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BB&T's Revenues Aided by Loan Growth, Rising Costs a Woe

Zacks Equity Research

BB&T Corporation’s BBT prospects look promising driven by impressive loan growth, potential lesser regulations and higher interest rates. Yet, constant increase in operating expenses remains a major concern.

BB&T’s organic growth strategy is impressive, given the continued rise in loan balance. The company witnessed rise in loans and leases at a five-year CAGR of 5.2% (2012–2016). Management expects loan balance to improve further, driven by economic growth and rise in demand for loans. Also, the passage of the Financial Choice Act is expected to strengthen lending activities. All these should support the company’s revenue growth.

Further, with higher interest rates (the Federal Reserve hiked rates thrice in last six months), the pressure on net interest margin (NIM) seems to be easing for BB&T. In the second quarter 2017, the company projects core NIM to increase 2–4 basis points on a sequential basis, mainly attributable to Fed rate hike in Mar 2017.

Also, BB&T along with other 33 major banks including JPMorgan Chase & Co. JPM, Bank of America Corporation BAC, KeyCorp KEY cleared this year’s stress test. This reflects continued strengthening of the company’s balance sheet position. Now, a dividend hike and a rise in share buyback authorization seem to be in the offing.

However, continuously rising operating expenses remains a big concern for BB&T. The primary reason for the rise is an increase in merger-related costs. As the company’s key focus is to increase revenues from insurance operations through opportunistic acquisitions, expenses are bound to rise in the quarters ahead.

Also, the company is making investments in artificial intelligence and robotics to improve operating efficiency. But these efforts are expected to lead to higher expenses in the near term.

While BB&T is witnessing loan growth, increased exposure to commercial, direct retail lending and residential mortgage loan portfolios poses a risk. Any deterioration in the macro-economic conditions could hurt the company’s financials.

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