STT State Street Corporation

BB&T Corp.’s (BBT) fourth-quarter 2011 earnings of 55 cents per share were marginally ahead of the Zacks Consensus Estimate of 52 cents. This also compares favorably with the prior quarter earnings of 52 cents and the prior-year earnings of 30 cents.

For the full year 2011, earnings came in at $1.83 per share, beating the Zacks Consensus Estimate of $1.80. The company reported earnings of $1.16 in the previous year.

Better-than-expected quarterly results benefited from higher revenue and lower provision for covered loans. 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. However, a substantial rise in non-interest expenses was the dampener.

Net income available to common shareholders for the quarter was $391 million, up 88% from $208 million reported in the prior-year quarter. For fiscal 2011, net income available to common shareholders stood at $1.3 billion compared with $816 million in the prior year.

Quarter in Detail

BB&T reported fourth-quarter revenue of $2.41 billion, up 12.5% sequentially and 3.3% year over year. The improvement in revenue was primarily due to higher net interest income, partially offset by lower non-interest income. Total revenue also beat the Zacks Consensus Estimate of $2.18 billion.

Total revenue for the full year 2011 was $8.77 billion, down 6.9% from $9.41 billion in the previous year. However, the full year revenue came in better than the Zacks Consensus Estimate of $8.52 billion.

Tax-equivalent net interest income grew 2.4% sequentially and 8.8% year over year to $1.49 billion. The year-over-year increase was due primarily to lower deposit and borrowing costs and a more favorable funding mix. However, net interest margin fell from 4.09% in the prior quarter and 4.04% in the previous year quarter to 4.02% in the fourth quarter.

BB&T’s non-interest income increased 33.6% sequentially but declined 4.4% year over year to $922 million. The decline was mainly the result of lower checkcard fees, decline in investment banking and brokerage fees and commissions and inferior net FDIC loss share income. 

Non-interest expense at BB&T surged 14.2% from the prior quarter and 13.9% year over year to $1.62 billion. The year-over-year increase was mainly led by higher foreclosed property expense and loan processing expenses. Also, there were $16 million as merger-related and restructuring charges during the quarter compared with $4 million in the year-ago quarter.

BB&T’s efficiency ratio improved to 53.5% from 54.6% in the prior quarter and 55.3% in the prior-year quarter. The decrease in efficiency ratio indicates improvement in profitability.

Credit Quality

BB&T’s credit quality continued to show improvements. As of December 31, 2011, total nonperforming assets (NPAs) declined 17.5% sequentially to $2.5 billion due to a $408 million decline in foreclosed property.

This marks the seventh consecutive quarterly decline in NPAs. As a percentage of total assets, NPAs came in at 1.45%, down from 1.83% as of September 30, 2011 and 2.64% as of December 31, 2010.

The provision for credit losses, excluding covered loans, fell 59% from the year-ago quarter, as improving credit quality resulted in lower provision expense. Net charge-offs (NCOs) were 1.46% of average loans and leases compared with 1.44% in the prior quarter and 2.15% in the year-ago quarter.

Profitability Ratios

Profitability metrics improved during the quarter. As of December 31, 2011, return on average assets stood at 0.93% compared with 0.89% reported in the prior quarter and 0.54% reported in the prior-year quarter. Similarly, return on average common equity was reported at 8.76%, versus 8.30% in the prior quarter and 4.88% in the prior-year quarter.

Capital Ratios

BB&T's capital levels have remained strong during the year. As of December 31, 2011, the Tier 1 risk-based capital ratio and tangible common equity ratio were 12.4% and 6.9% respectively, compared with 12.6% and 7.1% as of September 30, 2011.

BB&T's Tier 1 common capital ratio under the currently proposed Basel III capital standards was estimated to be 8.8% at December 31, 2011 unchanged with September 30, 2011 ratio.

Acquisition Announced in the Quarter

In November 2011, BB&T announced its plan to acquire BankAtlantic, the wholly owned subsidiary of BankAtlantic Bancorp Inc. (BBX). Under the terms of the deal, the company will acquire $2.1 billion in loans and roughly $3.3 billion in deposits (90% core and low-cost funds) for $301 million premium, representing 9.05% of the deposits at BankAtlantic on September 30, plus the net asset value of the bank. The agreement excludes BankAtlantic's nonperforming and other criticized assets.

Upon the closure, the deal will be accretive to BB&T’s earnings per share in 2012 excluding one-time acquisition expenses. The transaction will allow the company to speed up its expansion strategy in Florida region, by adding 78 branches to BB&T’s 64 branch network in Florida region.

Performance of Peers

Among BB&T’s peers, the fourth-quarter earnings for bothState Street Corp. (STT) and The Bank of New York Mellon Corp. (BK) were below the Zacks Consensus Estimate. Though there was improvement in net interest revenue and continued decline in operating expenses, the earnings for both the companies’ were dragged down by lower non-interest revenue.

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 construction and other real estate loan balances.

However, the company has a wide exposure to problem assets. Moreover, the current protracted economic recovery and various regulatory issues are making 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. Moreover, considering the fundamentals, we are maintaining our long-term Neutral recommendation on the shares.

 
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