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BB&T Beats Earnings on Lower Provision

Zacks Equity Research

BB&T Corp.’s (NYSE:BBT) fourth-quarter 2013 earnings per share of 75 cents beat the Zacks Consensus Estimate of 72 cents on the back lower of provision for credit losses. This was higher than 71 cents earned in the year-ago quarter.

Earnings for the quarter included one-time after-tax gain of $19 million related to the divesture of sale of a consumer lending subsidiary. There was negligible impact of this on the earnings per share.

However, for the full year 2013, BB&T recorded earnings per share of $2.19 versus $2.70 in 2012. Earnings for the year also missed the Zacks Consensus Estimate of $2.88.

In the pre-trading session, BBT’s stock price gained nearly 1.0%, reflecting a positive response among investors despite the overall negative market sentiment. However, nothing conclusive can be inferred till we observe the company’s share price movement during the trading session.

Better-than-expected results were driven by disciplined expense management and a significant decline in provision for credit losses, partially offset by a decline in the top line. Improvement in credit quality, capital ratios and profitability ratios were the other tailwinds for the quarter.

BB&T’s net income available to common shareholders was $537 million, up 6.1% from $506 million in the prior-year quarter. However, for the full year, net income came in at $1.6 billion, declining 18.5% from $1.9 billion in 2012.

Performance in Detail

Total revenue came in at $2.38 billion, down 6.0% year over year. However, it beat the Zacks Consensus Estimate of $2.36 billion.

For 2013, total revenue came in at $10.4 billion, down nearly 2.7% from $10.7 billion in 2012. However, total revenue surpassed the Zacks Consensus Estimate of 9.6 billion.

Tax-equivalent net interest income fell 7.7% year over year to $1.39 billion. The decrease was due to a fall in interest income, partially offset by lower interest expense.

Moreover, net interest margin (NIM) fell 28 basis points (bps) year over year to 3.56%. The pressure on NIM persists primarily due to lower yield on total loan portfolio and decline in interest earning assets, partially offset by a fall interest bearing liabilities.

Non-interest income declined 3.4% year over year to $985 million. The decrease was mainly due to fall in mortgage banking income, partially offset by increase in other income and Federal Deposit Insurance Corporation loss share income.

Non-interest expense declined 2.2% year over year to $1.46 billion. The fall was mainly due to a 77% decrease in foreclosed property expenses. This directly reflects that the company is strategically avoiding risky ventures and is instead focusing on conventional banking activities.

BB&T’s efficiency ratio in the reported quarter was 59.9%, up from 55.3% in the prior-year quarter. An increase in efficiency ratio indicates deterioration in profitability.

Average deposits declined 4.4% year over year to $125.9 billion. However, average loans held for investment were $114.8 billion, up 1.1% year over year.

Credit Quality

BB&T’s credit quality showed marked improvement. As of Dec 31, 2013, total non-performing assets (NPAs) declined 31.4% year over year to $1.05 billion. As a percentage of total assets, NPAs came in at 0.58%, down 27 bps year over year.

Similarly, excluding covered loans and government guaranteed loans, net charge-offs were 0.49% of average loans and leases, down 55 bps from the year-ago quarter. Further, allowance for loan and lease losses was 1.42% of total loans and leases held for investment, down from 1.70% as of Dec 31, 2012.

Moreover, provision for credit losses excluding covered loans was $60 million, down 76.2% from $252 million in the prior-year quarter.

Profitability and Capital Ratios

Profitability metrics also showed improvement in the quarter. As of Dec 31, 2013, return on average assets was 1.31%, against 1.20% at the prior-year quarter end. Moreover, return on average common equity increased to 10.85% from 10.51% as of Dec 31, 2012.

BB&T's capital ratios were also strong. As of Dec 31, 2013, Tier 1 risk-based capital ratio and tangible common equity ratio were 11.8% and 7.3%, respectively, compared with 10.5% and 6.6%, as of Dec 31, 2012.

BB&T's common equity Tier 1 ratio, under the currently proposed Basel III capital standards, was 9.6% as of Dec 31, 2013 based on the Federal Reserve's new comprehensive capital framework for banking organizations in the U.S.

Our Viewpoint

Sluggish economic recovery, a near-zero interest rate condition and various regulatory issues will continue to limit top-line growth. Moreover, expense management will tend to be more challenging due to the company’s upcoming plan to expand in Texas.

On the flip side, BB&T's inorganic growth strategy aided by a steady capital position will expectedly bolster its financials in the forthcoming quarters.

Currently, BB&T carries a Zacks Rank #2 (Buy).

Among other major regional bank, The Bank of New York Mellon Corp. (NYSE:BK) and Comerica Inc. (NYSE:CMA) are scheduled to report their results on Jan 17, while Northern Trust Corp. (NASD:NTRS) will do so on Jan 22.

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