Most analysts are now saying that banks cannot move earnings up with interest rates at current level. Fed just announced that rates will be held down the next three years (through 2014). Any estimates how much BB&T can earn if rates remain low?
Here's the bank's problem I think. I took a home loan in 1974 at 7 1/4%. By 1980 the prime was in the teens. My lender was in deep trouble I believe because I received numerous offers to buy out my loan at a significant discount. What happens with loans that banks are currently making at very low interest rates WHEN inflation returns? I believe that's the big reason that the banks are taking very low fed funds returns on the tons of cash that they are holding. Comments??
Interest rates increased precipitously from 1974 to 1980, one of the results of Johnson's "guns and butter" policies. Remember the war on poverty? Viet Nam?
Buying out your mortgage at a discount would be swapping low return (for the bank) mortgage for a higher return, providing they calculate the amount of discount accurately.
The "other side" of the bank's improved portfolio would have been that you would have to refinance in that period of much higher interest rates.
Your 7.25% rate in 1974 was already high in historical perspective, but the best I could obtain in early 1978 was 8.875%. That looked high but I could see what was coming, and I was buying into an area that would appreciate strongly above and beyond inflation so it was worth it.
Banks can make earnings at current interest rate levels...they pay nothing to their depositors as short term rates are zero (they actually turn a liability into an asset by charging fees to warehouse depositors' money), they get paid interst on reserves held at the fed, and their marginal cost of borrowing is zero, thanks to fed policy. To say banks cannot make money in such an environment is nonsense...they just have to compete, put the cash they have to work, and take market share. And they have to quit hiding behind the standard drivel about "we have a ton of capital but can only lend to qualified borrowers." Their credit depts have to change the defintion of "qualified borrower."
Higher rates will kill any recovery, kill the banking sector, further reduce the pool of "qualified borrowers" (i.e. if you cannot qualify for a loan when rates are zero, how will you qualify when rates go up 300bs?). Plus, in a rising rate environment, banks have to pay more for depositors' accounts, and the banks' cost of borrowing goes up too. There is no free lunch right now. Its all abou tthe credit spread...banks like BB&T whine about rates, but if they want a CRE loan at 6%, they are basically getting a +550 spread on that loan...that is crazy. Spreads should be at historic levels of 200-300 bps. A commerical mortgage should cost no more than swaps + 300, or 4%. Home mortgages should be even less. The banks say they cannot make money at those levels, but if they just take market share, they can.
This lies at the heart of fed policy. You give the banks free tax payer capital, keep interest rates at zero, make it easy to fund a bank, and then watch them make loans as the catalyst to revamp the economy. The banks have not done theit part...because they want more collateral, more spread, more freebies, more fees, etc. And they can get away wit this because the fed baile dout the entire industry at tax payer expense.
It would be interesting to take the supports out from under these lenders which would force them to either fail or start putting their capital to work.
The best path for BB&T, or any bank right now, is to lend lend lend. Take market share. Lower the credit hurdle.
If you're so unhappy with Kelly King and the BOD, go to the next annual meeting in April and voice your discontent.
I'm satisfied with the bank's financial performance. Imo, patience investors are likely to realize nice financial gains. I do think King's pay package is on the high side but it's not an issue with me as long as the bank earns 15% roe.
"Grow up Norm"
If you disagree with management, you have 2 choices - sell your shares or become an active shareholder seeking change. Even if you are a small shareholder, change is not impossible.
I don't understand the "beef" some of the folks have here with bbt management. Last qtr. results were very good and I think bank has a good change of achieving 15% roe in 2012.
Something is bad wrong with the system. We have owners (stock holders), mgt and labor.
Mgt, CEO, get humongeous raise, labor gets moderate raise and the owners get nothing, no dividend increase.
This tells me there is a major flaw in the share the wealth system when the owners are at the bottom of the profit ladder.
I always thought the owners were first, not last.