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BB&T Beats on Improved Revenue

Zacks Equity Research

BB&T Corp.’s (BBT) second-quarter 2012 earnings of 72 cents per share exceeded the Zacks Consensus Estimate by three cents. In addition, the reported earnings also significantly outpaced the prior-year quarter’s earnings of 44 cents.

Results benefited from growth in top line and lower provision for credit losses. The quarter also witnessed improved credit quality and enhanced capital and profitability ratios. Moreover, accelerating growth in loans and low-cost deposits were also impressive. Nevertheless, higher non-interest expenses were the headwind.

Net income available to common shareholders was $510 million, jumping 66.1% from $307 million reported in the prior-year quarter.

Performance in Details

BB&T reported second quarter total revenue of $2.47 billion, up 13.3% year over year. Total revenue also surpassed the Zacks Consensus Estimate of $2.41 billion.

Tax-equivalent net interest income grew 7.9% year over year to $1.50 billion. The increase was attributable to lower funding costs and a rise in earnings assets. However, net interest margin fell 20 basis points on the year-over-year basis to 3.95% in the reported quarter.

Non-interest income climbed 22.7% year over year to $966 million. The surge was mainly buoyed by higher mortgage banking income and insurance income, partially offset by lower checkcard fees.

Non-interest expense inched up 2.2% year over year to $1.42 billion. The rise was mainly attributable to higher personnel expenses, loan processing expenses, professional services and amortization of intangibles. Also, there were merger-related and restructuring charges of $2 million, during the quarter.

BB&T’s efficiency ratio improved to 53.9% from 55.8% in the prior-year quarter. The decrease in efficiency ratio indicates an improvement in profitability.

Average deposits for the reported quarter accelerated 17.7% year over year to $125.3 billion. Similarly, average loans held for investment stood at $109.2 billion, up 6.3% year over year.

Credit Quality

BB&T’s credit quality continued to show improvements during the reported quarter. As of June 30, 2012, total nonperforming assets (NPAs) declined 15.9% sequentially and 43.4% year over year to $1.90 billion due to decreases in nonperforming loans and foreclosed real estate.

This marks the ninth consecutive quarterly decline in NPAs. As a percentage of total assets, NPAs came in at 1.09%, down 24 bps sequentially and 109 bps year over year.

The provision for credit losses fell 3.2% from the prior quarter and 16.8% from the year-ago quarter to $273 million. Similarly, net charge-offs were 1.22% of average loans and leases, down 6 bps from the prior quarter and 58 bps from the year-ago quarter.

Further, the allowance for loan and lease losses was 1.86% of total loans and leases held for investment, excluding covered loans, down from 1.97% as of March 31, 2012, and 2.41% as of June 30, 2011. The decrease was primarily driven by improvement in the overall quality of the loan portfolio.

Profitability Ratios

Profitability metrics showed an improvement during the quarter. As of June 30, 2012, return on average assets stood at 1.22% compared with 1.03% in the prior quarter and 0.83% in the prior-year quarter. Similarly, return on average common equity improved to 11.21% in the reported quarter from 9.75% in the prior quarter and 7.25% in the prior-year quarter.

Capital Ratios

BB&T's capital levels have remained strong during the quarter. As of June 30, 2012, the Tier 1 risk-based capital ratio and tangible common equity ratio were 10.2% and 6.9% respectively, compared with 12.8% and 7.1% as of March 31, 2012 and 12.4% and 7.2% as of June 30, 2011. The declines in the above-mentioned ratios were primarily due to the acquisition of Crump Insurance.

BB&T's Tier 1 common capital ratio, under the currently proposed Basel III capital standards, was 8.2% as of June 30, 2012 against 9.2% as of March 31, 2012.

Acquisition during the Quarter

In April, BB&T announced the accomplishment of the purchase of Crump Group Inc.’s insurance business for $570 million in cash. The company, in particular, acquired the life and property and casualty insurance operating units of Crump. The acquisition is projected to be accretive to the company’s earnings. It is anticipated to enhance BB&T’s insurance annual revenue by approximately $300 million.

Performance of Peers

The second quarter earnings of State Street Corp. (STT) were marginally ahead of the Zacks Consensus Estimate. The improvement came on the back of enhanced net interest revenue and reduced operating expenses. The capital ratios also remained strong in the quarter. However, lower fee revenue was the primary headwind.

Likewise, The Bank of New York Mellon Corp.’s (BK) second-quarter 2012 earnings also topped the Zacks Consensus Estimate. Despite a decrease in net interest revenue and fee income, BNY Mellon’s results benefited from lower operating expenses. Moreover, asset quality continued to show improvements and capital ratios remained healthy.

Our Viewpoint

The growth story at BB&T is impressive following its organic expansion as well as acquisitions. The efforts to diversify from a concentration in real estate lending continues to progress well, with BB&T reporting an increase in average commercial and industrial loans, while reducing its other real estate loan balances.

However, BB&T has a wide exposure to problem assets. The current protracted economic recovery, continuous increase in operating expenses and various regulatory issues will make it difficult for the company to significantly improve its top line.

BB&T currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the shares.

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