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.

Related Articles
  1. Investing Basics

    Industry Handbook

    In this feature, we take an in-depth look at the various techniques that determine the value and investment quality of companies from an industry perspective.
  2. Fundamental Analysis

    How To Decode A Company's Earnings Reports

    Read between the lines to decipher a company's true financial condition.
  3. Fundamental Analysis

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  4. Bonds & Fixed Income

    Equity Valuation In Good Times And Bad

    Learn how to filter out the noise of the market place in order to find a solid way of determing a company's value.
  5. Markets

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
  6. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  7. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  8. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  9. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  10. Stock Analysis

    Tech Stocks Vs. Financial Stocks in 2016

    Consider the arguments for allocating more of your investment portfolio to either the technology sector or the financial sector for 2016.
  1. How can insurance companies find out about DUIs and DWIs?

    An insurance company can find out about driving under the influence (DUI) or driving while intoxicated (DWI) charges against ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
Trading Center