Saturday, April 24, 2010

BB&T - Patience Will Pay Off

I have been pretty outspoken in my appreciation of BB&T (BBT) management and the stock. During the credit crisis, BBT held up a fair bit better than most banking stocks, even though there was a steady drumbeat from analysts worrying about the company's commercial loan portfolio. With this week's earnings, it looks like things are slowly getting better at BBT, though the process of full recovery may take a little longer here than at other banks.

Results for the first quarter were alright. The company beat by $0.04 on an as-reported basis ($0.27 versus $0.23), though reported earnings were about a penny higher than the real earnings. Net charge-offs were 1.84% and the rate of increase has slowed down. For the full year, the company said it expects NCOs to average about 1.8%.

Provisions for the quarter were $575M, about 2.65% (versus 2.55% in December), while gross charge-offs were $509M. Deposits were up about 5% excluding the Colonial deal, while loans were down 4.3%. Some of this loan decline was seasonal, but management did say they were pulling back on deposit growth because they didn't see the loan demand to justify it. Non-interest income was down because of lower gains from securities and lower mortgage banking.

The real debate about BBT is going to center around the credit situation. Past due loans seem to have flattened, and that could be a sign that things have stabilized. I expect some analysts and buy-siders to be worried about the company's big jump in troubled debt restructurings (TDR). These climbed 60% sequentially to $1.7B. The bear case is going to be that the company is being too slow in recognizing loan losses and this is going to slow down the return to "normal" by at least a few quarters.

The company would counter by saying that they applied a separate underwriting process to these TDRs and they didn't restructure any loans that they didn't think would be repaid. So, in short, BBT is relying upon their underwriting standards. Given that the company has done quite well relative to its peers in terms of loan losses and underwriting, I'd be inclined to go along with management on this one. Maybe the TDRs do push out "normal" by a quarter or two, but you haven't made much money over time by betting against BBT management.

Much as I like BBT, and am happy to own the shares, I'm not sure that I'd be pounding the table right now. By my calculations, the stock is about 5 - 10% undervalued, and that's not much of a margin of safety. USBancorp (USB) and Wells Fargo (WFC) both seem relatively cheaper, as does JPMorgan (JPM), PNC (PNC) and a host of smaller, riskier banks. By the same token, BBT rarely ever gets cheap and you could do a lot worse than buy-and-hold this one.

(Disclosure - I own BBT and JPMorgan shares)

No comments: