STT State Street Corporation

BB&T Corporation’s (BBT) first quarter 2011 earnings came in at 32 cents per share, surpassing the Zacks Consensus Estimate by a penny as well as improving from the prior-year quarter’s earnings of 27 cents.

BB&T’s results reflected higher net interest margin and lower non-interest expenses. The quarter witnessed improved credit quality, enhanced capital ratios and lower provision expenses. However, a decline in the top line slightly dampened the results.

The GAAP net income available to common shareholders for the first quarter was $225 million, up 19.7% from $188 million reported in the comparable period last year.

BB&T reported first quarter revenue of $2.0 billion, down 7.1% from the year-ago quarter, driven by lower interest income and fee revenue. Total revenue also missed the Zacks Consensus Estimate of $2.2 billion.

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 decreasing its construction and other real estate loan balances.

Quarter in Detail

Tax-equivalent net interest income (NII) slipped 1.9% from the prior-year quarter to $1.3 billion in the reported quarter. The fall mainly resulted from a drop in average earnings assets, which was partly mitigated by higher net interest margin (NIM).

However, NIM in the first quarter stood at 4.01%, up 13 basis points from 3.88% reported in the prior-year quarter. Higher yields on loans acquired in the Colonial acquisition and lower deposit costs accounted for this expansion.

Non-interest income also followed the same path as NII declined 15.4% year over year to $714 million in the quarter. The decline was primarily caused by $74 million of losses and write-downs on commercial loans held for sale and $63 million related to FDIC loss share asset.

Non-interest expense at BB&T descended 2.3% year over year to $1.37 billion. The decrease was mainly led by a drop in foreclosed property costs, amortization of intangibles as well as merger-related and restructuring charges. However, these were partially offset by higher personnel expense, occupancy and equipment expense, regulatory charges, and loan processing expenses.

Credit Quality

BB&T’s credit quality continued to show a sequential improvement. BB&T's strategic efforts to improve the overall credit outlook were encouraging, with the company selling off approximately $500 million in problem assets during the reported quarter.

As of March 31, 2011, total nonperforming assets (NPAs) declined 2.7% sequentially and stood at $3.9 billion. This marks the fourth consecutive quarterly decline in NPAs. NPAs as a percentage of total assets came in at 2.69%, down from 2.73% as of December 31, 2010 and 2.79% as of March 31, 2010.

Provision for credit losses was $340 million, down 47.1% sequentially and 40.9% year over year.

Net charge-offs (NCOs) were 1.56% of average loans and leases, down from 2.02% in the prior quarter and 1.84% in the year-ago quarter. NCOs dropped in all loan portfolios, with the bulk of the drop in the commercial portfolio.

Overall, with improved nonperforming assets level and loan delinquencies, the quality of the loan portfolios is improving, and we find the upbeat outlook on future credit losses encouraging.

Profitability and Capital Ratios

Profitability metrics improved during the quarter. Return on average assets stood at 0.60%, against 0.54% reported in the prior quarter and 0.48% reported in the prior-year quarter. Meanwhile, return on average equity was reported at 5.48%, versus 4.88% in the prior quarter and 4.59% in the prior-year quarter.

Book value per share was $23.86, up from $23.67 in the prior quarter and $23.80 reported in the year-ago quarter.

At March 31, 2011, the Tier 1 risk-based capital ratio and Tier 1 common equity to risk-weighted assets ratio were 12.1% and 9.3% respectively, up from 11.8% and 9.1% as of December 31, 2010. BB&T’s risk-based capital ratios remained significantly above the regulatory standards of well-capitalized banks.

Competitors’ Performance

Quite like BB&T, State Street Corporation’s (STT) first quarter 2011 operating earnings of 88 cents per share were also ahead of the Zacks Consensus Estimate of 85 cents. Results in the quarter were aided primarily by growth in operating revenues and higher net interest margin, which were offset partly by higher operating expenses.

However, another peer, The Bank of New York Mellon Corporation (BK) reported first quarter earnings from continuing operations of 50 cents per share, which came in 7 cents below the Zacks Consensus Estimate. Though increased fee revenue wiped out provision for credit losses and rapidly growing capital were also among the positives, lower net interest revenue and higher non-interest expenses were the downsides.

Our Take

The growth story at BB&T is impressive following its organic expansion as well as acquisitions. Efforts to reduce its credit risk and diversifying its loan portfolio also look promising.

However, the company still has significant exposure to problem assets. Moreover, considering the current challenges related to the housing market, we believe that substantial development remains elusive on this front. In addition, we would like to see a significant top-line improvement before becoming extremely positive on the stock.

BB&T currently retains a Zacks # 3 Rank, which translates into a short-term ‘Hold’ rating. Furthermore, considering the fundamentals, we are maintaining our long-term “Neutral” recommendation on the shares.

 
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