Mediocre Performance Clouding BB&T's Long-Term Value

By Stephen D. Simpson, CFA | Updated May 10, 2013 AAA

The management of BB&T (NYSE:BBT) once enjoyed a pretty sterling reputation for their performance, but a variety of missteps seem to be accumulating. Couple that with “industry standard” mediocre performance, and I can understand why BB&T shares have gone almost nowhere over the past year and are, in fact, one of the worst performers of the peer group. For investors willing to play the long game, though, I do believe that meaningful value remains in these shares at today's price.

SEE: Equity Valuation In Good Times And Bad

Sluggish First Quarter Results
BB&T reported operating revenue growth of 4% for the first quarter, with revenue down 5% on a sequential basis. Net interest income was weak, falling 1% and 4% respectively, but not all that different than what U.S. Bancorp (NYSE:USB) and Wells Fargo (NYSE:WFC) reported earlier. BB&T did see comparatively low earning asset growth, while the net interest margin erosion (down 17bp from last year) wasn't too bad and the company's absolute NIM still compares favorably at 3.76%.

Fee income rose 11% and fell 7% (on an adjusted basis), as the company's mortgage banking revenue was even weaker than expected. Service charge income was also soft, while insurance was better than expected with 1% sequential growth.

Given the performance of U.S. Bancorp and PNC Financial (NYSE:PNC) in cutting costs this quarter, I was a little disappointing with BB&T's on-target performance (down 3% sequentially). All the same pre-provision net revenue did fall 8% (adjusted), the worst in the peer growth that have reported so far.

SEE: Analyzing A Bank’s Financial Statements

Loans – No Growth Today, But Growth Tomorrow?
BB&T's lending activity was pretty sluggish this quarter, as has been the case for most banks. Lending was pretty much flat with the fourth quarter on an end-of-period basis, with weakness in commercial and residential mortgage lending. On a more positive note, management did say that March was the best month in company history of loan originations, and they were more optimistic about lending growth through the balance of the year.

It's also worth mentioning that BB&T reported somewhat mixed credit metrics. The company's non-performing asset and net charge-off ratios are good, and continuing to improve, but the company's loan loss provision expense was not as good as we've seen from many other banks this quarter.

Do A Series Of Small Matters Add Up?
One of my concerns about BB&T is whether the company loses what has generally been a very strong reputation on the Street as a well-run bank. Over the last year or so there have been a string of slip-ups that were not all that problematic on an individual basis, and perhaps not fully in management's control, but nevertheless may be adding up in terms of sentiment.

The bank had to redo its merger with BankAtlantic because of how the company initially wanted to treat BankAtlantic's trust preferred shareholders. Then the company failed its recent CCAR evaluation despite having some of the strongest capital ratios in the group. Then there are other matters like the company's tax squabble with the IRS (the source of a large reported EPS adjustment this quarter). I could go on, but the point is that this is a stock where shareholders would certainly like to hear (and arguably need) a string of positive announcements as a change of pace.

SEE: Why Consumer Confidence Matters

The Bottom Line
I remain quite positive on BB&T shares, though I have to acknowledge that my view of the company's long-run profitability (as measured by return on equity) is more bullish than most sell-side analysts. I'm looking for a long-term ROE of 12%, and that supports a fair value of about $39 today. Go with a more Street consensus number of 10% and the target drops to about $32 – which, I'll note, is still above today's level.

With strong capital, good deposit share, and a management that seems to successfully manage “prudent aggression”, I think BB&T is a good bank stock to hold for the long term. I fully expect M&A to figure significantly in the company's future, and I do believe that it will work out its CCAR issues. I also believe, though, that the bank is facing more competition than ever before, with banks like Wells Fargo, PNC, and Fifth Third (Nasdaq:FITB) all directly targeting its core Southeast operating area. While I believe the stock's positives outweigh those challenges, investors shouldn't be fooled into thinking this is a “money for nothing” type of opportunity.

At the time of writing, Stephen D. Simpson owned shares of BB&T.

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