Oh man ... reading BB&T's (NYSE: BBT) third quarter earnings report gives me a headache. There are a lot of moving parts to this report and it is easy to get lost.
But here is a really simplified summary:
- BBT is doing a good job of cleaning up its balance sheet, and is doing so faster than the likes of SunTrust (NYSE: STI), Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC), and other comparables. BBT put $1.3B of non-performing loans in the held-for-sale bucket, and this basically pulls forward the losses. In other words, BBT is making the decision to report worse results now to accelerate the clean-up process. If this works, BBT will be reporting good earnings and returns in the future while other banks are still cleaning up the mess.
- BBT sold more assets than most people expected, but credit quality is improving. In the meantime, gains on the sale of securities helped neutralize the sales of bad loans. Interestingly, the effective duration for BBT is now below 3yrs - possibly an interesting statement about where BBT thinks rates might head.
- Unlike most banks, BBT is actually expanding its lending. Now, you can argue that BBT is growing its loan book when rates are still low (which would be bad), but the spreads over the cost of capital should still be pretty good. What's more, by staying "in the game", I think BBT might gain market share and customers from rivals.
- The mortgage buyback issue that has bedeviled large banks like JPMorgan (NYSE: JPM), Bank of America, and Citi (NYSE: C) does not appear to be much of a problem for BBT.
- Mortgage banking was really strong, and helped offset declines in deposit fees related to new banking rules. Unfortunately, the insurance business (the largest non-interest income generator) is not doing all that great, which is consistent with the soft P&C market right now.
- Net interest income was not bad on a relative basis, and the company is doing well on expense control.
I value BBT on the assumption that ROE can climb back to 14% in five years. Doing so gives me a target of $33.50 per share. That makes BBT more or less as cheap as Bank of America, Citi, and JPMorgan, and slightly cheaper than USBancorp (NYSE: USB).
Disclosure - I own shares of BBT and JPM
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