us an excellent analysis of the BBT credit situation (thank you Norm). I wish to continue the discussion by looking at the underlying earnings after stripping out the expenses due to the credit crisis. The following table looks at how much the credit crisis has cost BBT. The key to this analysis is the assumption as to what “normal” expenses are. I agree with Norm’s assessment of 100 basis points for loans, which results in approximately $1 billion per year, and that will grow with the loan portfolio. Additionally, foreclosure expenses and professional fees are negatively impacted by the crisis (think of all those properties to rehab and lawyers they have to pay). I compute “normal” foreclosure and professional fees as the costs incurred in 2007, plus 15% for the Colonial acquisition plus 2% annual inflation. The result of normal expenses and a comparison to actual expenses are below. BB&T Selected Financial Results Calculation of Credit Crisis Costs $ Millions, except shares (in millions) and EPS
YE 12/31/08 YE 12/31/09 YE 12/31/10 "Normalized" expenses Loan loss provision¹ ..................1,000 1,020 1,040 Foreclosure expenses² . 36 36 37 Professional fees² ....................160 163 166 . Total 1,196 1,219 1,244
Actual expenses Loan loss provision ..................1,445 2,811 2,638 Foreclosure expenses .....................79 356 747 Professional fees ....................204 262 334 Total ...........1,728 3,429 3,719
¹ Approximately 1% of total loans ² YE 12/31/07 Amounts, increased 15% for Colonial acquisition, 2% inflation after 2008 The end result is a cost of $.5 billion in 2008, $2.2 billion in 2009, and $2.5 billion in 2010. The 2010 quarterly pattern is $.514 b, $.665 b, $.710 b, and .586 b from Q1 to Q4 progressively. In my next post, I will convert this to an underlying earnings power.
In this analysis, I have tried to take the results of the previous analysis and convert it to an underlying earnings power. To make results comparable, I have assume the same number of shares outstanding throughout the three years (this is not factually correct, but it makes the computations comparable for trend purposes). In addition to eliminating the recessions expenses (see previous post), I have eliminated merger costs and securities gains and losses. The marginal tax rate is assumed to be 25%. The result is below.
YE 12/31/08 YE 12/31/09 YE 12/31/10 Shares outstanding³ 701.5 701.5 701.5
³ Hold shares outstanding at Q3 2010 levels for prior periods for comparison purposes
The conclusion is that BBT’s earnings are remarkably consistent in the last two years, and quite a bit higher than 2008. I attribute this to the Colonial acquisition.
If you accept the calculations, and apply a normalized P/E ratio of 12, then BBT stock price should top out at about $40 per share ($3.30 X 12 = $39.60) Additionally, this supports a quarterly dividend of approximately $.25 at 30% (the Fed guideline) or $.41 at 50%, BBT’s stated target. It will take some time to get there. Some conclusions from these posts will be next.
I have several observations and conclusions from the analysis shown on the two previous posts (I apologize for the formatting – I wish we could attach Excel spreadsheets to posts).
Observations: - BBT in its present form will top out at about $40 per share - Credit crisis expenses remain stubbornly high, although they showed decline in the fourth quarter, 2010 - Loan loss provisions are the most discussed losses, but foreclosure costs and professional fees are also high – these costs will remain elevated for some time due to the lengthy time involved in disposing of properties - Income in 2010 was artificially propped up by securities gains – approximately 60% of earnings came from this source - Securities gains in the fourth quarter were about 35% of the previous two quarters, reflecting rising interest rates and reduced pool of securities to sell - Securities gains are unlikely to be available in the future to a large degree Conclusions - Improvement in earnings will be slowed by the absence of securities gains - The underlying earnings power can be improved only through growth, which seems to be occurring - Acquisitions can help if accretive, but are probably not a panacea. Colonial acquisitions are rare, and probably will not be repeated for many years - The securities gains were achieved by selling higher yielding assets and replacing them with low yields, narrowing net interest margins, but protecting the bank from rising interest rates by purchasing variable rate instruments - Higher interest rates will actually be positive for banks in general, and BBT in particular as they raise rates faster than the underlying interest costs due to the much higher ratio of non interest bearing deposits. My forecast for BBT is a year end 2011 price of $33 – 37, a dividend of $.22 quarterly after two increases ($.03 in Q1, $.05 in Q4 or Q1 2012). Not as bullish as some posters here, but certainly not shabby either. By the way, my forecast for Q1 net income is $.36 to $.38. I know there are some posts saying $.65, but that does not reflect the continued pain of the credit crisis and the absence of securities gains. BBT is an excellent investment, but requires patience IMO.