STT State Street Corporation

BB&T Corp.’s (BBT) second quarter 2011 earnings came in at 44 cents per share, a penny ahead of the Zacks Consensus Estimate. This also compares favorably with the prior quarter earnings of 32 cents and prior-year quarter’s earnings of 30 cents.

Net income available to common shareholders for the second quarter was $307 million, up 36.4% from $225 million reported in the previous quarter and up 46.2% from $210 million recorded in year over year period.

BB&T reported second quarter revenue of $2.18 billion, up 4.0% sequentially but down 10.4% from the year-ago quarter. The increase was mainly driven by lower funding costs, stronger insurance commissions and lower losses from problem loan sales. Total revenue also surpassed the Zacks Consensus Estimate of $2.15 billion.

BB&T’s results reflected higher revenue and growth in both net interest and non-interest income. The quarter also witnessed improved credit quality, enhanced capital ratios and lower provision expenses. However, higher non-interest expenses slightly dampened the results.

Furthermore, 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) surged 5.2% from the prior quarter but slipped 0.1% from the prior-year quarter to $1.4 billion in the reported quarter. However, net interest margin in the second quarter stood at 4.15%, up 14 basis points (bps) sequentially and 3 bps year over year. Higher yields on loans acquired in the Colonial acquisition and lower funding costs accounted for this expansion.

Non-interest income followed the same path as NII, increasing 10.2% from the prior quarter but declining 24.3% year over year to $787 million in the quarter. The sequential rise was primarily attributable to $49 million increase insurance premium and $47 million decline in losses and write-downs on commercial loans held for sale, which were offset partly by a drop of $23 million related to FDIC loss share asset.

Non-interest expense at BB&T surged 1.7% from the prior quarter but retreated 7.0% year over year to $1.39 billion. The decrease was mainly led by a drop in foreclosed property costs, occupancy and equipment expense, amortization of intangibles as well as merger-related and restructuring charges. However, these were partially offset by higher personnel expense, regulatory charges, and loan processing expenses.

BB&T’s efficiency ratio stood at 55.8%, marking a decline from 57.1% in the previous quarter and 53.7% in the previous-year quarter. The decrease in efficiency ratio indicates improvement in profitability.

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 $675 million in problem assets during the reported quarter.

As of June 30, 2011, total nonperforming assets (NPAs) declined 13.2% sequentially and stood at $3.4 billion. This marks the fifth consecutive quarterly decline in NPAs. NPAs as a percentage of total assets came in at 2.18%, down from 2.56% as of March 31, 2011 and 2.93% as of June 30, 2010.

Provision for credit losses was $328 million, down 49.5% sequentially and 3.5% year over year.

Net charge-offs (NCOs) were 1.80% of average loans and leases, up from 1.65% in the prior quarter but down from 2.66% in the year-ago quarter. The reduction in NCOs reflected improvement in the loan portfolio and a lower level of problem assets.

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. As of June 30, 2011, return on average assets stood at 0.83% compared with 0.60% reported in the prior quarter and 0.56% reported in the prior-year quarter. Similarly, return on average equity was reported at 7.25%, versus 5.48% in the prior quarter and 5.01% in the prior-year quarter.

Book value per share was $24.37, up from $23.86 in the prior quarter and $24.07 reported in the year-ago quarter.

As of June 30, 2011, the Tier 1 risk-based capital ratio and Tier 1 common equity to risk-weighted assets ratio were 12.3% and 9.5% respectively, up from 12.1% and 9.3% as of March 31, 2011. BB&T’s risk-based capital ratios remained significantly above the regulatory standards of well-capitalized banks.

Guidance

BB&T expects NIM to remain in the range of 4.05% to 4.10% through the remainder of 2011 and anticipates it to benefit from a favorable funding mix, lower cost of funds and wider credit spreads.

Peer Performance

Quite like BB&T, one of its close competitors, The Bank of New York Mellon Corporation’s (BK) second-quarter earnings of 59 cents per share came in 3 cents ahead of the Zacks Consensus Estimate. Increased fee revenue, wiped out provision for credit losses and improved capital ratios despite dividend increase and stock repurchases were also among the positives. However, higher non-interest expenses were the downside.

However, another peer, State Street Corporation’s (STT) second quarter operating earnings of 96 cents per share were a penny behind the Zacks Consensus Estimate. Results in the quarter primarily benefited from the continuous rise in operating revenues, which were offset partly by higher operating expenses. The company’s capital ratios also continued to show improvement.

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 the company reporting an increase in average commercial and industrial loans and a decrease in its construction and other real estate loan balances.

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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