STT State Street Corporation

BB&T Corp.’s (BBT) third quarter 2012 earnings of 70 cents per share were in line with the Zacks Consensus Estimate. Moreover, this significantly outpaced the prior-year quarter’s earnings of 52 cents.

Results on the year-over-year basis were primarily aided by growth in revenue and almost stable provision for credit losses. Alongside, the quarter witnessed improved credit quality and enhanced capital as well as profitability ratios. Moreover, accelerating growth in loans and low-cost deposits were impressive. Nevertheless, higher operating expense was the primary dampener.

After considering pre-tax merger-related charges of $43 million related to the BankAtlantic acquisition, net income available to common shareholders was $469 million, surging 28.1% from $366 million in the prior-year quarter.

In July, BB&T announced the closure of the acquisition of BankAtlantic – the wholly-owned bank subsidiary of BankAtlantic Bancorp Inc. (BBX). Under the terms of the agreement, the company acquired $2.1 billion in loans and roughly $3.3 billion in deposits.

Performance in Details

BB&T reported third quarter total revenue of $2.48 billion, up 15.8% year over year. Moreover, total revenue surpassed the Zacks Consensus Estimate of $2.45 billion.

Tax-equivalent net interest income escalated 4.5% year over year to $1.52 billion. The increase was attributable to lower funding costs. However, net interest margin fell 15 basis points (bps) on the year-over-year basis to 3.94% in the reported quarter. The decline reflects lower yields on new loans and securities partly offset by the lower funding costs.

Non-interest income jumped 39.6% year over year to $963 million. The surge was largely buoyed by higher mortgage banking income, bankcard fees and merchant discounts and insurance income, partially offset by lower checkcard fees.

Non-interest expense increased 7.9% year over year to $1.53 billion. The rise was mainly attributable to higher personnel expenses and loan processing expenses. Also, there were merger-related and restructuring charges of $43 million during the quarter.

BB&T’s efficiency ratio stood at 55.2%, rising marginally from 54.6% in the prior-year quarter. The increase in efficiency ratio indicates deterioration in profitability.

Average deposits for the reported quarter accelerated 11.9% year over year to $128.7 billion. Similarly, average loans held for investment stood at $112.7 billion, up 8.5% year over year.

Credit Quality

BB&T’s credit quality continued to show improvements during the third quarter. As of September 30, 2012, total nonperforming assets (NPAs) declined 9.4% sequentially and 42.1% year over year to $1.72 billion due to decreases in nonperforming loans and foreclosed real estate.

This marks the tenth consecutive quarterly decline in NPAs. As a percentage of total assets, NPAs came in at 0.97%, down 12 bps sequentially and 86 bps year over year.

The provision for credit losses was $244 million compared with $259 million in the last quarter and $243 million in the prior-year quarter. Similarly, net charge-offs were 1.08% of average loans and leases, down 14 bps from the prior quarter and 36 bps from the year-ago quarter.

Further, the allowance for loan and lease losses was 1.76% of total loans and leases held for investment, excluding covered loans, down from 1.86% as of June 30, 2012, and 2.25% as of September 30, 2011. The decrease was primarily driven by improvement in the overall quality of the loan portfolio.

Profitability Ratios

Profitability metrics exhibited an improvement during the quarter. As of September 30, 2012, return on average assets stood at 1.10% compared with 0.89% in the prior-year quarter. Similarly, return on average common equity improved to 9.94% in the reported quarter from 8.30% in the prior-year quarter.

Capital Ratios

BB&T's capital levels remained strong during the quarter. As of September 30, 2012, the Tier 1 risk-based capital ratio and tangible common equity ratio were 10.9% and 6.8% respectively, compared with 10.2% and 6.9% as of June 30, 2012 and 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 8.0% as of September 30, 2012 against 8.2% as of June 30, 2012. The decline primarily came on the back of the BankAtlantic deal.

Peer Performances

The third quarter earnings of State Street Corp. (STT) were marginally ahead of the Zacks Consensus Estimate. Better-than-expected results benefited from improvement in net interest revenue and fall in operating expenses. Moreover, capital ratios and asset position remained robust during the quarter. However, decline in fee revenue was the primary dampener.

Likewise, The Bank of New York Mellon Corp.’s (BK) third quarter 2012 earnings topped the Zacks Consensus Estimate. Results benefited from the augmentation in top line. Yet, slightly higher operating expenses were the dampener. Moreover, asset quality continued to show improvement and capital ratios remained healthy.

Our Take

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 other real estate loan balances.

However, BB&T has a wide exposure to problem assets. The current protracted economic recovery, continuous increase in operating expenses and various regulatory issues will make 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. Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

 
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