Hold BB&T Ahead of Earnings

TheStreet.com

NEW YORK (TheStreet) -- The last time we discussed the prospects of BB&T , I raised concerns about (among other things) the bank's weakness in pre-provision net revenue (PPNR), which is equivalent to "operating income" in other sectors.

Although management has a solid reputation and had been working hard to streamline the business, the April quarter revealed a 8% year-over-year decline in PPNR, which was magnified due to weaker-than-expected cost-cutting measures. What's more, for BB&T the April quarter also revealed signs of struggle in residential and commercial lending.

This weakness in lending prolonged a performance issue that began late last year. Despite the fact that operating revenue grew 4% year over year, revenue was down sequentially, which also impacted profitability. I didn't want to blow these result too far out of context, though.

Given that the entire sector posted these same struggles, including Wells Fargo and Bank of America , I was more than willing to give BB&T the benefit of the doubt. But it never did escape my mind that the PPNR result was the worst performance among all of the major banks.

On July 18, BB&T will have an opportunity to reverse these trends when the bank reports results for the second quarter. The analyst consensus calls for earnings per share of 74 cents on revenue of $2.4 billion. Essentially, the Street expects revenue to arrive flat-to-down by as much as 40 basis points.

But this contradicts the optimism that management has recently demonstrated when speaking at the Morgan Stanley Financial Conference last month. Kelly King, the bank's CEO, talked about better-than-expected production the bank has seen in the April and May. This is while he also suggested that the month of June might be stronger.

With that in mind, it's tough for me to expect an underperformance in revenue when the bank reports second-quarter results. I believe investors should expect revenue growth of at least 3.5% and slightly above.

It's also encouraging that the bank has shown a willingness to take some chances on various growth opportunities, including its acquisition of BankAtlantic last year. In other words, with continued synergistic improvements, the bank should be able to realize improved capital expense reductions as the year progresses.

If there are any concerns about BB&T, it's with the company's stress test known as CCAR, or comprehensive capital analysis review. This is the test conducted by the Federal Reserve, which is used to ensure that financial institutions have adequate capital planning to prevent the sort of "too big to fail" situations that impacted the American taxpayer at the height of the credit crisis.

Surprisingly, BB&T failed its last evaluation despite demonstrating arguably the best capital ratio within the sector. At the recent conference last month, management announced to shareholders that the bank had resubmitted its CCAR for review.

I don't anticipate there will be a problem this time considering the bank recently raised its dividend by 15%. The bank would not have enacted a dividend hike if capital and/or liquidity were a concern.

With that in mind, while I'm inclined to believe the bank still has a solid operation, I'm not convinced the stock has much more upside potential from current levels. Before buying, I would wait to hear what management says about results of the CCAR. That, along with improved results in commercial and residential lending, should offer better near-term clarity.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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