Southeast regional bank BB&T (NYSE:BBT)
definitely got the memo this quarter about the themes being higher fee
income and lower credit costs. Unfortunately, BB&T also had
significantly higher non-operating expenses and a little more covered
loan run-off than expected, leading to pretty uninspiring operating
profit performance. BB&T should be in a good position to benefit
from the above-average population and economic growth expected in the
southeast part of the U.S., but it's hard to call the shares a screaming
bargain at today's price.
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http://www.investopedia.com/stock-analysis/071813/bbt-good-shape-credit-growth-iffy-bbt-usb-wfc-pnc.aspx
Showing posts with label BBT. Show all posts
Showing posts with label BBT. Show all posts
Thursday, July 18, 2013
Friday, July 20, 2012
Investopedia: BB&T Still Not Getting Its Due
Shareholders in super-regional bank BB&T (NYSE:BBT) just have to accept that this bank is a bit of a black sheep in the analyst community. Although, like U.S. Bancorp (NYSE:USB),
BB&T largely moved through the housing crash and credit crisis
bruised but not bloodied, analysts have seemingly been waiting for the
other shoe to drop. The good news, though, is that there is both value
and high-quality operations here and that will eventually show itself in
the market.
Please read more here:
http://stocks.investopedia.
Please read more here:
http://stocks.investopedia.
Wednesday, February 29, 2012
Seeking Alpha: Despite Setback, BB&T Has Plenty Of Growth Opportunities
The trouble with striking a good bargain is that sometimes it's a little too good to go through. While North Carolina-based BB&T (BBT) thought it had a deal to acquire most of the worthwhile assets of Florida's BankAtlantic (BBX), disaffected investors have successfully persuaded a Delaware judge to block the deal. Whether this deal goes through or not, though, BB&T has plenty of other fish in the sea as this under-rated bank continues to recover and acquire valuable assets.
A Judge Says "No"
BB&T had structured its deal with BankAtlantic along pretty aggressive lines. While the 9% deposit premium that BB&T offered for about $3.3 billion in deposits (and $2.1 billion in good loans) was on par with similar deals, including a deal whereby PNC (PNC) bought 19 branches and $350 million in deposits from BankAtlantic, this deal was basically going to hollow out BankAtlantic and leave it largely a holding company with some stressed/distressed assets.
Continue reading here:
Despite Setback, BB&T Has Plenty Of Growth Opportunities
A Judge Says "No"
BB&T had structured its deal with BankAtlantic along pretty aggressive lines. While the 9% deposit premium that BB&T offered for about $3.3 billion in deposits (and $2.1 billion in good loans) was on par with similar deals, including a deal whereby PNC (PNC) bought 19 branches and $350 million in deposits from BankAtlantic, this deal was basically going to hollow out BankAtlantic and leave it largely a holding company with some stressed/distressed assets.
Continue reading here:
Despite Setback, BB&T Has Plenty Of Growth Opportunities
Thursday, January 19, 2012
Seeking Alpha: A Strong Fourth Quarter May Change Perceptions On BB&T
Going into the credit crisis, BB&T (BBT) had the record and reputation of one of the best banks in the country. Through the credit crisis BB&T proved that its underwriting was sound and that it didn't need assistance to stay in business (and in fact was able to do a sizable FDIC-assisted deal). Post-crisis, though, it seems like a lot of banking analysts have collective amnesia and seem to think that BB&T isn't the bank that it used to be. Perhaps a solid end to 2011 and healthy guidance will start to move attitudes back.
Good Numbers To End The Year
There have been varying degrees of "clean" earnings from large banks like Wells Fargo (WFC), PNC (PNC), and U.S. Bancorp (USB) this reporting season, and BB&T comes in somewhere near the middle. Reported earnings of $0.55 were better than the average guess from analysts, and the adjusted earnings of $0.61 were even better. Those adjustments consist primarily of reversing out a $0.09 gain on securities and a $0.19 valuation adjustment on foreclosed real estate. BB&T's earnings included a reserve release of $0.11 - definitely large relative to the reported earnings.
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A Strong Fourth Quarter May Change Perceptions On BB&T
Good Numbers To End The Year
There have been varying degrees of "clean" earnings from large banks like Wells Fargo (WFC), PNC (PNC), and U.S. Bancorp (USB) this reporting season, and BB&T comes in somewhere near the middle. Reported earnings of $0.55 were better than the average guess from analysts, and the adjusted earnings of $0.61 were even better. Those adjustments consist primarily of reversing out a $0.09 gain on securities and a $0.19 valuation adjustment on foreclosed real estate. BB&T's earnings included a reserve release of $0.11 - definitely large relative to the reported earnings.
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A Strong Fourth Quarter May Change Perceptions On BB&T
Thursday, December 29, 2011
Seeking Alpha: BB&T Gets Little Credit Where Credit Is Due
Although it never swirled the drain like many larger and better-known banks, and was aggressive in dealing with its sour loans, large regional bank BB&T (BBT) has to fight to get much respect from the analyst and institutional investor community. Given that the market seemingly believes that the prior decades of top-tier performance were a mirage, investors can still buy into a solid and growing banking franchise with relatively modest expectations built into the price.
Still Hungry For More
BB&T has seldom been shy about doing deals and little has changed in recent times. The company was able to acquire Colonial as a byproduct of the credit crisis and recently reached a deal with BankAtlantic to essentially buy that company's good assets without taking on the bad. This deal, coming at the cost of a 9% deposit premium) will vault BB&T from #14 in Miami to #6 and significantly enhance its Florida footprint – one of its few remaining market share weak points. Based on other recent deals (including PNC's (PNC) deal for Royal Bank of Canada's (RY) U.S. assets and the Comerica (CMA)-Sterling deal), BBT paid a fair price, particularly given the much-reduced credit risks.
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BB&T Gets Little Credit Where Credit Is Due
Still Hungry For More
BB&T has seldom been shy about doing deals and little has changed in recent times. The company was able to acquire Colonial as a byproduct of the credit crisis and recently reached a deal with BankAtlantic to essentially buy that company's good assets without taking on the bad. This deal, coming at the cost of a 9% deposit premium) will vault BB&T from #14 in Miami to #6 and significantly enhance its Florida footprint – one of its few remaining market share weak points. Based on other recent deals (including PNC's (PNC) deal for Royal Bank of Canada's (RY) U.S. assets and the Comerica (CMA)-Sterling deal), BBT paid a fair price, particularly given the much-reduced credit risks.
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BB&T Gets Little Credit Where Credit Is Due
Friday, January 21, 2011
BB&T - Anything But Simple
BB&T (NYSE: BBT) delivered another complicated quarterly report for the fourth quarter of 2010. Although the company has clearly made a lot of progress with its credit quality and looks poised to really target growth again in 2011, it's not all positive. At some level, I am starting to wonder whether these murky reports (and the company's apparent unwillingness/inability to telegraph them better to analysts and investors) are a sign of a shift in the corporate culture - one that would not be positive for investors.
The Numbers
Looking at the numbers, operating revenue was down 3% yoy and down sequentially to about $2.3B - a slightly better result than analysts expected. Net interest income was up 2% sequentially, and although the net interest margin fell a bit (5 bp), the absolute level of 4.04% was really quite good. Fee income was down 5% sequentially, though, so BB&T has clearly been challenged to maintain this lucrative source of income - other banks have had this same problem and that makes U.S. Bancorp's (NYSE: USB) all the more impressive. Expenses were up 4% sequentially; normally this would concern me, but it is pretty clear that BBT management is ramping up ahead of some growth expectations in 2011.
Better, If Confusing, Credit
Credit was confusing, but better. The NPA ratio dropped 12bp sequentially to 2.64%, while the NPA/loan ratio dropped 24bp to 3.88%. Unlike U.S. Bancorp, Citigroup (NYSE: C), and many other banks, BBT did not release reserves this quarter. The company's NCOs for the quarter were $538M, while the provisioning was $643 million. The company ended the quarter with non-performing loan coverage of 119% which is quite high and healthy - and perhaps a sign that there could be reserve releases down the road.
One note on credit - the company continued its NPA disposal strategy this quarter and that almost certainly had to mess with the numbers. Given that losses have to be recognized upon sale, that probably inflated the loan loss recognition in this quarter and played a role in that reserve release discrepancy relative to other banks. During the quarter the company also sold over $6 billion in agency securities and $400 million in non-agency securities, swapping them for shorter-duration, floating-rate debt (a sign BBT expects rates to be moving up).
All in all, if you net out the gains from the security sales and the accelerated loan loss recognition, BBT appeared to beat estimates by $0.01.
Ramping Up For An Active 2011?
Looking out to 2011, BBT seems ready to get aggressive. The company is looking for a modest decline in NIM, but the company has been expanding its deposit base at an above-average rate (though not paying too much). The company is also seeing solid loan growth, though that isn't immediately apparent by just looking at the numbers, as the loan disposal strategy messes up the comparisons.
I'm clearly a little miffed at how the company has been presenting information to the Street, but I'm still pro-BBT and pro-management. I think BBT is a very well-run bank (maybe not better than U.S. Bancorp or M & T Bank (NYSE: MTB), but better than Wells Fargo (NYSE: WFC), Zions (Nasdaq: ZION) and quite a few others). I do believe that BBT will emerge from this mess as a winner and one of the leading large banks. Moreover, I'm happy that the company is not getting drawn into bidding wars - BBT was almost certainly interested in buying Sterling, but I'm glad they didn't outbid Comerica (NYSE: CMA) for it. After all, there are more fish in the sea and BBT can afford to be disciplined.
I still think these shares are quite undervalued. I use a return-to-equity model to value bank stocks, and I'm projecting that BBT will achieve a return on equity of 14% in five years' time. With that, I see these shares worth about $34.75. That is pretty significant undervaluation in the market; suggesting that the Street is underestimating the company's ROE recovery and/or assigning a level of risk (discount rate) that seems too high.
So, I would clearly BUY BBT shares today. That said, shop around. Citizens Republic (Nasdaq: CRBC) and Severn Bancorp (Nasdaq: SVBI) could be interesting to really aggressive investors, as could Citigroup (NYSE: C). PNC (NYSE: PNC), Zions, Southside (Nasdaq: SBSI), Timberland (Nasdaq: TSBK), and Peoples Financial (Nasdaq: PFBX) all stand out as well, though many of these are illiquid and risky.
Buy BBT.
Disclosure: I own shares of BBT
The Numbers
Looking at the numbers, operating revenue was down 3% yoy and down sequentially to about $2.3B - a slightly better result than analysts expected. Net interest income was up 2% sequentially, and although the net interest margin fell a bit (5 bp), the absolute level of 4.04% was really quite good. Fee income was down 5% sequentially, though, so BB&T has clearly been challenged to maintain this lucrative source of income - other banks have had this same problem and that makes U.S. Bancorp's (NYSE: USB) all the more impressive. Expenses were up 4% sequentially; normally this would concern me, but it is pretty clear that BBT management is ramping up ahead of some growth expectations in 2011.
Better, If Confusing, Credit
Credit was confusing, but better. The NPA ratio dropped 12bp sequentially to 2.64%, while the NPA/loan ratio dropped 24bp to 3.88%. Unlike U.S. Bancorp, Citigroup (NYSE: C), and many other banks, BBT did not release reserves this quarter. The company's NCOs for the quarter were $538M, while the provisioning was $643 million. The company ended the quarter with non-performing loan coverage of 119% which is quite high and healthy - and perhaps a sign that there could be reserve releases down the road.
One note on credit - the company continued its NPA disposal strategy this quarter and that almost certainly had to mess with the numbers. Given that losses have to be recognized upon sale, that probably inflated the loan loss recognition in this quarter and played a role in that reserve release discrepancy relative to other banks. During the quarter the company also sold over $6 billion in agency securities and $400 million in non-agency securities, swapping them for shorter-duration, floating-rate debt (a sign BBT expects rates to be moving up).
All in all, if you net out the gains from the security sales and the accelerated loan loss recognition, BBT appeared to beat estimates by $0.01.
Ramping Up For An Active 2011?
Looking out to 2011, BBT seems ready to get aggressive. The company is looking for a modest decline in NIM, but the company has been expanding its deposit base at an above-average rate (though not paying too much). The company is also seeing solid loan growth, though that isn't immediately apparent by just looking at the numbers, as the loan disposal strategy messes up the comparisons.
I'm clearly a little miffed at how the company has been presenting information to the Street, but I'm still pro-BBT and pro-management. I think BBT is a very well-run bank (maybe not better than U.S. Bancorp or M & T Bank (NYSE: MTB), but better than Wells Fargo (NYSE: WFC), Zions (Nasdaq: ZION) and quite a few others). I do believe that BBT will emerge from this mess as a winner and one of the leading large banks. Moreover, I'm happy that the company is not getting drawn into bidding wars - BBT was almost certainly interested in buying Sterling, but I'm glad they didn't outbid Comerica (NYSE: CMA) for it. After all, there are more fish in the sea and BBT can afford to be disciplined.
I still think these shares are quite undervalued. I use a return-to-equity model to value bank stocks, and I'm projecting that BBT will achieve a return on equity of 14% in five years' time. With that, I see these shares worth about $34.75. That is pretty significant undervaluation in the market; suggesting that the Street is underestimating the company's ROE recovery and/or assigning a level of risk (discount rate) that seems too high.
So, I would clearly BUY BBT shares today. That said, shop around. Citizens Republic (Nasdaq: CRBC) and Severn Bancorp (Nasdaq: SVBI) could be interesting to really aggressive investors, as could Citigroup (NYSE: C). PNC (NYSE: PNC), Zions, Southside (Nasdaq: SBSI), Timberland (Nasdaq: TSBK), and Peoples Financial (Nasdaq: PFBX) all stand out as well, though many of these are illiquid and risky.
Buy BBT.
Disclosure: I own shares of BBT
Friday, January 14, 2011
Quick Thoughts On JPMorgan Earnings
All in all, JPMorgan (NYSE: JPM) reported pretty decent earnings this morning. The company beat the consensus number by $0.12, with about $0.06 of that coming from actual better-than-expected operating performance.
Net interest income was down about 3% sequentially (not so good), but investment banking was pretty strong (positive). The company also had a lot of shuffling of reserves - adding $2.1B in reserves to WaMu's credit book, adding $1.5B to litigation reserves, releasing $2B in reserves tied to credit cards, releasing $1.2B in reserves tied to the bank's core mortgage portfolio (its own mortgages, not WaMu's), and recognizing $1.2B in securities gains.
Non-performing assets were down 6% on a sequential basis (though still quite high at $16.6B), while consumer NPLs were down about 10% (and wholesale were up 6%).
So, bottom line(s):
- A good quarter, but not a blow-out
- Cards continue to recover nicely, and that should be good news for Citi (NYSE: C), Bank of America (NYSE: BAC), US Bancorp (NYSE: USB), American Express (NYSE: AXP), and Capital One (NYSE: COF). Interestingly, but not surprisingly, debtors are making sure they take care of their credit card bills, even while they default on their mortgage (after all, you can't spend a house, right?).
- Lower net interest income and higher losses/charge-offs in commercial real estate are bad news for regional banks. It wouldn't surprise me to see a little concern regarding banks like Comerica (NYSE: CMA), BB&T (NYSE: BBT), Zions (Nasdaq: ZION), Westamerica (Nasdaq: WABC) and so on.
- Loan growth is coming back and losses are getting better. The GSE put-back issue may be close to over (if the Bank of America deal is any indication), and there seems to be increasing clarity on the foreclosure litigation front.
- JPMorgan is moving on to the next phase and figuring out what to do with its capital. I would like to see them get more active internationally, but time will tell if Dimon agrees with me.
I would BUY JPMorgan shares today.
Disclosure: I own shares of JPMorgan and BB&T.
Net interest income was down about 3% sequentially (not so good), but investment banking was pretty strong (positive). The company also had a lot of shuffling of reserves - adding $2.1B in reserves to WaMu's credit book, adding $1.5B to litigation reserves, releasing $2B in reserves tied to credit cards, releasing $1.2B in reserves tied to the bank's core mortgage portfolio (its own mortgages, not WaMu's), and recognizing $1.2B in securities gains.
Non-performing assets were down 6% on a sequential basis (though still quite high at $16.6B), while consumer NPLs were down about 10% (and wholesale were up 6%).
So, bottom line(s):
- A good quarter, but not a blow-out
- Cards continue to recover nicely, and that should be good news for Citi (NYSE: C), Bank of America (NYSE: BAC), US Bancorp (NYSE: USB), American Express (NYSE: AXP), and Capital One (NYSE: COF). Interestingly, but not surprisingly, debtors are making sure they take care of their credit card bills, even while they default on their mortgage (after all, you can't spend a house, right?).
- Lower net interest income and higher losses/charge-offs in commercial real estate are bad news for regional banks. It wouldn't surprise me to see a little concern regarding banks like Comerica (NYSE: CMA), BB&T (NYSE: BBT), Zions (Nasdaq: ZION), Westamerica (Nasdaq: WABC) and so on.
- Loan growth is coming back and losses are getting better. The GSE put-back issue may be close to over (if the Bank of America deal is any indication), and there seems to be increasing clarity on the foreclosure litigation front.
- JPMorgan is moving on to the next phase and figuring out what to do with its capital. I would like to see them get more active internationally, but time will tell if Dimon agrees with me.
I would BUY JPMorgan shares today.
Disclosure: I own shares of JPMorgan and BB&T.
Thursday, October 21, 2010
BB&T - What a Mess
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
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
Monday, September 27, 2010
Santander and M&T Bank - Here We Go Again (Again...)
The dealings between Spain's Santander (NYSE: STD) and U.S. bank M&T Bank (NYSE: MTB) are starting to remind me of the cheesy horror movies I loved as a kid. This deal just will not die ... it keeps coming back again and again, only to die at the end of the latest installment.
According to multiple media reports, Santander and M&T had once again been in discussions regarding some sort of merger. And once again, the deal fell apart over an inability to agree on who would run the company.
If these reports are to be believed, M&T's CEO Robert Williams actually had the chutzpah to insist that his team run the combined entity. Keep in mind, Santander is 10 TIMES the size of M&T. Although Santander was apparently willing to consider letting them run Sovereign Bank (that is Santander's U.S. operation and the likely "home" for M&T if a deal happens), that was not acceptable to MTB.
The fact that this keeps coming up shows that Santander is indeed keen to do this deal; helped no doubt by the reality that Allied Irish Banks (NYSE: AIB) is very much in trouble and needs to sell its large stake in M&T Bank. It seems equally clear, though, that M&T management does not want to let go of the reins and sell the company.
Who knows how much longer this is all going to go on? I have to imagine that M&T would dearly love for AIB to find another more-or-less silent partner that would take that 22.5% stake and just be content with that. Unfortunately, non-controlling stakes in foreign banks have burned many of the major European banks and there is likely a shortage of volunteers to try again.
Likewise, I am beginning to wonder if Santander needs to move on to a new target. M&T is a well-run bank, but you can only pine for the girl of your dreams for so long before you need to get on with life. If Santander could find a more willing partner in PNC (NYSE: PNC), BB&T (NYSE: BBT), or SunTrust (NYSE: STI), maybe they ought to explore that.
Ultimately, this deal does make financial sense for both sides. Unfortunately, there are issues of ego and non-financial factors that seem to be very difficult to surmount. Given the track record of M&T management, MTB shareholders should not be in any great hurry (the "down side" to no deal is that it is still an excellent independent bank). Likewise, Santander should not be so keen on M&T that they ignore other high-quality (and perhaps more willing) partners.
Disclosure - I own shares of BBT
Update - Other sources are indicating that the debate about post-merger control has to do only with Sovereign; whether M&T management would control the combined Sovereign + MTB bank or whether it would be the current team. That certainly makes a great deal more sense than my initial read (thinking that MTB wanted control of all of STD).
According to multiple media reports, Santander and M&T had once again been in discussions regarding some sort of merger. And once again, the deal fell apart over an inability to agree on who would run the company.
If these reports are to be believed, M&T's CEO Robert Williams actually had the chutzpah to insist that his team run the combined entity. Keep in mind, Santander is 10 TIMES the size of M&T. Although Santander was apparently willing to consider letting them run Sovereign Bank (that is Santander's U.S. operation and the likely "home" for M&T if a deal happens), that was not acceptable to MTB.
The fact that this keeps coming up shows that Santander is indeed keen to do this deal; helped no doubt by the reality that Allied Irish Banks (NYSE: AIB) is very much in trouble and needs to sell its large stake in M&T Bank. It seems equally clear, though, that M&T management does not want to let go of the reins and sell the company.
Who knows how much longer this is all going to go on? I have to imagine that M&T would dearly love for AIB to find another more-or-less silent partner that would take that 22.5% stake and just be content with that. Unfortunately, non-controlling stakes in foreign banks have burned many of the major European banks and there is likely a shortage of volunteers to try again.
Likewise, I am beginning to wonder if Santander needs to move on to a new target. M&T is a well-run bank, but you can only pine for the girl of your dreams for so long before you need to get on with life. If Santander could find a more willing partner in PNC (NYSE: PNC), BB&T (NYSE: BBT), or SunTrust (NYSE: STI), maybe they ought to explore that.
Ultimately, this deal does make financial sense for both sides. Unfortunately, there are issues of ego and non-financial factors that seem to be very difficult to surmount. Given the track record of M&T management, MTB shareholders should not be in any great hurry (the "down side" to no deal is that it is still an excellent independent bank). Likewise, Santander should not be so keen on M&T that they ignore other high-quality (and perhaps more willing) partners.
Disclosure - I own shares of BBT
Update - Other sources are indicating that the debate about post-merger control has to do only with Sovereign; whether M&T management would control the combined Sovereign + MTB bank or whether it would be the current team. That certainly makes a great deal more sense than my initial read (thinking that MTB wanted control of all of STD).
Thursday, July 22, 2010
BB&T - Good, Bad, Awful All In One
BB&T (NYSE: BBT) put up a quarter for the second quarter that is tricky to figure out. There was good news and bad news, often the same news, and a lot of things to consider.
Revenue rose 6% (sequentially) this quarter, a strong result by this quarter's standards. Net interest income rose more than 3% - better than US Bancorp (NYSE: USB), Wells Fargo (NYSE: WFC), and PNC (NYSE: PNC). Net interest margin was 4.1%, which was likewise quite strong on a comparative basis. Loan growth was quite modest - down just a bit on an average balance basis and up slightly on a period-ending basis.
And for some people, that is all the good news there is.
Most news accounts are going to say that BBT missed earnings by $0.04, but that is not quite true. Strip out security gains and what-not and you get earnings per share more like $0.14 or $0.15 per share - far below that Wall Street guess of $0.34.
Why were earnings so weak? A big part of it was the company's decision to sell $628M in bad loans. These were "troubled assets" (polite speak for craptastic loans gone bad) that the company was looking to sell, but doing so forced them to run the losses through the income statement. On top of that, the higher costs of managing foreclosed property and integrating Colonial added to the expense ratio. Consequently, efficiency and returns on assets and equity were poor.
Loan loss reserves as a percentage of loans were 2.7% - on the low side for similar banks, while charge-offs were 2.5% (which was on the high side). Non-performing loans stayed flat quarter on quarter, as did NPLs as a percentage of loans. That stands in contrast to companies like USB and M&T Bank (NYSE:MTB) where non-performing loans dropped quarter on quarter.
Considering how things look in the economy, I like the fact that BBT management continues to be so conservative. USB management's feelings about the economy are such that they are not releasing reserves yet, and that seems reasonable. So when I see that BBT carries a rather high Tier 1 common ratio, I feel pretty good about it - why stretch your balance sheet and leverage yourself to go out and make mortgage loans when rates are at historic loans? Makes no sense to me.
All in all, I have to lower my target on BBT to $35.50, predicated on ROE going back to 14% over time. That is not an exciting amount of appreciation potential, but it is enough for me when we are talking about a well-run and conservative bank.
If I did not own BBT, what would I buy? JPMorgan (NYSE: JPM), which Ialways already own, also looks very cheap - maybe one of the cheapest domestic banks I know. Wells Fargo also looks appealing, and maybe Bank of America (NYSE: BAC) too, but BAC and JPM are very different businesses than BBT. Among more similar banks, like PNC, Suntrust (NYSE: STI), or Regions (NYSE: RF), I would much rather own BBT.
Disclosure - I own shares of BBT and JPM
Revenue rose 6% (sequentially) this quarter, a strong result by this quarter's standards. Net interest income rose more than 3% - better than US Bancorp (NYSE: USB), Wells Fargo (NYSE: WFC), and PNC (NYSE: PNC). Net interest margin was 4.1%, which was likewise quite strong on a comparative basis. Loan growth was quite modest - down just a bit on an average balance basis and up slightly on a period-ending basis.
And for some people, that is all the good news there is.
Most news accounts are going to say that BBT missed earnings by $0.04, but that is not quite true. Strip out security gains and what-not and you get earnings per share more like $0.14 or $0.15 per share - far below that Wall Street guess of $0.34.
Why were earnings so weak? A big part of it was the company's decision to sell $628M in bad loans. These were "troubled assets" (polite speak for craptastic loans gone bad) that the company was looking to sell, but doing so forced them to run the losses through the income statement. On top of that, the higher costs of managing foreclosed property and integrating Colonial added to the expense ratio. Consequently, efficiency and returns on assets and equity were poor.
Loan loss reserves as a percentage of loans were 2.7% - on the low side for similar banks, while charge-offs were 2.5% (which was on the high side). Non-performing loans stayed flat quarter on quarter, as did NPLs as a percentage of loans. That stands in contrast to companies like USB and M&T Bank (NYSE:MTB) where non-performing loans dropped quarter on quarter.
Considering how things look in the economy, I like the fact that BBT management continues to be so conservative. USB management's feelings about the economy are such that they are not releasing reserves yet, and that seems reasonable. So when I see that BBT carries a rather high Tier 1 common ratio, I feel pretty good about it - why stretch your balance sheet and leverage yourself to go out and make mortgage loans when rates are at historic loans? Makes no sense to me.
All in all, I have to lower my target on BBT to $35.50, predicated on ROE going back to 14% over time. That is not an exciting amount of appreciation potential, but it is enough for me when we are talking about a well-run and conservative bank.
If I did not own BBT, what would I buy? JPMorgan (NYSE: JPM), which I
Disclosure - I own shares of BBT and JPM
BB&T - Bad For My Beta
Nothing quite as annoying as owning a stock that is down more than 2% on a day when the markets are racing up more than 2%. That takes the wind out of your relative performance sails pretty quickly!
I will be back later today with a more detailed write-up of BB&T's (NYSE: BBT) earnings. For now, suffice it to say that I thought the earnings were better than the market seems to think. A lot of the banks that are jumping up today are doing so because of reserve releases and other sorts of tinkering with credit estimations. To be very cynical about it, bank executives are saying "we do not think things are so bad ... so, voila, our earnings are better!". BBT, though, plays by much more conservative rules.
Now, I am not saying they were great earnings - they were not. But they were not as bad as the stock's reaction would suggest.
Again, more on this later.
Disclosure - I own shares of BBT
I will be back later today with a more detailed write-up of BB&T's (NYSE: BBT) earnings. For now, suffice it to say that I thought the earnings were better than the market seems to think. A lot of the banks that are jumping up today are doing so because of reserve releases and other sorts of tinkering with credit estimations. To be very cynical about it, bank executives are saying "we do not think things are so bad ... so, voila, our earnings are better!". BBT, though, plays by much more conservative rules.
Now, I am not saying they were great earnings - they were not. But they were not as bad as the stock's reaction would suggest.
Again, more on this later.
Disclosure - I own shares of BBT
Tuesday, July 20, 2010
How About Santander & BB&T?
Ok, I know there is plenty of real news right now and I probably should not be spending my time on idle speculation. I also know rumors are a dime a dozen, and I really do not want to be involved in starting any myself. But I find myself wondering whether Spain's Santander (NYSE: STD) would think of having a go at BB&T (NYSE: BBT).
First, let me start by saying that I own BB&T, so I certainly have a personal financial interest in this notion.
I think it is pretty clear that Santander is not finished acquiring assets, and it is equally clear that they want to expand their U.S. operations. The company has been trying to find a way to reach a deal with Buffalo-based M&T Bank (NYSE: MTB), in part by acquiring Allied Irish Bank's (NYSE: AIB) stake in MTB. That said, MTB does not appear to want to sell out to Santander beyond AIB's stake. So we have an impasse there.
But what about BB&T? Although BB&T has large operations in Georgia (one of the sinkholes in the credit crisis) and a large commercial real estate portfolio, BBT has thus far done pretty well throughout the crisis and the bank has a well-earned reputation for both sound and conservative management. BBT management is also on record saying that they will need to make transformational M&A maneuvers in the coming years, and I do not believe the Colonial deal was what they meant.
BBT would give Santander access to a faster-growing area of the country (faster than the Mid-Atlantic), a large deposit base, and a profitable insurance business. The Southeast is also an area seeing significant Hispanic immigration and that might be synergistic for Santander given their operations in Mexico and Latin America.
It also does not hurt that BBT is undervalued right now and could be a cheaper "get" than MTB.
Of course, Santander has ample options - including simply standing pat and growing organically. If Santander wants to grow in the Southeast, Suntrust (NYSE: STI) is an option as well, and so to Regions Financial (NYSE: RF). And who knows? Maybe they go to Texas for Texas Capital Bancshares (Nasdaq: TCBI), or the western US for Zions (Nasdaq: ZION) or the upper midwest for TCF (NYSE: TCB). So on and so on - which is why I do not like speculating on these things; you can do it all day and get nowhere.
Still, I find the idea of a Santander-BBT link-up to be intriguing. I am a fan of both banks and have thought about purchasing Santander relatively recently. If I was not already over-exposed to finance, I probably would have by now. Nevertheless, time will tell ...
Disclosure - I own shares of BBT
First, let me start by saying that I own BB&T, so I certainly have a personal financial interest in this notion.
I think it is pretty clear that Santander is not finished acquiring assets, and it is equally clear that they want to expand their U.S. operations. The company has been trying to find a way to reach a deal with Buffalo-based M&T Bank (NYSE: MTB), in part by acquiring Allied Irish Bank's (NYSE: AIB) stake in MTB. That said, MTB does not appear to want to sell out to Santander beyond AIB's stake. So we have an impasse there.
But what about BB&T? Although BB&T has large operations in Georgia (one of the sinkholes in the credit crisis) and a large commercial real estate portfolio, BBT has thus far done pretty well throughout the crisis and the bank has a well-earned reputation for both sound and conservative management. BBT management is also on record saying that they will need to make transformational M&A maneuvers in the coming years, and I do not believe the Colonial deal was what they meant.
BBT would give Santander access to a faster-growing area of the country (faster than the Mid-Atlantic), a large deposit base, and a profitable insurance business. The Southeast is also an area seeing significant Hispanic immigration and that might be synergistic for Santander given their operations in Mexico and Latin America.
It also does not hurt that BBT is undervalued right now and could be a cheaper "get" than MTB.
Of course, Santander has ample options - including simply standing pat and growing organically. If Santander wants to grow in the Southeast, Suntrust (NYSE: STI) is an option as well, and so to Regions Financial (NYSE: RF). And who knows? Maybe they go to Texas for Texas Capital Bancshares (Nasdaq: TCBI), or the western US for Zions (Nasdaq: ZION) or the upper midwest for TCF (NYSE: TCB). So on and so on - which is why I do not like speculating on these things; you can do it all day and get nowhere.
Still, I find the idea of a Santander-BBT link-up to be intriguing. I am a fan of both banks and have thought about purchasing Santander relatively recently. If I was not already over-exposed to finance, I probably would have by now. Nevertheless, time will tell ...
Disclosure - I own shares of BBT
Monday, July 12, 2010
Santander Keeps Building Assets
The more I keep researching and reading about Santander (NYSE: STD), the more interesting this global bank gets. I am still not completely certain that Santander will succeed in reaching a deal with M&T Bank (NYSE: MTB) or even reach a deal with Allied Irish Bank (NYSE: AIB) for its stake in MTB, but there are always other interesting fish in the see.
Last month, Santander paid $2.5 billion to acquire Bank of America's (NYSE: BAC) 25% stake in Santander Mexico. Bank of America originally paid Santander about $1.6 billion for that stake in late 2002, so that is not a bad return on investment. With the deal, Santander took full control of its Mexican operations, but the deal did not change earnings or capital all that much.
And now today Santander is at it again - paying close to $700M to Swedish bank SEB for its German commercial banking business. This move will not have a major impact on Santander's earnings or returns, but it will double the company's German branch count.
That is two deals in two months to expand banking operations in places where Santander already has a foothold and where business conditions are relatively good. True, Mexico has taken a hit during this recession and Germany is at risk from contagion in Europe, but they are still attractive banking markets. Moreover, Santander had a little competition for this latest deal (supposedly from Italy's Unicredito), so that at least suggests some positive signs of life in the overall marketplace.
What next for Santander? I would expect them to invest more heavily in Peru and Colombia. I would also expect them to do more deals in the United States. They have been curiously quiet in the US of late. While banks ranging from JPMorgan (NYSE: JPM) to BB&T (NYSE: BBT) to PNC (NYSE: PNC) stepped up to acquire failed or severely stressed banks, Santander has been quiet. Sooner or later, I have to assume that changes - if they cannot do a deal with M&T, do they look at other options like Regions (NYSE: RF), Fifth Third (Nasdaq: FITB), Suntrust (NYSE: STI) and so on?
And what about other areas? Canada is not quite as free-wheeling as the United States, but it is an attractive market. And then there is Africa and Asia - a company with Santander's experience in developing economies could probably do well in these regions.
I guess we will just have to wait and see. In the meantime, I do not see these two deals getting in the way of any U.S. strategy the company may desire - they still have the resources to buy MTB if they wish, though I suppose all parties involved will at least wait for the results of the Europe-wide stress tests (due to come out later this month).
Disclosure - I own share of JPMorgan and BBT
Last month, Santander paid $2.5 billion to acquire Bank of America's (NYSE: BAC) 25% stake in Santander Mexico. Bank of America originally paid Santander about $1.6 billion for that stake in late 2002, so that is not a bad return on investment. With the deal, Santander took full control of its Mexican operations, but the deal did not change earnings or capital all that much.
And now today Santander is at it again - paying close to $700M to Swedish bank SEB for its German commercial banking business. This move will not have a major impact on Santander's earnings or returns, but it will double the company's German branch count.
That is two deals in two months to expand banking operations in places where Santander already has a foothold and where business conditions are relatively good. True, Mexico has taken a hit during this recession and Germany is at risk from contagion in Europe, but they are still attractive banking markets. Moreover, Santander had a little competition for this latest deal (supposedly from Italy's Unicredito), so that at least suggests some positive signs of life in the overall marketplace.
What next for Santander? I would expect them to invest more heavily in Peru and Colombia. I would also expect them to do more deals in the United States. They have been curiously quiet in the US of late. While banks ranging from JPMorgan (NYSE: JPM) to BB&T (NYSE: BBT) to PNC (NYSE: PNC) stepped up to acquire failed or severely stressed banks, Santander has been quiet. Sooner or later, I have to assume that changes - if they cannot do a deal with M&T, do they look at other options like Regions (NYSE: RF), Fifth Third (Nasdaq: FITB), Suntrust (NYSE: STI) and so on?
And what about other areas? Canada is not quite as free-wheeling as the United States, but it is an attractive market. And then there is Africa and Asia - a company with Santander's experience in developing economies could probably do well in these regions.
I guess we will just have to wait and see. In the meantime, I do not see these two deals getting in the way of any U.S. strategy the company may desire - they still have the resources to buy MTB if they wish, though I suppose all parties involved will at least wait for the results of the Europe-wide stress tests (due to come out later this month).
Disclosure - I own share of JPMorgan and BBT
Friday, June 25, 2010
Banking Reform - Much Ado About Quite Little
So, now we see the compromise bill on banking reform/overhaul, and it's really not that big of a deal after all. For all of the blustering of the likes of Barney Frank, very little changes. Banks will be allowed to stay in the swap business, more or less, as only non-investment grade credit, equity, and commodity swaps are going to be pushed into non-bank subsidiaries. Moreover, the parent banks can still guarantee those subsidiaries.
All in all, then, all the talk about forcing banks out of the derivatives business was basically just noise. Then again, the whole idea was largely noise - of the banking industry, Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan (NYSE: JPM), Goldman Sachs (NYSE: GS), and Wells Fargo (NYSE: WFC) comprised something like 97% of derivative holdings (according to the OCC), so it was never a "bank issue" anyway. It was an issue for those quasi-bank/brokers, and only the biggest ones at that.
Another area of concern was the "Volcker Rule" that was going to severely limit banks proprietary trading (that is, trading for their own account) and ability to invest in hedge funds and private equity. According to this bill, banks can invest in these up to a total of 3% of their Tier 1 capital. At that level, it's not going to have a major effect on anybody so far as I can tell (that's nearly a $4B limit for JPM and nearly $2B for Goldman). Then again, that's a 3% limit on investing in funds *AND* prop trading, so maybe Goldman will find that limitation a bit constraining, as prop trading is such a large part of their business historically.
In a strange way, this might actually be good news for some of these banks. See, there's a LOT of money in marketing and running these funds, but investors often want to see the manager keep some skin in the game. Now, though, these banks have a built-in excuse for making only very modest investments in their own funds. "Gee, sorry ... we'd like to, but there's that 3% limit we have to obey". Now, instead, the banks may be able to just collect the "2 and 20" (that is, a 2% management fee and 20% of profits) and not worry about having a lot of their own money tied up. Pretty sweet, huh?
Other details seem pretty positive too. There was a fear that the banking sector was going to be made to pay for the wind-down of Freddie Mac and Fannie Mae (maybe $400B - $500B), but that seems to be off the table. Congress also dropped the idea of creating a $150B bailout/wind-down fund (again, paid for by banks, but all of us ultimately through higher fees and interest rates) to be used in seizing and winding down failed banks.
Still, there will be a new tax of about $19B and a change to the regulatory framework will allow the Fed to impose greater capital requirements on individual banks if the regulators decide the underlying risk warrants such a move. Regulators will also now have more authority and discretion to step in, seize, and restructure or wind down banks - ideally before they get themselves into truly dangerous messes. In addition, there will be limits on certain financial transaction fees (like the ones charged by Visa or MasterCard to merchants).
All in all, this is about as good of a deal as the industry could have hoped. There will be a few constraints on their activities and some higher costs, but nothing that will dramatically impair their ability to get back to doing very profitable business for years to come. Now, it's not a done deal yet, but I would be pretty surprised if the bill doesn't pass. It does end up looking like a normal compromise - nobody is going to be all that happy with it, but both parties will probably acknowledge that it's the best they can come up with for now.
The biggest banks, especially those with proprietary trading desks and large derivative businesses, come out of this great. Banks that are more like "normal banks", BB&T (NYSE: BBT), US Bancorp (NYSE: USB), PNC (NYSE: PNC), and so on will arguably see some higher costs and regulatory burdens, but aren't really getting any perks from the deal either.
There are plenty of reasons to be cautious on banks, lending activity is weak and credit quality is still iffy, but at least regulatory/legislative risk is now largely resolved.
Disclosure: I own shares of JPMorgan and BBT.
All in all, then, all the talk about forcing banks out of the derivatives business was basically just noise. Then again, the whole idea was largely noise - of the banking industry, Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan (NYSE: JPM), Goldman Sachs (NYSE: GS), and Wells Fargo (NYSE: WFC) comprised something like 97% of derivative holdings (according to the OCC), so it was never a "bank issue" anyway. It was an issue for those quasi-bank/brokers, and only the biggest ones at that.
Another area of concern was the "Volcker Rule" that was going to severely limit banks proprietary trading (that is, trading for their own account) and ability to invest in hedge funds and private equity. According to this bill, banks can invest in these up to a total of 3% of their Tier 1 capital. At that level, it's not going to have a major effect on anybody so far as I can tell (that's nearly a $4B limit for JPM and nearly $2B for Goldman). Then again, that's a 3% limit on investing in funds *AND* prop trading, so maybe Goldman will find that limitation a bit constraining, as prop trading is such a large part of their business historically.
In a strange way, this might actually be good news for some of these banks. See, there's a LOT of money in marketing and running these funds, but investors often want to see the manager keep some skin in the game. Now, though, these banks have a built-in excuse for making only very modest investments in their own funds. "Gee, sorry ... we'd like to, but there's that 3% limit we have to obey". Now, instead, the banks may be able to just collect the "2 and 20" (that is, a 2% management fee and 20% of profits) and not worry about having a lot of their own money tied up. Pretty sweet, huh?
Other details seem pretty positive too. There was a fear that the banking sector was going to be made to pay for the wind-down of Freddie Mac and Fannie Mae (maybe $400B - $500B), but that seems to be off the table. Congress also dropped the idea of creating a $150B bailout/wind-down fund (again, paid for by banks, but all of us ultimately through higher fees and interest rates) to be used in seizing and winding down failed banks.
Still, there will be a new tax of about $19B and a change to the regulatory framework will allow the Fed to impose greater capital requirements on individual banks if the regulators decide the underlying risk warrants such a move. Regulators will also now have more authority and discretion to step in, seize, and restructure or wind down banks - ideally before they get themselves into truly dangerous messes. In addition, there will be limits on certain financial transaction fees (like the ones charged by Visa or MasterCard to merchants).
All in all, this is about as good of a deal as the industry could have hoped. There will be a few constraints on their activities and some higher costs, but nothing that will dramatically impair their ability to get back to doing very profitable business for years to come. Now, it's not a done deal yet, but I would be pretty surprised if the bill doesn't pass. It does end up looking like a normal compromise - nobody is going to be all that happy with it, but both parties will probably acknowledge that it's the best they can come up with for now.
The biggest banks, especially those with proprietary trading desks and large derivative businesses, come out of this great. Banks that are more like "normal banks", BB&T (NYSE: BBT), US Bancorp (NYSE: USB), PNC (NYSE: PNC), and so on will arguably see some higher costs and regulatory burdens, but aren't really getting any perks from the deal either.
There are plenty of reasons to be cautious on banks, lending activity is weak and credit quality is still iffy, but at least regulatory/legislative risk is now largely resolved.
Disclosure: I own shares of JPMorgan and BBT.
Thursday, June 17, 2010
M&T and Santander ... This Could Actually Make Sense
Rumor going around is that Spanish banking giant Santander (NYSE: STD) may consider a bid for the exceptionally well-run M&T Bank (NYSE: MTB). If this happens to be true, it is a deal I would probably like ... at the right price, of course.
For those not familiar with it, MTB is a Buffalo-based bank with operations across the Mid-Atlantic. While the return on equity and return on assets do not immediately jump out as top-tier, it is widely considered one of the best-run banks in the country. I happen to share that opinion, and would group it along with the likes of US Bancorp (NYSE: USB) and BB&T (NYSE: BBT) as some of the best-run banks in the country. As such, they have not been hurt quite so badly by the housing/credit boom and bust.
What makes this an intriguing deal is that Santander is also an exceptionally well-run bank, even if it carries the "Scarlet S" of being a Spanish bank. Santander gets about 25% of its profits from Spain, with 21% coming from Brazil, 14% from "other" Latin American countries, 12% from the UK, but only a tiny bit (about 2%) from its US business (from its acquisition of Sovereign a few years back). Although the U.S. is not an under-banked market by any means, it is a profitable one and it is reasonable to think STD would have interest.
The opening for Santander is coming, ironically enough, from problems at another large European bank. MTB is 25%-owned by Allied Irish Banks (NYSE: AIB), a good-enough bank when times were good in Ireland. Times are not nearly so good now, though, and AIB is under pressure to raise capital. With MTB shares near a 52-week high, selling that stake could be a very appealing means of generating that needed capital.
Ahhh, but now for the "but". In this case, the "but" is valuation. Even if I stretch some of my assumptions about future growth, I have a tough time going above $100 per share in fair value. Given the restrictions on moving deposits across borders (collecting deposits in Buffalo to fund loans in Buenos Aires is frowned upon), there would not be a lot of synergies for Santander. So, the question for me is whether Santander can basically position AIB over the barrel and strike a bargain price on the stake (as large blocks of stock often move at discounts, similar to public share offerings), and use some of that to offset the takeover premium it will have to pay to buy a controlling stake.
Then again, that assumes that Santander wants, or feels it needs, full control. They could, conceivably be content with just holding that sizable stake and cashing dividend checks.
Personally, I don't think this deal happens I'm coming around to the idea that this deal eventually gets done. It makes sense, but I'm not sure Santander is in a position to do anything quite so bold, and I'm not sure AIB wants to let go of its MTB stake if it has other options to avoid it. Still, should the deal happen, it has the advantage of being a combination of two very well-run banks. As it stands now, Santander is a stock that is definitely on my watch list whether the deal happens or not.
I wrote that prior paragraph last night, and after sleeping on it, I'm changing my mind. I think the odds of a deal are at least 50-50. Santander has a lot of pressures at home and the capital stress tests going on in Europe now might limit just how bold Santander can be. Nevertheless, AIB will have almost no choice but to sell its stake and Santander is clearly interested in expanding its U.S. footprint. If the deal happens, it's a marriage of two very well-run banks. But even if the deal does not go off, I would be happy owning either bank. As it stands now, Santander looks cheap and it is definitely on my watch list.
Full disclosure - I own share of BBT
In the original posting I forgot to mention that M&T and Santander have talked before about a merger. I apologize for not mentioning that as it certainly ups the odds of a transaction.
For those not familiar with it, MTB is a Buffalo-based bank with operations across the Mid-Atlantic. While the return on equity and return on assets do not immediately jump out as top-tier, it is widely considered one of the best-run banks in the country. I happen to share that opinion, and would group it along with the likes of US Bancorp (NYSE: USB) and BB&T (NYSE: BBT) as some of the best-run banks in the country. As such, they have not been hurt quite so badly by the housing/credit boom and bust.
What makes this an intriguing deal is that Santander is also an exceptionally well-run bank, even if it carries the "Scarlet S" of being a Spanish bank. Santander gets about 25% of its profits from Spain, with 21% coming from Brazil, 14% from "other" Latin American countries, 12% from the UK, but only a tiny bit (about 2%) from its US business (from its acquisition of Sovereign a few years back). Although the U.S. is not an under-banked market by any means, it is a profitable one and it is reasonable to think STD would have interest.
The opening for Santander is coming, ironically enough, from problems at another large European bank. MTB is 25%-owned by Allied Irish Banks (NYSE: AIB), a good-enough bank when times were good in Ireland. Times are not nearly so good now, though, and AIB is under pressure to raise capital. With MTB shares near a 52-week high, selling that stake could be a very appealing means of generating that needed capital.
Ahhh, but now for the "but". In this case, the "but" is valuation. Even if I stretch some of my assumptions about future growth, I have a tough time going above $100 per share in fair value. Given the restrictions on moving deposits across borders (collecting deposits in Buffalo to fund loans in Buenos Aires is frowned upon), there would not be a lot of synergies for Santander. So, the question for me is whether Santander can basically position AIB over the barrel and strike a bargain price on the stake (as large blocks of stock often move at discounts, similar to public share offerings), and use some of that to offset the takeover premium it will have to pay to buy a controlling stake.
Then again, that assumes that Santander wants, or feels it needs, full control. They could, conceivably be content with just holding that sizable stake and cashing dividend checks.
I wrote that prior paragraph last night, and after sleeping on it, I'm changing my mind. I think the odds of a deal are at least 50-50. Santander has a lot of pressures at home and the capital stress tests going on in Europe now might limit just how bold Santander can be. Nevertheless, AIB will have almost no choice but to sell its stake and Santander is clearly interested in expanding its U.S. footprint. If the deal happens, it's a marriage of two very well-run banks. But even if the deal does not go off, I would be happy owning either bank. As it stands now, Santander looks cheap and it is definitely on my watch list.
Full disclosure - I own share of BBT
In the original posting I forgot to mention that M&T and Santander have talked before about a merger. I apologize for not mentioning that as it certainly ups the odds of a transaction.
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)
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)
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